Independence Realty Trust
2019
ANNUAL
REPORT
DIRECTORS
EXECUTIVE OFFICERS
Scott F. Schaeffer
Chief Executive Officer
Independence Realty Trust
William C. Dunkelberg
Professor Emeritus
Temple University
Richard D. Gebert
Retired Audit Partner
Grant Thornton LLP
Melinda H. McClure
Executive Vice President,
Strategy
Old Dominion National Bank
Mack D. Pridgen III
Retired General Counsel,
Vice President & Secretary
Highwoods Properties, Inc.
Richard H. Ross*
President & Chief Financial
Officer
Quintasen Homes
DeForest B. Soaries Jr.
Senior Pastor
First Baptist Church
of Lincoln Gardens
Scott F. Schaeffer
Chief Executive Officer
Farrell M. Ender
President
James J. Sebra
Chief Financial Officer
& Treasurer
Jessica K. Norman
Executive Vice President, General Counsel
& Secretary
Jason R. Delozier
Cheif Accounting Officer
*Mr. Ross will retire upon the expiriation of his term.
W W W . I R T L I V I N G . C O M | N Y S E: I R T
Independence Realty Trust
Independence Realty Trust
DEAR FELLOW STOCKHOLDERS,
As I write this letter, our country is living in unprecedented times due to the COVID-19 outbreak. We
are closely monitoring the situation and following CDC guidelines to ensure the safety of our residents
and employees. While the situation continues to unfold, I remain confident that we have built a
business model and strong balance sheet that will weather near-term pressure and enable IRT to
deliver long-term value to all of our stakeholders.
While our focus is on the critical matters at hand, it is important to reflect on how far we have come
across all levels of our organization not only in 2019 but since our formation. We have steadily
enhanced the value and quality of our portfolio, expanded the size and skill set of our workforce and
increased shareholder value through rent growth and net operating income growth. This pattern of
growth has enabled us to consistently provide stockholders attractive, risk-adjusted returns, as
evidenced by the fact that we have outperformed 85% of our peers on the FTSE NAREIT Apartment
index over the last three years.
2019, in particular, was a year of significant acceleration for IRT. During the year, our organic growth
initiatives, led by our value-add program, were in full swing and delivered very positive results. With a
dedicated team in place to manage renovation projects in each market, we were able to execute more
seamlessly and manage the lease up process more proactively, building upon the lessons learned and
momentum gained during the first year of this initiative. We also continued to recycle capital to both
improve the quality of our assets and create operating efficiencies in our markets.
Continued Focus on Our Value-Add and Capital Recycling Programs
Since the inception of our value-add program, we have completed renovations in 2,715 units, achieving
a weighted average return on investment of 18.5% on interior renovation costs. As of year-end, we
have a total of 23 projects in the pipeline or underway, representing 7,136 units. On average, we are
seeing 18.3% rent premiums on renovated units, which is up from 15.8% last year.
We also executed upon our capital recycling program, which involves continuously evaluating our
markets and communities to ensure we scale in cities where we see long-term growth, and conversely
reevaluate those markets that are difficult to scale or may not prove to be attractive long-term
investments.
During the year, we acquired three properties, one each in Atlanta, Raleigh and Tampa and sold four,
exiting the Austin, Little Rock, and suburban Chicago markets. As we move forward, we will continue to
prudently evaluate the portfolio for attractive opportunities to sell communities that no longer fit within
our core criteria and reinvest in communities that allow us to expand our presence in key markets.
Dedicated to an Effective and Efficient Balance Sheet
In May of 2019, we closed on a new $350 million unsecured revolving credit facility refinancing the
previous unsecured credit facility. This agreement increased our capacity, lowered our interest rates,
extended maturities, and most importantly offered flexibility for future growth initiatives.
We closed 2019 with 57 properties and total gross assets of approximately $1.8 billion. Our normalized
net debt to adjusted EBITDA was 8.9x, down from 9.2x a year ago. At year end, our debt is 91% fixed
rate or hedged through 2024, with no significant maturities until 2023. As of the end of the year, based
on gross assets, 51% or our assets are unencumbered. That is an increase from 44% unencumbered
since fourth quarter 2018.
Well-Positioned to Capture Growth in 2020
Looking ahead, we are entering 2020 from a position of strength. Our organic growth initiatives have
proven successful and we expect to be able to continue to produce above market returns. Specifically,
we have a robust runway of value-add opportunities, highlighted by 4,400 units yet to be renovated.
We are also excited about how technology will continue to shape the apartment landscape. This year,
we plan to continue to develop and explore technology that will both improve the daily lives of our
residents, as well as drive further operating efficiencies at our communities. We’ve already been
successful at developing proprietary technology in our value-add renovation group and will continue to
invest in technology in a meaningful, but thoughtful, way.
Sustainability
We would also like to highlight the strides IRT is taking to continue to build upon our sustainability
platform. We have formed a cross-functional Sustainability Group which is led by our head of asset
management who has been a Leed Accredited Professional since 2008 with a specialty in existing
buildings. Additional 2020 initiatives will include improved procurement of Earth-friendly products and
identifying opportunities for energy audits. Overall, IRT will continue to align sustainability with its
culture and is excited to bring our employees and residents along this journey with us.
Our Team and Vision
I want to take a moment to recognize our team, both in the field and in our corporate offices for their
dedication and strong execution. Over the past year, we have generated the strongest NOI growth
since our inception and delivered on our goal to cover the dividend during the fourth quarter.
We are very excited about the state of our business and the tremendous opportunities that lie ahead.
First, we remain committed to our value-add initiative. Second, we continue to see strong real estate
fundamentals across our core markets, and we'll execute a capital recycling strategy to align our
portfolio to best capitalize on these positive trends. And lastly, our ability to continue to drive outsized
growth provides a line of sight to improve our leverage profile over time.
On behalf of our entire team, I’d like to thank you for your support of IRT. We are pleased with our
operating results and will weather the current period of uncertainty and turmoil while we strive towards
delivering long-term value for our shareholders. We wish you a safe and healthy 2020.
Sincerely,
Scott F. Schaeffer
Chairman and Chief Executive Officer
DEAR FELLOW STOCKHOLDERS,
As I write this letter, our country is living in unprecedented times due to the COVID-19 outbreak. We
are closely monitoring the situation and following CDC guidelines to ensure the safety of our residents
and employees. While the situation continues to unfold, I remain confident that we have built a
business model and strong balance sheet that will weather near-term pressure and enable IRT to
deliver long-term value to all of our stakeholders.
While our focus is on the critical matters at hand, it is important to reflect on how far we have come
across all levels of our organization not only in 2019 but since our formation. We have steadily
enhanced the value and quality of our portfolio, expanded the size and skill set of our workforce and
increased shareholder value through rent growth and net operating income growth. This pattern of
growth has enabled us to consistently provide stockholders attractive, risk-adjusted returns, as
evidenced by the fact that we have outperformed 85% of our peers on the FTSE NAREIT Apartment
index over the last three years.
2019, in particular, was a year of significant acceleration for IRT. During the year, our organic growth
initiatives, led by our value-add program, were in full swing and delivered very positive results. With a
dedicated team in place to manage renovation projects in each market, we were able to execute more
seamlessly and manage the lease up process more proactively, building upon the lessons learned and
momentum gained during the first year of this initiative. We also continued to recycle capital to both
improve the quality of our assets and create operating efficiencies in our markets.
Continued Focus on Our Value-Add and Capital Recycling Programs
Since the inception of our value-add program, we have completed renovations in 2,715 units, achieving
a weighted average return on investment of 18.5% on interior renovation costs. As of year-end, we
have a total of 23 projects in the pipeline or underway, representing 7,136 units. On average, we are
seeing 18.3% rent premiums on renovated units, which is up from 15.8% last year.
We also executed upon our capital recycling program, which involves continuously evaluating our
markets and communities to ensure we scale in cities where we see long-term growth, and conversely
reevaluate those markets that are difficult to scale or may not prove to be attractive long-term
investments.
During the year, we acquired three properties, one each in Atlanta, Raleigh and Tampa and sold four,
exiting the Austin, Little Rock, and suburban Chicago markets. As we move forward, we will continue to
prudently evaluate the portfolio for attractive opportunities to sell communities that no longer fit within
our core criteria and reinvest in communities that allow us to expand our presence in key markets.
Dedicated to an Effective and Efficient Balance Sheet
In May of 2019, we closed on a new $350 million unsecured revolving credit facility refinancing the
previous unsecured credit facility. This agreement increased our capacity, lowered our interest rates,
extended maturities, and most importantly offered flexibility for future growth initiatives.
We closed 2019 with 57 properties and total gross assets of approximately $1.8 billion. Our normalized
net debt to adjusted EBITDA was 8.9x, down from 9.2x a year ago. At year end, our debt is 91% fixed
rate or hedged through 2024, with no significant maturities until 2023. As of the end of the year, based
on gross assets, 51% or our assets are unencumbered. That is an increase from 44% unencumbered
since fourth quarter 2018.
Well-Positioned to Capture Growth in 2020
Looking ahead, we are entering 2020 from a position of strength. Our organic growth initiatives have
proven successful and we expect to be able to continue to produce above market returns. Specifically,
we have a robust runway of value-add opportunities, highlighted by 4,400 units yet to be renovated.
We are also excited about how technology will continue to shape the apartment landscape. This year,
we plan to continue to develop and explore technology that will both improve the daily lives of our
residents, as well as drive further operating efficiencies at our communities. We’ve already been
successful at developing proprietary technology in our value-add renovation group and will continue to
invest in technology in a meaningful, but thoughtful, way.
Sustainability
We would also like to highlight the strides IRT is taking to continue to build upon our sustainability
platform. We have formed a cross-functional Sustainability Group which is led by our head of asset
management who has been a Leed Accredited Professional since 2008 with a specialty in existing
buildings. Additional 2020 initiatives will include improved procurement of Earth-friendly products and
identifying opportunities for energy audits. Overall, IRT will continue to align sustainability with its
culture and is excited to bring our employees and residents along this journey with us.
Our Team and Vision
I want to take a moment to recognize our team, both in the field and in our corporate offices for their
dedication and strong execution. Over the past year, we have generated the strongest NOI growth
since our inception and delivered on our goal to cover the dividend during the fourth quarter.
We are very excited about the state of our business and the tremendous opportunities that lie ahead.
First, we remain committed to our value-add initiative. Second, we continue to see strong real estate
fundamentals across our core markets, and we'll execute a capital recycling strategy to align our
portfolio to best capitalize on these positive trends. And lastly, our ability to continue to drive outsized
growth provides a line of sight to improve our leverage profile over time.
On behalf of our entire team, I’d like to thank you for your support of IRT. We are pleased with our
operating results and will weather the current period of uncertainty and turmoil while we strive towards
delivering long-term value for our shareholders. We wish you a safe and healthy 2020.
Sincerely,
Scott F. Schaeffer
Chairman and Chief Executive Officer
IRT Living
Imagine What’s Possible
When You Feel At Home
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
(State or other jurisdiction of
incorporation or organization)
1835 Market Street, Suite 2601,
Philadelphia, PA
(Address of principal executive offices)
26-4567130
(I.R.S. Employer
Identification No.)
19103
(Zip Code)
(267) 270-4800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Common stock
Trading Symbol(s)
IRT
Name of each exchange on which registered
NYSE
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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, a 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
Non-accelerated filer
Emerging growth company
☒
☐
☐
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by checkmark 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 Act). Yes ☐ No ☒
The aggregate market value of the shares of common stock of the registrant held by non-affiliates of the registrant, based upon the closing
price of such shares on June 28, 2019 of $11.57, was approximately $1,043,558,574.
As of February 11, 2020 there were 91,133,802 outstanding shares of the registrant’s common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for registrant’s 2020 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
INDEPENDENCE REALTY TRUST, INC.
TABLE OF CONTENTS
Forward Looking Statements ............................................................................................................................................................... 1
PART I
Item 1. Business ................................................................................................................................................................................ 2
Item 1A. Risk Factors .......................................................................................................................................................................... 6
Item 1B. Unresolved Staff Comments ................................................................................................................................................. 31
Item 2. Properties .............................................................................................................................................................................. 32
Item 3. Legal Proceedings ................................................................................................................................................................ 32
Item 4. Mine Safety Disclosures ....................................................................................................................................................... 32
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ........... 33
Item 6. Selected Financial Data ........................................................................................................................................................ 36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................................... 36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................................................................................. 45
Item 8. Financial Statements and Supplementary Data..................................................................................................................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................................... 76
Item 9A. Controls and Procedures ....................................................................................................................................................... 76
Item 9B. Other Information ................................................................................................................................................................. 76
Item 10. Directors, Executive Officers and Corporate Governance.................................................................................................... 77
Item 11. Executive Compensation ...................................................................................................................................................... 77
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............................. 77
Item 13. Certain Relationships and Related Transactions, and Director Independence ...................................................................... 78
Item 14. Principal Accountant Fees and Services ............................................................................................................................... 78
PART III
PART IV
Item 15. Exhibits and Financial Statement Schedules ........................................................................................................................ 78
Item 16 Form 10-K Summary .............................................................................................................................................................. 81
EXPLANATORY NOTE
As used herein, the terms “we,” “our” “us” and “IRT” 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. Our multifamily apartment
communities are referred to as “communities,” “properties,” “apartment properties,” and “multifamily properties.”
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The Securities and Exchange Commission (the “SEC”), encourages companies to disclose forward-looking information so that
investors can better understand a company’s future prospects and make informed investment decisions. This annual report on Form
10-K contains or incorporates by reference such “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar
substance used in connection with any discussion of future operating or financial performance identify forward-looking statements.
We claim the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform
Act of 1995. These statements may be made directly in this annual report on Form 10-K and they may also be incorporated by
reference in this annual report on Form 10-K to other documents filed with the SEC, and include, without limitation, statements about
future financial and operating results and performance, statements about our plans, objectives, expectations and intentions with respect
to future operations, products and services, and other statements that are not historical facts. These forward-looking statements are
based upon the current beliefs and expectations of our management and are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are difficult to predict and generally beyond our control. In addition, these
forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to
change. Actual results may differ materially from the anticipated results discussed in these forward-looking statements.
The risk factors discussed and identified in Item 1A of this annual report on Form 10-K and in other of our public filings with
the SEC could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-
looking statements. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date
of this annual report on Form 10-K. All subsequent written and oral forward-looking statements attributable to us or any person acting
on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the
extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect
events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events.
1
ITEM 1.
Business
Our Company
PART I
We are a self-administered and self-managed Maryland real estate investment trust (“REIT”), that acquires, owns, operates,
improves and manages multifamily apartment communities across non-gateway U.S. markets. As of December 31, 2019, we owned
and operated 57 multifamily apartment properties that contain 15,554 units. Our properties are located in Georgia, North Carolina,
Tennessee, Kentucky, Ohio, Oklahoma, Indiana, Texas, Florida, South Carolina, Missouri, Louisiana, and Alabama. We do not have
any foreign operations and our business is not seasonal. Our executive offices are located at 1835 Market Street, Suite 2601,
Philadelphia, PA 19103 and our telephone number is (267) 270-4800. We have offices in Philadelphia, Pennsylvania and Chicago,
Illinois.
Our Business Objective and Investment Strategies
Our primary business objective is to maximize stockholder value through diligent portfolio management, strong operational
performance, and a consistent return of capital through distributions and capital appreciation. Our investment strategy is focused on
the following:
gaining scale within key amenity rich submarkets of non-gateway cities that offer good school districts, high-quality
retail and major employment centers and are unlikely to experience substantial new apartment construction in the
foreseeable future;
increasing cash flows at our existing apartment properties through prudent property management and strategic
renovation projects; and
acquiring additional properties that have strong and stable occupancies and support a rise in rental rates or that have
the potential for repositioning through capital expenditures or tailored management strategies.
We seek to achieve these objectives by executing the following strategies:
Focus on properties in markets that have strong apartment demand, reduced competition from national apartment
buyers and no substantial new apartment construction. In evaluating potential acquisitions, we analyze apartment
occupancy and trends in rental rates, employment and new construction, among many other factors, and seek to identify
properties located primarily in non-gateway markets where there is strong demand for apartment units, less apartment
development relative to demand, stable resident bases and occupancy rates, positive net migration trends and strong
employment drivers. We generally seek to avoid markets where we believe potential yields have decreased as a result of
the acquisition and development efforts of large institutional buyers.
Acquire properties that have operating upside through professional property management strategies. We have
expertise in acquiring and managing properties to maximize the net operating income of such properties through effective
marketing and leasing, disciplined management of rental rates and efficient expense management. We seek to acquire
properties that we believe possess significant prospects for increased occupancy and rental revenue growth. Our target
profile for acquisitions currently is midrise/garden-style apartments containing 150-500 units with high quality amenities
that we can acquire at less than replacement cost in the $15 million to $50 million price range with a five to fifteen-year
operating track record. We do not intend to limit ourselves to properties in this target profile, however, and may make
acquisitions outside of this profile or change our target profile whenever market conditions warrant.
Selectively use our capital to improve apartment properties where we believe the return on our investment will be
accretive to stockholders. We have significant experience allocating capital to value-added improvements of apartment
properties to produce better occupancy and rental rates. We will selectively deploy our capital into revenue-enhancing
capital projects that we believe will improve the physical plant or market positioning of particular apartment properties
and generate increased income over time. This value add initiative is a core component of our growth strategy.
Selectively dispose of properties that no longer meet our long-term strategy or when market conditions are
favorable. Dispositions also allow us to realize a portion of the value created through our investments and provide
additional liquidity. In evaluating potential dispositions, we evaluate the opportunity to strategically exit markets where
2
we lack scale and redeploy sales proceeds to fund acquisitions and renovations and to reduce our leverage in lieu of
raising additional capital.
2019 Developments
Value Add Initiative
During 2019, we made significant progress completing renovations at properties previously included in our value add initiative.
In addition, we identified additional properties to include in our value add initiative. Overall, in 2019, we completed 1,483-unit
renovations and added 2,822 units to our value add initiative pipeline. The momentum from our value add initiative continued to
build throughout 2019 and helped drive strong rental revenue growth at communities included in our value add initiative.
As of December 31, 2019, we had identified 7,136 units across 23 properties for renovations and upgrades as part of our value
add initiative. As of December 31, 2019, we had completed renovations and upgrades at 2,715 of the 7,136 units while achieving a
return on total investment of 16.2% to date. We expect to complete the remaining value add projects at the selected communities
throughout 2020 and 2021.
2019 Property Acquisitions
During 2019, we acquired three communities, totaling 806 units, for a gross purchase price of $128.9 million. The acquisitions
expand our reach in Raleigh, NC, Tampa, FL, and Atlanta, GA. The communities were all built or renovated in 1999. The acquired
units had occupancy of 96.5% and had an average effective monthly rent per occupied unit of $1,144 at the time of acquisition.
2019 Property Dispositions
During 2019, we disposed of four communities, totaling 1,132 units, for a gross sale price of $154.5 million and recognized a
total net gain on sale of $35.2 million. The dispositions represent our exit from the Little Rock, AR, Chicago, IL, and Austin, TX,
markets.
New Unsecured Revolving Line of Credit
On May 9, 2019, we closed on a new $350.0 million unsecured credit facility that consists entirely of an unsecured revolving
line of credit, refinancing and terminating the previous unsecured credit facility. We have the right to increase the aggregate amount of
the line of credit up to $600.0 million, under certain conditions. The new revolving line of credit matures in May 2023 and bears
interest at a rate equal to either (i) the 1-month LIBOR rate plus a margin of 125 to 200 basis points, or (ii) a base rate plus a margin of
25 to 100 basis points. The applicable margin is determined based upon our total consolidated leverage ratio, as defined in the
agreements. At the time of closing, based on our leverage ratio, the margin spread to LIBOR was 155 basis points.
Term Loan Agreement Amendment
In November 2019, we amended our $100.0 million term loan with KeyBank to reduce the interest spread. The interest rate on
the term loan was LIBOR plus a spread of 1.60% to 2.50%. After the amendment, the interest rate on the term loan was LIBOR plus a
spread of 1.20% to 1.90%. The maturity date on the term loan did not change.
2019 At-the-Market Offering
During 2019, we issued 1,717,291 shares of common stock under our at-the-market offering program at an average price per
share of $12.82, generating proceeds to us (net of approximately $0.4 million in commissions) of approximately $21.3 million. We
used these proceeds to fund value add initiatives during 2019 and to reduce borrowings on our unsecured credit facility. As of
December 31, 2019, approximately $93.5 million remained available for share issuances under our at-the-market program.
Financing Strategy
We use a combination of debt and equity sources to fund our business objectives. We seek to maintain a capital structure that
provides us with the flexibility to manage our business and pursue our growth strategies, while allowing us to service our debt
requirements and generate appropriate risk-adjusted returns for our stockholders. We believe these objectives are best achieved by a
capital structure that consists of common equity and prudent amounts of debt financing. However, we may raise capital in any form
and under terms that we deem acceptable and in our best interests. Our longer-term goal is to reduce our leverage ratio by growing the
net operating income at our communities through rental increases, including those driven by value add initiatives, and prudent expense
management. If our Board of Directors changes our policies regarding our use of leverage, we expect that it will consider many
factors, including, our long-term strategic plan, the leverage ratios of publicly traded REITs with similar investment strategies, the cost
of leverage as compared to expected operating net revenues and general market conditions. For further description of our indebtedness
at December 31, 2019, see “Part II-Item 8, Financial Statements and Supplementary Data-Note 5: Indebtedness” below, or the
financial statement indebtedness note. See also “Part I-Item 1A. Risk Factors – Risks Associated with Debt Financing” below for
more information about the risks related to operating on a leveraged basis.
3
Development and Structure of Our Company; Segment
We were formed as a Maryland corporation on March 26, 2009 and conduct our business through a traditional umbrella
partnership REIT (“UPREIT”) structure in which all of our assets are held by, and substantially all of our operations are conducted
through, our operating partnership, Independence Realty Operating Partnership, LP (“IROP”), and subsidiaries of IROP. IROP was
formed as a Delaware limited partnership on March 27, 2009. We are the sole general partner of IROP and manage and control its
business. As of December 31, 2019, we owned a 99.0% interest in IROP. The remaining 1.0% consists of common units of limited
partnership interest issued to third parties in exchange for contributions of properties to IROP. We refer to these transactions as
UPREIT transactions. Limited partners have certain limited approval and voting rights and their common units are exchangeable, in
defined circumstances, for the equivalent number of shares of common stock or, at our option, the equivalent value in cash.
We are an internally managed REIT. Our wholly owned subsidiary, IRT Management, LLC (“IRT Management”), which was
formed on October 26, 2016, is a full-service apartment property management company that, as of December 31, 2019, employed 410
staff and professionals and managed 15,554 apartment units, all of which are owned by us. IRT Management provides services to us in
connection with the rental, leasing, operation and management of our properties. Substantially all of our assets are comprised of
multifamily real estate assets generally leased to tenants for a term of one-year or less. Therefore, we aggregate our real estate assets
for reporting purposes and operate in one reportable segment, see “Part II-Item 8, Financial Statements and Supplementary Data-Note
11: Segment Reporting” below.
Competition
In attracting and retaining residents to occupy our properties, we compete with numerous other housing alternatives. Our
properties compete directly with other rental apartments as well as condominiums and single-family homes that are available for rent
or purchase in the sub-markets in which our properties are located. Principal factors of competition include rent or price charged,
attractiveness of the location and property, and quality and breadth of services and amenities. If our competitors offer leases at rental
rates below current market rates, or below the rental rates we currently charge our tenants, we may lose potential tenants.
The number of competitive properties relative to demand in a particular area has a material effect on our ability to lease
apartment units at our properties and on the rents we charge. In certain sub-markets there exists an oversupply of single family homes
and condominiums and a reduction of households, both of which affect the pricing and occupancy of our rental apartments.
Additionally, we compete with other real estate investors, including other apartment REITs, pension and investment funds,
partnerships and investment companies in acquiring, redeveloping and managing apartment properties. This competition affects our
ability to acquire properties and the price that we pay for such acquisitions.
Employees
As of February 11, 2020, we had 444 employees and believe our relationships with our employees to be good. None of our
employees are covered by a collective bargaining agreement.
Regulation
Our investments are subject to various federal, state, and local laws, ordinances, and regulations, including, among other things,
the Americans with Disabilities Act of 1990, the Fair Housing Amendments Act of 1988, zoning regulations, land use controls,
environmental controls relating to air and water quality, noise pollution, and indirect environmental impacts such as increased motor
vehicle activity, and fair housing laws. We believe that we have all permits and approvals necessary under current law to operate our
investments.
Environmental Matters
As a part of our standard due diligence process for acquisitions, we generally obtain environmental studies of the sites from
outside environmental engineering firms. The purpose of these studies is to identify potential sources of contamination at the site and
to assess the status of environmental regulatory compliance. These studies generally include historical reviews of the site, reviews of
certain public records, preliminary investigations of the site and surrounding properties, inspection for the presence of asbestos, poly-
chlorinated biphenyls (“PCBs”), and underground storage tanks and the preparation and issuance of written reports. Depending on the
results of these studies, more invasive procedures, such as soil sampling or ground water analysis, may be performed to investigate
potential sources of contamination. The environmental studies we received on properties that we have acquired have not revealed any
material environmental liabilities. Should any potential environmental risks or conditions be discovered during our due diligence
process, the potential costs of remediation will be assessed carefully and factored into the cost of acquisition, assuming the identified
4
risks and factors are deemed to be manageable and within reason. We are not aware of any existing conditions that we believe would
be considered a material environmental liability. Nevertheless, it is possible that the studies do not reveal all environmental risks or
that there are material environmental liabilities of which we are not aware. Moreover, no assurance can be given concerning future
laws, ordinances or regulations, or the potential introduction of hazardous or toxic substances by neighboring properties or residents.
Qualification as a Real Estate Investment Trust
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, (the “Code”), commencing with our
taxable year ended December 31, 2011. We recorded no income tax expense for the years ended December 31, 2019, 2018, and 2017.
To continue to qualify as a REIT, we must continue to meet certain tests which, among other things, generally require that our
assets consist primarily of real estate assets, our income be derived primarily from real estate assets, and that we distribute at least
90% of our REIT taxable income (other than our net capital gains) to our stockholders annually. If we maintain our qualification as a
REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on our net income to the extent we distribute
such net income to our stockholders annually. Even if we continue to qualify as a REIT, we will continue to be subject to certain
federal, state and local taxes on our income and our property. Our 2019 distributions to our stockholders exceeded our REIT taxable
income. We believe that we are organized and operate in such a manner as to continue to qualify and maintain treatment as a REIT
and we intend to operate in such a manner so that we will remain qualified as a REIT for federal income tax purposes. For a
discussion of the tax implications of our REIT status to us and our stockholders, see “Material U.S. Federal Income Tax
Considerations” contained in Exhibit 99.1 to this Annual Report on Form 10-K.
The table below reconciles the differences between reported net income (loss), total taxable income and estimated REIT taxable
income for the three years ended December 31, 2019 (dollars in thousands):
Net Income (loss)
Add (deduct):
Depreciation and amortization differences
Gain/loss differences
Other book to tax differences:
Capitalized acquisition costs
Share-based compensation expense
Other
Total taxable income (loss)
Deductible capital gain distribution
Taxable (income)/loss allocable to noncontrolling interest
Estimated REIT taxable income (loss) before dividends paid deduction
$
$
For the Years
Ended December 31
2018
2017
2019
$
46,354 $
26,610 $
31,441
(5,329 )
19,447
(8,007 )
8,984
-
(242 )
1,874
62,104 $
(62,236 )
(675 )
(807 ) $
-
984
2,070
30,641 $
(20,545 )
(163 )
9,933 $
(8,646 )
2,816
4,966
647
476
31,700
(25,904 )
(889 )
4,907
For the year ended December 31, 2019, the tax classification of our dividends on common shares was as follows:
Record
Date
12/27/2018
3/29/2019
6/28/2019
9/27/2019
Payment
Date
1/24/2019
4/25/2019
7/25/2019
10/25/2019
Dividend
Paid
Ordinary
Income
Total Capital
Gain
Distribution
Unrecaptured
Section 1250
Gain
Return
of Capital
$
$
0.1800 $
0.1800
0.1800
0.1800
0.7200 $
0.0279 $
0.0279
0.0279
0.0279
0.1117 $
0.1247 $
0.1247
0.1247
0.1247
0.4988 $
0.0563 $
0.0563
0.0563
0.0563
0.2253 $
Section 199A
0.0279
0.0279
0.0279
0.0279
0.1117
0.0274 $
0.0274
0.0274
0.0274
0.1094 $
The dividend paid on January 24, 2020 to holders of record on December 26, 2019 will be treated as a 2020 distribution for tax
purposes.
5
For the year ended December 31, 2018, the tax classification of our dividends on common shares was as follows:
Record
Date
12/29/2017
4/4/2018
7/6/2018
10/5/2018
Payment
Date
1/15/2018
4/20/2018
7/20/2018
10/19/2018
Dividend
Paid
Ordinary
Income
Total Capital
Gain
Distribution
Unrecaptured
Section 1250
Gain
Return
of Capital
$
$
0.0600 $
0.1800
0.1800
0.1800
0.6000 $
0.0232 $
0.0696
0.0696
0.0696
0.2320 $
0.0224 $
0.0672
0.0672
0.0672
0.2240 $
0.0081 $
0.0242
0.0242
0.0242
0.0807 $
Section 199A
0.0232
0.0696
0.0696
0.0696
0.2320
0.0144 $
0.0432
0.0432
0.0432
0.1440 $
The dividend paid on January 24, 2019 to holders of record on December 27, 2018 was treated as a 2019 distribution for tax
purposes.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains an
internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically
with the SEC. The internet address of the SEC site is http://www.sec.gov. Our internet address is http://www.irtliving.com. We make
our SEC filings available free of charge on or through our internet website as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC. In addition, the charters of our Board’s Compensation Committee, Audit Committee,
and Nominating and Governance Committee, as well as, our Corporate Governance Guidelines, Insider Trading Policy, Whistle
Blower Policy, Code of Ethics, Stock Ownership Guidelines, Clawback Policy, and Section 16 Reporting Compliance Procedures are
available on our website free of charge. We are not incorporating by reference into this report any material from our website. The
reference to our website is an inactive textual reference to the uniform resource locator (URL) and is for your reference only.
Code of Ethics
We maintain a Code of Ethics applicable to our Board of Directors and all of our officers and employees, including our principal
executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions. A copy
of our Code of Ethics is available on our website, www.irtliving.com. In addition to being accessible through our website, copies of
our Code of Ethics can be obtained, free of charge, upon written request to Investor Relations, 1835 Market Street, Philadelphia, PA
19103. Any amendments to or waivers of our Code of Ethics that apply to our principal executive officer, principal financial officer,
principal accounting officer, controller and persons performing similar functions and that relate to any matter enumerated in Item
406(b) of Regulation S-K promulgated by the SEC will be disclosed on our website.
ITEM 1A. Risk Factors
You should carefully consider these risk factors, together with all of the other information included in this Annual Report
on Form 10-K, including our consolidated financial statements and the related notes thereto, before you decide whether to make
an investment in our securities. The risks set out below are not the only risks we face. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, prospects,
financial condition, cash flows, liquidity, funds from operations, results of operations, stock price, ability to service our
indebtedness, and/or ability to make cash distributions to our security holders (including those necessary to maintain our REIT
qualification). In such case, the value of our common stock and the trading price of our securities could decline, and you may lose
all or a significant part of your investment. Some statements in the following risk factors constitute forward looking statements.
Please refer to the explanation of the qualifications and limitations on forward-looking statements under “Forward-Looking
Statements” of this Form 10-K.
Risks Related to Our Business and Operations
We are dependent on a concentration of our investments in a single asset class, making our results of operations more
vulnerable to a downturn in the sector.
As of December 31, 2019, substantially all of our investments are concentrated in the multifamily apartment sector. As a
result, we are subject to risks inherent in investments in a single type of property. A downturn or slowdown in the demand for
multifamily housing may have more pronounced effects on our results of operations or on the value of our assets than if we had
diversified our investments into more than one asset class.
6
Our operations are concentrated in the Southeast region of the United States; we are subject to general economic
conditions in the regions in which we operate.
Our portfolio of properties consists primarily of apartment communities geographically concentrated in the Southeastern
United States, including Atlanta, Georgia, Raleigh-Durham, North Carolina, Louisville, Kentucky, Memphis, Tennessee, Columbus,
Ohio, Tampa, Florida, and Oklahoma City, Oklahoma. Our performance could be adversely affected by economic conditions in, and
other factors relating to, these geographic areas, including supply and demand for apartments in these areas, zoning and other
regulatory conditions and competition from other communities and alternative forms of housing. In particular our performance is
disproportionately influenced by job growth and unemployment. To the extent the economic conditions, job growth and
unemployment in any of these markets deteriorate or any of these areas experiences natural disasters, the value of our portfolio, our
results of operations and our ability to make payments on our debt and to make distributions could be adversely affected.
Adverse economic conditions may reduce or eliminate our returns and profitability and, as a result, our ability to make
distributions to our stockholders.
Our operating results may be materially and adversely affected by market and economic challenges, which may reduce or
eliminate our returns and profitability and, as a result, our ability to make distributions to our stockholders. These market and
economic challenges include, principally, the following:
adverse conditions in the real estate industry could harm our business and financial condition by reducing the value of
our existing assets, limiting our access to debt and equity capital and otherwise negatively impacting our operations;
any future downturn in the U.S. economy and the related reduction in spending, reduced home prices and high
unemployment may result in tenant defaults under leases, vacancies at our apartment communities and concessions or
reduced rental rates under new leases due to reduced demand;
the rate of household formation or population growth in our markets or a continued or exacerbated economic slow-down
experienced by the local economies where our properties are located or by the real estate industry generally may result in
changes in supply of, or demand for, apartment units in our markets; and
the failure of the real estate market to attract the same level of capital investment in the future that it attracts at the time
of our purchases, or a reduction in the number of companies seeking to acquire properties, may result in the value of our
investments not appreciating or decreasing significantly below the amount we pay for these investments.
The length and severity of any economic slow-down or downturn cannot be predicted. Our results of operations financial
condition and ability to make distributions to our stockholders could be negatively affected to the extent that an economic slow-down
or downturn is prolonged or severe.
We depend on residents for revenue, and vacancies, resident defaults or lease terminations may cause a material decline
in our operating results.
The success of our investments depends upon the occupancy levels, rental revenue and operating expenses of our apartment
communities. Our revenues may be adversely affected by the general or local economic climate, local real estate considerations (such
as oversupply of or reduced demand for apartment units), the perception by prospective residents of the safety, convenience and
attractiveness of the areas in which our apartment communities are located (including the quality of local schools and other amenities)
and increased operating costs (including real estate taxes and utilities).
Occupancy rates and rents at a community, including apartment communities that are newly constructed or renovated and in
the lease-up phase, may fail to meet our original expectations for a number of reasons, including changes in market and economic
conditions beyond our control and the development by competitors of competing communities, and we may be unable to complete
lease-up of a community on schedule, resulting in increased construction and financing costs and a decrease or delay in expected
rental revenues.
Vacancy rates may increase in the future and we may be unable to lease vacant units or renew expiring leases on attractive
terms, or at all, and we may be required to offer reduced rental rates or other concessions to residents. Our revenues may be lower as
a result of lower occupancy rates, increased turnover, reduced rental rates, increased economic concessions and potential increases in
uncollectible rent. In addition, we will continue to incur expenses, including maintenance costs, insurance costs and property taxes,
even though a property maintains a high vacancy rate, and our financial performance will suffer if our revenues decrease or our costs
increase.
The underlying value of our properties and our ability to make distributions to our stockholders will depend upon our ability
to lease our available apartment units and the ability of our residents to generate enough income to pay their rents in a timely manner.
7
Our residents’ inability to pay rents may be impacted by employment and other constraints on their personal finances, including debts,
purchases and other factors. Upon a resident default, we will attempt to remove the resident from the premises and re-lease the unit as
promptly as possible. Our ability and the time required to evict a resident, however, will depend on applicable law. Substantially all
of the leases for our properties are short-term leases (generally, one year or less in duration). As a result, our rental income and our
cash flow are impacted by declines in market conditions more quickly than if our leases were for longer terms.
Short-term tenant leases expose us to the effects of declining market rent, which could adversely impact our ability to
make cash distributions to our stockholders.
We expect that most of our tenant leases will be for a term of one year or less. Because these leases generally permit the
tenants to leave at the end of the lease term without any penalty, our rental revenues may be impacted by declines in market rents
more quickly than if our leases were for longer terms.
We will face competition from third parties, including other apartment properties, which may limit our profitability and
the return on any investment in our securities.
The apartment industry is highly competitive. This competition may limit our ability to increase revenue and could reduce
occupancy levels and revenues at our apartment properties. We compete with many other entities engaged in real estate investment
activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited
partnerships, and other entities engaged in real estate investment activities. Many of these entities have significant financial and other
resources, including operating experience, allowing them to compete effectively with us. Competitors with substantially greater
financial resources than us may be able to accept more risk than we can effectively manage. In addition, those competitors that are not
REITs may be at an advantage to the extent they can use working capital to finance projects, while we (and our competitors that are
REITs) will be required by the annual distribution provisions under the Code to distribute significant amounts of cash from operations
to our stockholders. Competition may also result in overbuilding of apartment properties, causing an increase in the number of
apartment units available which could potentially decrease our occupancy and apartment rental rates. We may also be required to
expend substantial sums to attract new residents. The resale value of the property could be diminished because the market value of a
particular property will depend principally upon the net revenues generated by the property. In addition, increases in operating costs
due to inflation may not be offset by increased apartment rental rates. Further, costs associated with real estate investment, such as
real estate taxes and maintenance costs, generally are not reduced when circumstances cause a reduction in income from the
investment. These events would cause a significant decrease in revenues and the trading price of our common stock, and could cause
us to reduce the amount of distributions to our stockholders.
Our investment strategy may limit an increase in the diversification of our investments.
Our ability to diversify our portfolio may be limited both as to the number of investments owned and the geographic regions
in which our investments are located. While we will seek to diversify our portfolio by geographic location, we expect to continue to
focus on markets with high potential for attractive returns located in the United States and, accordingly, our actual investments may
continue to result in concentrations in a limited number of geographic regions. As a result, there is an increased likelihood that the
performance of any single property, or the economic performance of a particular region in which our properties are located, could
materially affect our operating results.
8
We may fail to consummate one or more property acquisitions or dispositions that we anticipate, whether as part of our
capital recycling strategy or otherwise, and this failure could have a material adverse impact on our financial results.
We may disclose anticipated property acquisitions or dispositions, including prior to our entry into a letter of intent or
definitive agreement for such acquisition or disposition and prior to our completion of due diligence or satisfaction of closing
conditions. Acquisitions and dispositions are inherently subject to a number of factors and conditions, some of which are outside of
our control, and there can be no assurance that we will be able to consummate acquisitions or dispositions that we anticipate. If we fail
to consummate a disposition that we anticipated, we will not have the use of the proceeds from the disposition and may not be able to
carry out our intended plans for use of such proceeds and may be required to obtain alternative sources of funds on less favorable
terms. If we fail to consummate a targeted acquisition and have issued additional securities to fund such acquisition, then we will
have issued securities without realizing a corresponding increase in earnings and cash flow from the targeted acquisition. In addition,
we may have broad authority to use the net proceeds of an offering of securities for other purposes, including the repayment of
indebtedness, the acquisition of other properties or for other investments, which may not be initially accretive to our results of
operations. As a result, failure to consummate one or more anticipated acquisitions or dispositions could have a material adverse
impact on our financial condition, results of operations and the market price of our common stock.
We may suffer from delays in locating suitable investments or, because of our public company status, may be unable to
acquire otherwise suitable investments, which could adversely affect our growth prospects and results of operations.
Our ability to achieve our investment objectives and to make distributions to our stockholders depends upon our ability to
locate, obtain financing for and consummate the acquisition of apartment properties that meet our investment criteria. The current
market for apartment properties that meet our investment criteria is highly competitive. We cannot be sure that we will be successful
in obtaining suitable investments on financially attractive terms or at all.
Additionally, as a public company, we are subject to the ongoing reporting requirements under the Securities Exchange Act
of 1934, as amended, (the “Exchange Act”). Pursuant to the Exchange Act, we may be required to file with the SEC financial
statements for the properties we acquire. To the extent any required financial statements are not available or cannot be obtained, we
may not be able to acquire the property. As a result, we may be unable to acquire certain properties that otherwise would be suitable
investments.
If we are unable to invest the proceeds of any offering of our securities in real properties in a timely manner, we may invest
the proceeds in short-term, investment-grade investments which typically will yield significantly less than what we expect our
investments will yield. As a result, delays we encounter in identifying and consummating potential acquisitions may adversely affect
our growth prospects, results of operations and our ability to make distributions to our stockholders.
If we fail to maintain an effective system of integrated internal controls, we may not be able to accurately report our
financial results and may be required to incur additional costs and divert management resources.
We depend on our ability to produce accurate and timely financial statements in order to run our business. If we fail to do so,
our business could be negatively affected and our independent registered public accounting firm may be unable to attest to the
accuracy of our financial statements. A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct,
misstatements on a timely basis. A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal
control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those
responsible for oversight of a registrant’s financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in
internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be
prevented or detected and corrected, on a timely basis by the company’s internal controls.
Although we continuously monitor the design, implementation and operating effectiveness of our internal controls over
financial reporting and disclosure controls and procedures, there can be no assurance that significant deficiencies or material
weaknesses will not occur in the future. If we fail to maintain effective internal controls and disclosure controls in the future, it could
result in a material misstatement of our financial statements that may not be prevented or detected on a timely basis, which could
cause investors, analysts and others to lose confidence in our reported financial information. Our inability to remedy any additional
deficiencies or material weaknesses that may be identified in the future could, among other things, cause us to fail to file timely our
periodic reports with the SEC (which may have a material adverse effect on our ability to access the capital markets); prevent us from
providing reliable and accurate financial information and forecasts or from avoiding or detecting fraud; or require us to incur
additional costs or divert management resources to achieve compliance.
9
We may be adversely affected by changes in state and local tax laws and may become subject to tax audits from time to
time.
Because we are organized and qualified as a REIT, we are generally not subject to federal income taxes, but we are subject to
certain state and local taxes. From time to time, changes in state and local tax laws or regulations are enacted, which may result in an
increase in our tax liability. A shortfall in tax revenues for states and local jurisdictions in which we own apartment communities may
lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional state and
local taxes. These increased tax costs could adversely affect our financial condition and the amount of cash available for distribution
to our stockholders. In the normal course of business, we or our affiliates (including entities through which we own real estate) may
also become subject to federal, state or local tax audits. If we (or such entities) become subject to federal, state or local tax audits, the
ultimate result of such audits could have an adverse effect on our financial condition.
If we are not able to cost-effectively maximize the life of our properties, we may incur greater than anticipated capital
expenditure costs, which may adversely affect our ability to make distributions to our stockholders.
As of December 31, 2019, the average age of our apartment communities was approximately 19 years, after adjusting for
significant renovations. While the majority of our properties are newly-constructed or have undergone substantial renovations since
they were constructed, older properties may carry certain risks including unanticipated repair costs, increased maintenance costs as
older properties continue to age, and cost overruns due to the need for special materials and/or fixtures specific to older properties.
Although we take a proactive approach to property preservation, utilizing a preventative maintenance plan, and selective
improvements that mitigate the cost impact of maintaining exterior building features and aging building components, if we are not
able to cost-effectively maximize the life of our properties, we may incur greater than anticipated capital expenditure costs which may
adversely affect our ability to make distributions to our stockholders.
If we are unable to retain or obtain key personnel, our ability to implement our investment strategies could be hindered,
which could reduce our ability to make distributions and adversely affect the trading price of our common stock.
Our success depends to a significant degree upon the contributions of certain of our officers and other key personnel. If any
of our key personnel were to terminate their employment with us, our operating results could suffer. Further, we do not have and do
not intend to maintain key person life insurance that would provide us with proceeds in the event of death or disability of any of our
key personnel. We believe our future success depends upon our ability to hire and retain highly skilled managerial, operational and
marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting and
retaining such skilled personnel. If we lose or are unable to obtain the services of key personnel, our ability to implement our
investment strategies could be delayed or hindered, and the trading price of our common stock may be adversely affected.
Our growth will depend upon future acquisitions of multifamily apartment communities, and we may be unable to
complete acquisitions on advantageous terms or acquisitions may not perform as we expect.
Our growth will depend upon future acquisitions of multifamily apartment communities, which entails various risks,
including risks that our investments may not perform as we expect. Further, we will face competition for attractive investment
opportunities from other real estate investors, including local real estate investors and developers, as well as other multifamily REITs,
income-oriented non-traded REITs, and private real estate fund managers, and these competitors may have greater financial resources
than us and a greater ability to borrow funds to acquire properties. This competition may increase as investments in real estate
become increasingly attractive relative to other forms of investment. As a result of competition, we may be unable to acquire
additional properties as we desire or the purchase price may be significantly elevated. In addition, our acquisition activities pose the
following risks to our ongoing operations:
we may not achieve the increased occupancy, cost savings and operational efficiencies projected at the time of
acquiring a property;
management may incur significant costs and expend significant resources evaluating and negotiating potential
acquisitions, including those that we subsequently are unable to complete;
we may acquire properties that are not initially accretive to our results upon acquisition, and we may not
successfully manage and operate those properties to meet our expectations;
we may acquire properties outside of our existing markets where we are less familiar with local economic and
market conditions;
some properties may be worth less or may generate less revenue than, or simply not perform as well as, we believed
at the time of the acquisition;
we may be unable to assume mortgage indebtedness with respect to properties we seek to acquire or obtain
financing for acquisitions on favorable terms or at all;
10
we may forfeit earnest money deposits with respect to acquisitions we are unable to complete due to lack of
financing, failure to satisfy closing conditions or certain other reasons;
we may spend more than budgeted to make necessary improvements or renovations to acquired properties; and
we may acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or
unknown, such as clean-up of environmental contamination, claims by tenants, vendors or other persons against the
former owners of the properties, and claims for indemnification by general partners, trustees, officers, and others
indemnified by the former owners of the properties.
Our investment in property development or redevelopment may be more costly or difficult to complete than we anticipate,
and development and construction risks could adversely affect our profitability.
We may develop or redevelop properties where market conditions warrant such investment. Development and redevelopment
activities may be more costly or difficult to complete than we anticipate, and once made, investments in these activities may not
produce results in accordance with our expectations. Risks associated with development, redevelopment and associated construction
activities include:
unavailability of favorable financing sources in the debt and equity markets;
construction cost overruns, including on account of rising interest rates, diminished availability of materials
and labor, and increases in the costs of materials and labor;
construction and lease-up delays and failure to achieve target occupancy levels and rental rates, resulting in
increased debt service and lower than projected returns on our investment;
complications in obtaining, or inability to obtain, necessary zoning, land-use, building occupancy and other
governmental or quasi-governmental permits and authorizations, which could result in increased costs or the
delay or abandonment of opportunities and impairment charges;
unexpected environmental remediation costs;
potential disputes with, and negligent performance by, construction contractors, architects, engineers and other
service providers with which we may contract as part of a development or redevelopment project, which would
expose us to unexpected costs, delays and potential liabilities; and
occupancy rates, rents and concessions at a newly developed community may fluctuate depending on a number
of factors, including market and economic conditions, preventing us from meeting our expected return on our
investment and our overall profitability goals.
Our growth depends on securing external sources of capital that are outside of our control, which may affect our ability to
take advantage of strategic opportunities, satisfy debt obligations and make distributions to our stockholders.
In order to maintain our qualification as a REIT, we are generally required under the Code to distribute annually at least 90%
of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In
addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable
income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs,
including any necessary acquisition financing, from operating cash flow. Consequently, we may rely on third-party sources to fund
our capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt we incur may increase our
leverage or impose additional and more stringent restrictions on our operations than we currently have. If we issue additional equity
securities to finance developments and acquisitions instead of incurring debt, the interests of our existing stockholders could be
diluted. Our access to third-party sources of capital depends, in part, on:
general market conditions;
the market’s perception of our growth potential;
our current debt levels;
our current and expected future earnings;
our cash flow and cash distributions; and
the market price per share of our common stock
If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities
exist, meet the capital and operating needs of our existing properties or satisfy our debt service obligations. Further, in order to meet
the REIT distribution requirements and maintain our REIT status and to avoid the payment of income and excise taxes, we may need
to borrow funds on a short-term basis even if the then-prevailing market conditions are not favorable for these borrowings. These
short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for U.S.
11
federal income tax purposes or the effect of non-deductible capital expenditures, the creation of reserves, certain restrictions on
distributions under loan documents or required debt or amortization payments.
To the extent that capital is not available to acquire properties, profits may not be realized or their realization may be delayed,
which could result in an earnings stream that is less predictable than some of our competitors and result in us not meeting our
projected earnings and distributable cash flow levels in a particular reporting period. Failure to meet our projected earnings and
distributable cash flow levels in a particular reporting period could have an adverse effect on our financial condition and on the market
price of our common stock.
We may be subject to contingent or unknown liabilities related to properties or business that we have acquired or may
acquire for which we may have limited or no recourse against the sellers.
The properties or businesses that we have acquired or may acquire may be subject to unknown or contingent liabilities for
which we have limited or no recourse against the sellers. Unknown liabilities might include liabilities for, among other things,
cleanup or remediation of undisclosed environmental conditions, liabilities under the Employee Retirement Income Security Act of
1974, as amended, (“ERISA”), claims of residents, vendors or other persons dealing with the entities prior to the acquisition of such
property, tax liabilities, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. Because
many liabilities, including tax liabilities, may not be identified within the applicable contractual indemnification period, we may have
no recourse against any of the owners from whom we acquired such properties for these liabilities. The existence of such liabilities
could significantly adversely affect the value of the property subject to such liability. As a result, if a liability was asserted against us
based on ownership of any of such properties, then we might have to pay substantial sums to settle it, which could adversely affect our
cash flows.
We may suffer losses that are not covered by insurance.
If we suffer losses that are not covered by insurance or that are in excess of our insurance coverage, we could lose invested
capital and anticipated profits. We maintain comprehensive insurance for our properties, including casualty, liability, fire, extended
coverage, terrorism, earthquakes, hurricanes and rental loss customarily obtained for similar properties in amounts which our advisor
determines are sufficient to cover reasonably foreseeable losses, and with policy specifications and insured limits that we believe are
adequate and appropriate under the circumstances. Material losses may occur in excess of insurance proceeds with respect to any
property, and there are types of losses, generally of a catastrophic nature, such as losses due to wars, pollution, environmental matters
(such as snow or ice storms, windstorms, tornadoes, hurricanes, earthquakes, flooding or other severe weather) and mold, which are
either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments.
Moreover, we cannot predict whether all of the coverage that we currently maintain will be available to us in the future, or what the
future costs or limitations on any coverage that is available to us will be. We rely on third party insurance providers for our property,
general liability and worker’s compensation insurance. While there has yet to be any non-performance by these major insurance
providers, should any of them experience liquidity issues or other financial distress, it could negatively impact us. In addition, we
annually assess our insurance needs based on the cost of coverage and other factors. We may choose to self-insure a greater portion of
this risks in the future or may choose to have higher deductibles or lesser policy terms.
We may experience a decline in the fair value of our assets and be forced to recognize impairment charges, which could
materially and adversely impact our financial condition, liquidity and results of operations and the market price of our common
stock.
A decline in the fair value of our assets may require us to recognize an impairment against such assets under generally
accepted accounting principles as in effect in the United States (“GAAP”), if we were to determine that, with respect to any assets in
unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow
for recovery to the amortized cost of such assets. If such a determination were to be made, we would recognize unrealized losses
through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the
date they are considered to be impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent
disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale
price received and adjusted amortized cost of such assets at the time of sale. If we are required to recognize asset impairment charges
in the future, these charges could materially and adversely affect our financial condition, liquidity, results of operations and the per
share trading price of our common stock.
Representations and warranties made by us in connection with sales of our properties may subject us to liability that could
result in losses and could harm our operating results and, therefore distributions we make to our stockholders.
When we sell a property, we may be required to make representations and warranties regarding the property and other
customary items. In the event of a breach of such representations or warranties, the purchaser of the property may have claims for
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damages against us, rights to indemnification from us or otherwise have remedies against us. In any such case, we may incur
liabilities that could result in losses and could harm our operating results and, therefore distributions we make to our stockholders.
We rely on information technology systems in our operations, and any breach or security failure of those systems could
materially adversely affect our business, results of operations, financial condition and reputation.
Our information technology networks and related systems are essential to our ability to conduct our day to day
operations. In addition, our business requires us to collect and hold personally identifiable information of our residents and
prospective residents, and our employees and their dependents, in connection with our leasing and property management
activities. As a result, we face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the
internet, malware, computer viruses, attachments to emails, persons who access our systems from inside or outside our organization
and other significant disruptions of our information technology networks and related systems. We undertake various actions to
maintain the security and integrity of our information technology networks and related systems and have implemented various
measures to manage the risk of a security breach or disruption. We also maintain cyber liability insurance to provide some coverage
for certain risks arising out data and network breaches. However, we cannot be sure that our security efforts and measures will be
effective or that our cyber liability insurance coverage will be sufficient in the event of a cyber incident.
Furthermore, certain components of our information technology network are dependent upon third-party service providers
and we share personally identifiable information with many of these service providers so they can assist us with certain aspects of our
business. Our third-party service providers are primarily responsible for the security of their own information technology
environments and in certain instances, we rely significantly on third-party service providers to supply and store our sensitive data in a
secure manner. All of these third-parties face risks relating to cybersecurity similar to ours which could disrupt their businesses or
result in the disclosure of personally identifiable information that has been shared with them, and therefore adversely impact
us. While we provide guidance and specific requirements in some cases, we do not directly control any of such parties’ information
technology security operations, or the amount of investment they place in guarding against cybersecurity threats. Accordingly, we are
subject to any flaws in or breaches to their information technology systems or those which they operate for us.
A security breach or other significant disruption involving our information technology networks and related systems or
those of our vendors could: disrupt our operations; result in the unauthorized access to, and the destruction, loss, theft,
misappropriation or release of, proprietary, personally identifiable, confidential, sensitive or otherwise valuable information including
resident information and lease data, which others could use to compete against us or which could expose us to damage claims by third
parties for disruptive, destructive or otherwise harmful outcomes; require significant management attention and resources to remedy
any damages that result; subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other
agreements; or damage our business relationships or reputation generally. Any or all of the foregoing could materially and adversely
affect our business and the value of our stock.
In addition, the collection and use of personally identifiable information is governed by federal and state laws and
regulations. Privacy and information security laws continue to evolve and may be inconsistent from one jurisdiction to
another. Compliance with all such laws and regulations may be difficult due to the uncertainty surrounding the interpretation of such
laws. Such laws may also increase the our operating costs and adversely impact our ability to market our properties and
services. Noncompliance with such laws could result in the imposition of fines, awards of damages to private litigants, payment of
attorneys’ fees and other costs to plaintiffs, and substantial litigation costs.
Changes in U.S. accounting standards may materially and adversely affect our reported results of operations.
Accounting for public companies in the United States is in accordance with GAAP, which is established by the Financial Accounting
Standards Board (the “FASB”), an independent body whose standards are recognized by the SEC as authoritative for publicly held
companies. Uncertainties posed by various initiatives of accounting standard-setting by the FASB and the SEC, which create and
interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their
interpretation and application of these standards that govern the preparation of our financial statements. These changes could have a
material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or
revised standard retroactively, resulting in potentially material restatements of prior period financial statements.
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A change in the United States government policy with regard to Fannie Mae and Freddie Mac could impact our financial
condition.
Fannie Mae and Freddie Mac are a major source of financing for the multifamily residential real estate sector. Many
multifamily companies depend heavily on Fannie Mae and Freddie Mac to finance growth by purchasing or guarantying apartment
loans and to refinance outstanding indebtedness as it matures.
If new U.S. government regulations (i) heighten Fannie Mae’s and Freddie Mac’s underwriting standards, (ii) adversely
affect interest rates and (iii) continue to reduce the amount of capital they can make available to the multifamily sector, it could reduce
or remove entirely a vital resource for multifamily financing. Any potential reduction in loans, guarantees and credit-enhancement
arrangements from Fannie Mae and Freddie Mac could jeopardize the effectiveness of the multifamily sector’s available financing and
decrease the amount of available liquidity and credit that could be used to acquire and diversify our portfolio of multifamily assets, as
well as dispose of our multifamily assets upon our liquidation, and our ability to refinance our existing mortgage obligations as they
come due and obtain additional long-term financing for the acquisition of additional multifamily apartment communities on favorable
terms or at all. In addition, the members of the current presidential administration have announced that restructuring and privatizing
Fannie Mae and Freddie Mac is a priority of the current administration, and there is uncertainty regarding the impact of this action on
us and buyers of our properties.
Bankruptcy or defaults of our counterparties could adversely affect our performance.
We have relationships with and, from time to time, we execute transactions with or receive services from many
counterparties, such as general contractors engaged in connection with our redevelopment activities. As a result, bankruptcies or
defaults by these counterparties could result in services not being provided, projects not being completed on time, or on budget, or at
all, or volatility in the financial markets and economic weakness could affect the counterparties’ ability to complete transactions with
us as intended, both of which could result in disruptions to our operations that may materially adversely affect our business and results
of operations.
Our use of social media presents risks.
The use of social media could cause us to suffer brand damage or unintended information disclosure. Negative posts or
communications about us on a social networking website could damage our reputation. Further, employees or others may disclose
non-public information regarding us or our business or otherwise make negative comments regarding us on social networking or other
websites, which could adversely affect our business and results of operations. As social media evolves we will be presented with new
risks and challenges.
Severe or inclement weather and climate change could result in losses to us.
Certain of our properties are located in areas that may experience catastrophic weather and other natural events from time to
time, including fires, snow or ice storms, windstorms or hurricanes, earthquakes, flooding or other severe weather. To the extent that
extreme weather or natural events become more common or severe in areas where our communities are located, as a result of changes
in the climate or otherwise, we could experience a significant increase in insurance premiums and deductibles, or a decrease in the
availability of coverage, which may adversely affect our financial condition or results of operations. These adverse weather and
natural events could cause damage or losses that may be greater than insured levels. In the event of a loss in excess of insured limits,
we could lose our capital invested in the affected property, as well as anticipated future revenue related to the property. We could also
continue to be obligated to repay any mortgage indebtedness related to the property.
In the event extreme weather conditions such as prolonged changes in precipitation and temperature become more common
or severe in areas where our communities are located, we may experience a decrease in demand for our communities located in these
areas or affected by these conditions, which may lead to a decline in the value of these communities. We may also see an increase in
costs resulting from increased maintenance related to water damage, wind and hail, or the removal of snow and ice, or we may be
required to increase capital expenditures on resiliency measures designed to lessen the impact of severe weather. In addition, changes
in federal, state, and local legislation and regulation based on concerns about climate change could result in increased capital
expenditures to improve the energy efficiency of our existing properties without a corresponding increase in revenues.
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We face numerous risks associated with the real estate industry that could adversely affect our results of operations
through decreased revenues or increased costs.
As a real estate company, we are subject to various changes in real estate conditions and any negative trends in such real
estate conditions may adversely affect our results of operations through decreased revenues or increased costs. These conditions
include:
changes in national, regional and local economic conditions, which may be negatively impacted by concerns about
inflation, deflation, government deficits, high unemployment rates, decreased consumer confidence and liquidity
concerns, particularly in markets in which we have a high concentration of properties;
fluctuations in interest rates, which could adversely affect our ability to obtain financing on favorable terms or at all,
or could reduce our ability to deploy capital in investments that are accretive to our stockholders;
the inability of our residents to pay rent timely, or at all;
the existence and quality of the competition, such as the attractiveness of our properties as compared to our
competitors’ properties based on considerations such as convenience of location, rental rates, amenities and safety
record;
increased operating costs, including increased real property taxes, maintenance, insurance and utilities costs;
weather conditions that may increase or decrease energy costs and other weather-related expenses;
civil unrest, acts of God, including earthquakes, floods, hurricanes and other natural disasters, which may result in
uninsured losses, and acts of war or terrorism;
oversupply of multifamily housing or a reduction in demand for real estate in the markets in which our properties are
located;
a favorable interest rate environment that may result in a significant number of potential residents of our multifamily
apartment communities deciding to purchase homes instead of renting;
changes in, or increased costs of compliance with, laws and/or governmental regulations, including those governing
usage, zoning, the environment and taxes; and
rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising rents
to offset increases in operating costs.
Economic conditions may adversely affect the residential real estate market and our income.
A residential property’s income and value may be adversely affected by international, national and regional economic
conditions. During the past five years, the U.S. and international markets have experienced increased levels of volatility due to a
combination of many factors, including decreased values of homes and commercial real estate, limited access to credit markets,
increased energy costs, increased unemployment rates, and a national and global recession. Although recently some economic
conditions appear to have improved, if such improvement does not continue or if new economic or capital markets problems arise, the
value of our portfolio may decline significantly. A deterioration in economic conditions may also have an adverse effect on our
operations if they result in our tenants or prospective tenants being unable to afford the rents we need to charge to be profitable.
In addition, local real estate conditions such as an oversupply of properties or a reduction in demand for properties,
availability of “for sale” properties and competition from other similar properties, our ability to provide adequate maintenance,
insurance and management services, increased operating costs (including real estate taxes), the attractiveness and location of the
property and changes in market rental rates, may adversely affect a property’s income and value. A rise in energy costs could result in
higher operating costs, which may affect our results from operations. In addition, local conditions in the markets in which we own or
intend to own properties may significantly affect occupancy or rental rates at such properties. Layoffs, plant closings, relocations of
significant local employers and other events reducing local employment rates and the local economy; an oversupply of, or a lack of
demand for, apartments; a decline in household formation; the inability or unwillingness of residents to pay rent increases; and rent
control, rent stabilization and other housing laws, all could prevent us from raising or maintaining rents, and could cause us to reduce
rents.
The illiquidity of real estate investments could make it difficult for us to respond to changing economic, financial, and
investment conditions or changes in the operating performance of our properties, which could reduce our cash flows and adversely
affect results of operations.
Real estate investments are relatively illiquid and may become even more illiquid during periods of economic downturn. As
a result, we will have a limited ability to vary our portfolio in response to changes in economic, financial and investment conditions or
changes in the operating performance of our properties. We may not be able to sell a property or properties quickly or on favorable
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terms in response to changes in the economy or other conditions when it otherwise may be prudent to do so. This inability to respond
quickly to changes in the performance of our properties as a result of an economic or market downturn could adversely affect our
results of operations if we cannot sell an unprofitable property.
We will also have a limited ability to sell assets in order to fund working capital, repay debt and similar capital needs. Our
financial condition could be adversely affected if we were, for example, unable to sell one or more of our properties in order to meet
our debt obligations upon maturity. We cannot predict whether we will be able to sell any property for the price or on the terms set by
us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the
length of time needed to find a willing purchaser and to close the sale of a property. We also may be required to expend funds to
correct defects or to make improvements before a property can be sold, and we cannot assure you that we will have funds available to
correct those defects or to make those improvements. Our inability to dispose of assets at opportune times or on favorable terms could
adversely affect our cash flows and results of operations.
Moreover, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of
real estate companies. In particular, the tax laws applicable to REITs require that we hold our properties for investment, rather than
primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of properties that otherwise would be
in our best interests.
Therefore, we may not be able to vary our portfolio promptly in response to economic or other conditions or on favorable
terms, which may adversely affect our cash flows, our ability to make distributions to our stockholders and the market price of our
common stock.
Properties we purchase may not appreciate or may decrease in value.
The residential real estate market may experience substantial influxes of capital from investors. A substantial flow of capital,
combined with significant competition for real estate, may result in inflated purchase prices for such assets. To the extent we purchase
real estate in such an environment, we are subject to the risk that, if the real estate market subsequently ceases to attract the same level
of capital investment, or if the number of investors seeking to acquire such assets decreases, our returns will be lower and the value of
our assets may not appreciate or may decrease significantly below the amount we paid for such assets. In addition, if interest rates
applicable to financing apartment properties rise, that may negatively affect the values of our properties in any period when
capitalization rates for our properties, an important valuation metric, do not make corresponding adjustments.
We may incur liabilities in connection with properties we acquire.
We may acquire properties that are subject to liabilities or that have problems relating to environmental condition, state of
title, physical condition or compliance with zoning laws, building codes, or other legal requirements, many of which may not be
known to us at the time of acquisition. In each case, our acquisition may be without any, or with only limited, recourse with respect to
unknown liabilities or conditions. If any liability were asserted against us relating to those properties or entities, or if any adverse
condition existed with respect to the properties or entities, we might have to pay substantial sums to settle or cure it, which could
adversely affect our cash flow and operating results. While we will attempt to obtain appropriate representations and undertakings
from the sellers of the properties or entities we acquire, the sellers may not have the resources to satisfy their indemnification
obligations if a liability arises.
Increasing real estate taxes, utilities and insurance costs may negatively impact operating results.
Our properties may be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and
maintenance, administrative and other expenses. Real estate taxes, utilities costs and insurance premiums, in particular, are subject to
significant increases and fluctuations, which can be widely outside of our control. A number of our markets had tax reassessments in
2019 and we expect this to continue in future years. If our costs continue to rise, without being offset by a corresponding increase in
rental rates, our results of operations could be negatively impacted, and our ability to pay our dividends and distributions and senior
debt could be affected.
Lawsuits or other legal proceedings could result in substantial costs.
We are subject to various lawsuits and other legal proceedings and claims that arise in the ordinary course of our business
operations. The defense or settlement of any lawsuit or claim may adversely affect our business, financial condition, or results of
operations or result in increased insurance premiums.
We may be unable to secure funds for property improvements, which could reduce cash distributions to our stockholders.
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When tenants do not renew their leases or otherwise vacate, we may be required to expend funds for capital improvements to
the vacated apartment units in order to attract replacement tenants. In addition, we may require substantial funds to renovate an
apartment property in order to sell, upgrade or reposition it in the market. If our reserves are insufficient to fund these improvements,
we may have to obtain financing. We cannot assure you that sufficient financing will be available or, if available, will be available on
economically feasible terms or on terms acceptable to us. Moreover, some reserves required by lenders may be designated for specific
uses and may not be available for capital improvements to other properties. Additional borrowing will increase our interest expense,
and
The profitability of our acquisitions is uncertain.
We intend to acquire properties selectively. Acquisition of properties entails risks that investments will fail to perform in
accordance with expectations. In undertaking acquisitions, we will incur certain risks, including the expenditure of funds on, and the
devotion of management’s time to, transactions that may not come to fruition. Additional risks inherent in acquisitions include risks
that the properties will not achieve anticipated occupancy levels and that estimates of the costs of improvements to bring an acquired
property up to standards established for the market position intended for that property may prove inaccurate.
Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect our operations.
We have and may in the future acquire multiple properties in a single transaction. Such portfolio acquisitions are more
complex and expensive than single-property acquisitions, and the risk that a multiple-property acquisition does not close may be
greater than in a single-property acquisition. Portfolio acquisitions may also result in us owning investments in geographically
dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may
require that a group of properties be purchased as a package even though we may not want to purchase one or more properties in the
portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be
required to operate, or attempt to dispose of, these properties. To acquire multiple properties in a single transaction, we may be
required to accumulate a large amount of cash. We expect the returns that we can earn on such cash to be less than the ultimate
returns on real property, and therefore, accumulating such cash could reduce the funds available for distributions. Any of the
foregoing events may have an adverse effect on our operations.
If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.
If we decide to sell any of our properties, we intend to use commercially reasonable efforts to sell them for cash. However,
in some instances, we may sell our properties by providing financing to purchasers. If we provide financing to purchasers, we will
bear the risk of default by the purchaser which would reduce the value of our assets, impair our ability to make distributions to our
stockholders and reduce the price of our common stock.
Our revenue and net income may vary significantly from one period to another due to investments in value-add properties
and portfolio acquisitions, which could increase the variability of our cash distributions.
We may make investments in properties that have existing cash flow which are in various phases of development,
redevelopment or repositioning and where we believe that, through capital expenditures, we can achieve enhanced returns (which we
refer to as value-add properties), which may cause our revenues and net income to fluctuate significantly from one period to another.
Projects do not produce revenue while in development or redevelopment. We have identified a number of properties in our portfolio
as value-add properties and intend to make capital expenditures on such properties. During any period when the number of our
projects in development or redevelopment or those with significant capital requirements increases without a corresponding increase in
stable revenue-producing properties, our revenues and net income will likely decrease, and we could have losses.
Moreover, value-add properties subject us to the risks of higher than expected construction costs, failure to complete projects
on a timely basis, failure of the properties to perform at expected levels upon completion of development or redevelopment, and
increased borrowings necessary to fund higher than expected construction or other costs related to the project. There can be no
assurance that our value-add properties will be developed or repositioned in accordance with the anticipated timing or at the
anticipated cost, or that we will achieve the results we expect from these value-add properties. Failure to achieve anticipated results
could materially and adversely affect our financial condition and results of operations and ability to make distributions to
stockholders.
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We may acquire or develop properties through joint ventures, and any investment that we may make in joint ventures
could be adversely affected by our lack of sole decision-making authority regarding major decisions, our reliance on our joint
venture partners’ financial condition, any disputes that may arise between us and our joint venture partners and our exposure to
potential losses from the actions of our joint ventures.
We may enter into joint ventures with third parties to acquire or develop properties. We may also purchase properties in
partnerships, co-tenancies or other co-ownership arrangements. Such investments may involve risks not otherwise present when we
acquire or develop properties without third parties, including the following:
a co-venturer or partner may have certain approval rights over major decisions, including as to forms, amounts and
timing of equity and debt financing, operating and capital budgets, and timing of sales and liquidations, which may
prevent us from taking actions that we believe are in the best interest of our stockholders but are opposed by our co-
venturers or partners;
a co-venturer or partner may at any time have economic or business interests or goals which are or become
inconsistent with our business interests or goals, including inconsistent goals relating to the sale of properties held in
the joint venture or the timing of termination or liquidation of the joint venture;
a co-venturer or partner might experience financial distress, become insolvent or bankrupt or fail to fund its share of
required capital contributions, which may delay construction or development of a property or increase our financial
commitment to the joint venture;
we may incur liabilities as a result of an action taken by our co-venturer or partner;
a co-venturer or partner may be in a position to take actions contrary to our instructions, requests, objectives or
policies, including our policy with respect to qualifying and maintaining our qualification as a REIT;
agreements governing joint ventures, limited liability companies and partnerships often contain restrictions on the
transfer of a member’s or partner’s interest or “buy-sell” or other provisions that may result in a purchase or sale of
the interest at a disadvantageous time or on disadvantageous terms;
disputes between us and our co-venturer or partner may result in litigation or arbitration that would increase our
expenses and prevent our officers and directors from focusing their time and effort on our business and result in
subjecting the properties owned by the joint venture to additional risk; and
under certain joint venture arrangements, neither venture partner may have the power to control the venture, and an
impasse could be reached which may result in a delay of key decisions and such delay may have a negative effect on
the joint venture.
Any of these risks could materially and adversely affect our ability to generate and recognize attractive returns on joint
venture investments, which could have a material adverse effect on our results of operations, financial condition and distributions to
our stockholders.
Risks Associated with Debt Financing
We plan to incur mortgage indebtedness and other borrowings and are not limited in the amount or percentage of
indebtedness that we may incur, which may increase our business risks.
We intend to acquire properties subject to existing financing or by borrowing new funds. In addition, we intend to incur
additional mortgage debt by obtaining loans secured by some, or all, of our real properties to obtain funds to acquire additional real
properties and/or make capital improvements to properties. We may also borrow funds, if necessary, to satisfy the requirement that
we generally distribute to stockholders as dividends at least 90% of our annual REIT taxable income (computed without regard to
dividends paid and excluding net capital gain), or otherwise as is necessary or advisable to assure that we maintain our qualification as
a REIT for U.S. federal income tax purposes.
Our Articles of Restatement, which we refer to as our Charter, and our bylaws do not limit the amount or percentage of
indebtedness that we may incur. We are subject to risks normally associated with debt financing, including the risk that our cash
flows will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to
refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness
or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing
indebtedness.
In particular, loans obtained to fund property acquisitions will generally be secured by mortgages or deeds in trust on such
properties. If we are unable to make our debt service payments as required, a lender could foreclose on the property or properties
securing its debt.
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In addition, for U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the
property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the
debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not
receive any cash proceeds. We may, in some circumstances, give a guaranty on behalf of an entity that owns one or more of our
properties. In these cases, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any
mortgages contain cross-collateralization or cross-default provisions, there is a risk that we could lose part or all of our investment in
multiple properties. Each of these events could in turn cause the value of our common stock and distributions payable to stockholders
to be reduced.
Any mortgage debt which we place on properties may prohibit prepayment and/or impose a prepayment penalty upon the sale
of a mortgaged property. If a lender invokes these prohibitions or penalties upon the sale of a property or prepayment of a mortgage
on a property, the cost to us to sell the property could increase substantially. This could decrease the proceeds from a sale or
refinancing or make the sale or refinancing impractical, which may lead to a reduction in our income, reduce our cash flows and
adversely impact our ability to make distributions to stockholders.
We may also finance our property acquisitions using interest-only mortgage indebtedness. During the interest-only period,
the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the
mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal
during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and
interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments will increase the
amount of our scheduled payments and may increase our risk of default under the related mortgage loan. If the mortgage loan has an
adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments
and substantial principal or balloon maturity payments will reduce the funds available for distribution to our stockholders because cash
otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make
distributions to our stockholders.
In providing financing to us, a lender may impose restrictions on us that would affect our ability to incur additional debt,
make certain investments, reduce liquidity below certain levels, make distributions to our stockholders and otherwise affect our
distribution and operating policies. Our unsecured credit facility and unsecured term loans include restrictions and requirements
relating to the incurrence of debt, permitted investments, maximum level of distributions, maintenance of insurance, mergers and sales
of assets and transactions with affiliates. We expect that any other loan agreements we enter into will contain similar covenants and
may also impose other restrictions and limitations. Any such covenants, restrictions or limitations may limit our ability to make
distributions to you and could make it difficult for us to satisfy the requirements necessary to maintain our qualification as a REIT for
U.S. federal income tax purposes.
Lenders may be able to recover against our other properties under our mortgage loans.
In financing our property acquisitions, we may seek to obtain secured nonrecourse loans. However, only recourse financing
may be available, in which event, in addition to the property securing the loan, the lender would have the ability to look to our other
assets for satisfaction of the debt if the proceeds from the sale or other disposition of the property securing the loan are insufficient to
fully repay it. Also, in order to facilitate the sale of a property, we may allow the buyer to purchase the property subject to an existing
loan whereby we remain responsible for certain liabilities associated with the debt.
If we are required to make payments under any “bad boy” carve-out guaranties that we may provide in connection with
certain mortgages and related loans, our business and financial results could be materially adversely affected.
In obtaining certain nonrecourse loans, we may provide standard carve-out guaranties. These guaranties are only applicable
if and when the borrower directly, or indirectly through agreement with an affiliate, joint venture partner or other third party,
voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper
(commonly referred to as “bad boy” guaranties). Although we believe that “bad boy” carve-out guaranties are not guaranties of
payment in the event of foreclosure or other actions of the foreclosing lender that are beyond the borrower’s control, some lenders in
the real estate industry have recently sought to make claims for payment under such guaranties. In the event such a claim were made
against us under a “bad boy” carve-out guaranty following foreclosure on mortgages or related loan, and such claim were successful,
our business and financial results could be materially adversely affected.
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Our variable rate indebtedness subjects us to interest rate risk, and interest rate hedges that we may obtain may be costly
and ineffective.
As of December 31, 2019, $486.3 million of our $985.6 million of total outstanding indebtedness bore interest at variable
rates. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the
amount borrowed would remain the same, and our net income and cash flows would correspondingly decrease. In order to partially
mitigate our exposure to increases in interest rates, we have entered into interest rate swaps and collars on $400.0 million of our
variable rate debt, which involve the exchange of variable for fixed rate interest payments. Taking into account our current interest
rate swap and collar agreements, a 100-basis point increase in interest rates would result in a $1.5 million increase in annual interest
expense. See Item 7., “Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources – Interest Rate Risk and Sensitivity.” To the extent that we use derivative financial instruments to hedge our
exposure to variable rate indebtedness, we may be exposed to credit, basis and legal enforceability risks. Derivative financial
instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or
repurchase agreements. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative
contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk
occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability
is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the
risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. Moreover, hedging
strategies involve transaction and other costs. If we are unable to manage these risks and costs effectively, our results of operations,
financial condition and ability to make distributions may be adversely affected.
Some of our outstanding mortgage indebtedness contains, and we may in the future acquire or finance properties with,
lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period
of years on some properties.
A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out
provisions may include terms that provide strong financial disincentives for borrowers to prepay their outstanding loan balance and
exist in order to protect the yield expectations of lenders. Some of our outstanding mortgage indebtedness is, and we expect that many
of our properties will be, subject to lock-out provisions. Lock-out provisions could materially restrict us from selling or otherwise
disposing of or refinancing properties when we may desire to do so. Lock-out provisions may prohibit us from reducing the
outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or
increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other
actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on
the value of our shares relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions
could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even
though that disposition or change in control might be in the best interests of our stockholders.
Complying with REIT requirements may limit our ability to hedge risk effectively.
The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Any income or gain
derived by us from transactions that hedge certain risks, such as the risk of changes in interest rates, will not be treated as gross
income for purposes of either the 75% or the 95% Gross Income Test, as defined in Exhibit 99.1 “Material U.S. Federal Income Tax
Considerations” of this report, provided specific requirements are met. Such requirements include that the hedging transaction be
properly identified within prescribed time periods and that the transaction either (i) hedges risks associated with indebtedness issued
by us that is incurred to acquire or carry real estate assets or (ii) manages the risks of currency fluctuations with respect to income or
gain that qualifies under the 75% or 95% Gross Income Test (or assets that generate such income). To the extent that we do not
properly identify such transactions as hedges, hedge with other types of financial instruments, or hedge other types of indebtedness,
the income from those transactions will not be treated as qualifying income for purposes of the 75% and 95% Gross Income Tests. As
a result of these rules, we may have to limit the use of hedging techniques that might otherwise be advantageous, which could result in
greater risks associated with interest rate or other changes than we would otherwise incur.
There is refinancing risk associated with our debt.
We expect that we will incur additional indebtedness in the future. Certain of our outstanding debt contains, and we may in
the future acquire or finance properties with debt containing, limited or no principal amortization, which would require that the
principal be repaid at the maturity of the loan in a so-called “balloon payment.” As of December 31, 2019, the financing arrangements
of our outstanding indebtedness could require us to make lump-sum or “balloon” payments of approximately $955.3 million at
maturity dates that range from 2021 to 2026. At the maturity of these loans, assuming we do not have sufficient funds to repay the
debt, we will need to refinance the debt. If the credit environment is constrained at the time of our debt maturities, we would have a
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very difficult time refinancing debt. In addition, for certain loans, we locked in our fixed-rate debt at a point in time when we were
able to obtain favorable interest rate, principal payments and other terms. When we refinance our debt, prevailing interest rates and
other factors may result in us paying a greater amount of debt service, which will adversely affect our cash flow and our ability to
make distributions to our stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to choose from a
number of unfavorable options, including agreeing to otherwise unfavorable financing terms on one or more of our unencumbered
assets, selling one or more properties at disadvantageous terms, including unattractive prices, or defaulting on the mortgage and
permitting the lender to foreclose. Any one of these options could have a material adverse effect on our business, financial condition,
results of operations and our ability to make distributions to our stockholders.
High mortgage rates and/or unavailability of mortgage debt may make it difficult for us to finance or refinance properties,
which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can make.
If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place
mortgage debt on properties, we may be unable to refinance the properties when the loans become due, or to refinance on favorable
terms. If interest rates are higher when we refinance our properties, our income could be reduced. If any of these events occur, our
cash flow could be reduced. This, in turn, could reduce cash available for distribution to our security holders and may hinder our
ability to raise more capital by issuing more stock or by borrowing more money.
Some of our mortgage loans may have “due on sale” provisions, which may impact the manner in which we acquire, sell
and/or finance our properties.
In purchasing properties subject to financing, we may obtain financing with “due-on-sale” and/or “due-on-encumbrance”
clauses. Due-on-sale clauses in mortgages allow a mortgage lender to demand full repayment of the mortgage loan if the borrower
sells the mortgaged property. Similarly, due-on-encumbrance clauses allow a mortgage lender to demand full repayment if the
borrower uses the real estate securing the mortgage loan as security for another loan. In such event, we may be required to sell our
properties on an all-cash basis, to acquire new financing in connection with the sale, or to provide seller financing which may make it
more difficult to sell the property or reduce the selling price.
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We may be adversely affected by changes in LIBOR reporting practices, the method in which LIBOR is determined or the
use of alternative reference rates.
In July 2017, the United Kingdom regulator that regulates LIBOR announced its intention to phase out LIBOR rates by the
end of 2021. It is impossible to predict the further effect of this announcement, any changes in the methods by which LIBOR is
determined or other reforms to LIBOR that may be enacted. In April 2018, the New York Federal Reserve commenced publishing an
alternative reference rate, the Secured Overnight Financing Rate (“SOFR”), proposed by a group of major market participants (the
Alternative Reference Rates Committee (“ARRC”)), and convened by the U.S. Federal Reserve with participation by SEC Staff and
other regulators. SOFR is based on transactions in the more robust U.S. Treasury repurchase market and has been proposed as the
alternative to LIBOR for use in derivatives and other financial contracts that currently rely on LIBOR as a reference rate. ARRC has
proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry-wide and
company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. At this time, no consensus exists as
to what rate or rates may become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will
continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported
before or after 2021 or whether additional reforms to LIBOR may be enacted. Such developments and any other legal or regulatory
changes in the method by which LIBOR is determined or the transition from LIBOR to a successor benchmark may result in, among
other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and changes in the rules or
methodologies of LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s
determination and, in certain situations, could result in LIBOR no longer being determined and published. If a published U.S. dollar
LIBOR rate is unavailable after 2021, the benchmark interest rate for our debt which is currently indexed to LIBOR (“LIBOR Debt”)
will be determined using an alternate rate of interest established pursuant to the provisions set forth in the documents governing our
LIBOR Debt and the spread will be adjusted to account for any initial difference between such alternate rate of interest and the LIBOR
rate most recently in effect, as more specifically provided in our LIBOR Debt documents. Despite the initial adjustment in the our
spread, uncertainty as to the extent and manner of future changes in the alternate rate of interest may result in interest rates and/or
payments that are higher than, lower than or that do not otherwise correlate over time with the interest rates and/or payments that
would have been made on our obligations if LIBOR rate was available in its current form. Further, the same costs and risks that may
lead to the unavailability of U.S. dollar LIBOR may make one or more of the alternative methods impossible or impracticable to
determine. Any of these proposals or consequences could have a material adverse effect on our financing costs, and consequently, on
our financial condition, operating results and cash flows.
Compliance with Laws
We are subject to significant regulations, which could adversely affect our results of operations through increased costs
and/or an inability to pursue business opportunities.
Local zoning and use laws, environmental statutes and other governmental requirements may restrict or increase the costs of
our development, expansion, renovation and reconstruction activities and thus may prevent or delay us from taking advantage of
business opportunities. Failure to comply with these requirements could result in the imposition of fines, awards to private litigants of
damages against us, substantial litigation costs and substantial costs of remediation or compliance. In addition, we cannot predict
what requirements may be enacted in the future or that such requirements will not increase our costs of regulatory compliance or
prohibit us from pursuing business opportunities that could be profitable to us, which could adversely affect our results of operations.
The costs of compliance with environmental laws and regulations may adversely affect our net income and the cash
available for any distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations
relating to environmental protection and human health and safety. Examples of federal laws include: the National Environmental
Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Solid Waste Disposal Act, as amended
by the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic
Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act. These
laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and
aboveground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the
remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on
tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality
of the original disposal.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such
property. The costs of removal or remediation could be substantial. These laws often impose liability whether or not the owner or
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operator knew of, or was responsible for, the presence of the hazardous or toxic substances. In addition, the presence of these
substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent the property or to use
the property as collateral for future borrowing.
Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be
operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of
noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental
laws and common law principles govern the presence, maintenance, removal and disposal of certain building materials, including
asbestos and lead-based paint. Such hazardous substances could be released into the air and third parties may seek recovery from
owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous
substances.
In addition, if any property in our portfolio is not properly connected to a water or sewer system, or if the integrity of such
systems is breached, microbial matter or other contamination can develop. If this were to occur, we could incur significant remedial
costs and we may also be subject to private damage claims and awards, which could be material. If we become subject to claims in
this regard, it could materially and adversely affect us.
Property values may also be affected by the proximity of such properties to electric transmission lines. Electric transmission
lines are one of many sources of electro-magnetic fields (“EMFs”), to which people may be exposed. Research completed regarding
potential health concerns associated with exposure to EMFs has produced inconclusive results. Notwithstanding the lack of
conclusive scientific evidence, some states now regulate the strength of electric and magnetic fields emanating from electric
transmission lines and other states have required transmission facilities to measure for levels of EMFs. On occasion, lawsuits have
been filed (primarily against electric utilities) that allege personal injuries from exposure to transmission lines and EMFs, as well as
from fear of adverse health effects due to such exposure. This fear of adverse health effects from transmission lines may be
considered both when property values are determined to obtain financing and in condemnation proceedings. We may not, in certain
circumstances, search for electric transmission lines near our properties, but are aware of the potential exposure to damage claims by
persons exposed to EMFs.
The cost of defending against such claims of liability, of compliance with environmental regulatory requirements, of
remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or
results of operations and, consequently, amounts available for distribution to our stockholders.
We cannot provide any assurance properties which we acquire will not have any material environmental conditions, liabilities
or compliance concerns. Accordingly, we have no way of determining at this time the magnitude of any potential liability to which
we may be subject arising out of environmental conditions or violations with respect to the properties we own.
Costs associated with addressing indoor air quality issues, moisture infiltration and resulting mold remediation may be
costly.
As a general matter, concern about indoor exposure to mold or other air contaminants has been increasing as such exposure
has been alleged to have a variety of adverse effects on health. As a result, there have been a number of lawsuits in our industry
against owners and managers of apartment communities relating to indoor air quality, moisture infiltration and resulting mold. Some
of our properties may contain microbial matter such as mold and mildew. The terms of our property and general liability policies
generally exclude certain mold-related claims. Should an uninsured loss arise against us, we would be required to use our funds to
resolve the issue, including litigation costs. We can offer no assurance that liabilities resulting from indoor air quality, moisture
infiltration and the presence of or exposure to mold will not have a future impact on our business, results of operations and financial
condition.
Our costs associated with and the risk of failing to comply with the Americans with Disabilities Act may affect our net
income.
We generally expect that our properties will be subject to the Americans with Disabilities Act of 1990, as amended (the
“Disabilities Act”). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements
related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public
accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to
people with disabilities. The Disabilities Act does not, however, consider residential properties, such as apartment properties, to be
public accommodations or commercial facilities, except to the extent portions of such facilities, such as a leasing office, are open to
the public. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of
injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with
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the Disabilities Act or place the burden on the seller or a third party to ensure compliance with such laws. However, we cannot assure
you that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, costs in complying with these
laws may adversely affect our results of operations financial condition and ability to make distributions to our stockholders.
We must comply with the Fair Housing Amendments Act of 1988 (the “FHAA”), and failure to comply could result in
substantial costs.
We must comply with the FHAA, which requires that apartment properties first occupied after March 13, 1991 be accessible
to handicapped residents and visitors. As with the Disabilities Act, compliance with the FHAA could require removal of structural
barriers to handicapped access in a community, including the interiors of apartment units covered under the FHAA. Recently there
has been heightened scrutiny of apartment housing properties for compliance with the requirements of the FHAA and the Disabilities
Act and an increasing number of substantial enforcement actions and private lawsuits have been brought against apartment
communities to ensure compliance with these requirements. Noncompliance with the FHAA could result in the imposition of fines,
awards of damages to private litigants, payment of attorneys’ fees and other costs to plaintiffs, substantial litigation costs and
substantial costs of remediation.
Legislative or regulatory action could adversely affect the returns to our investors.
United States Federal Income Tax Risks
Legislative, regulatory or administrative changes could be enacted or promulgated at any time, either prospectively or with
retroactive effect, and may adversely affect us and/or our stockholders.
On December 22, 2017, a bill informally known as the Tax Cuts and Jobs Act (the “TCJA”) was signed into law. The TCJA
makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations, generally effective for
taxable years beginning after December 31, 2017. In addition to reducing corporate and individual tax rates, the TCJA eliminates or
restricts various deductions. One such deduction limitation is a general limitation of the deduction for net business interest expense in
excess of 30% of a business’s “adjusted taxable income,” except for taxpayers that engage in certain real estate businesses and elect
out of this rule (provided that such electing taxpayers must use an alternative depreciation system with longer depreciation periods).
Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and
before January 1, 2026. The TCJA makes numerous large and small changes to the tax rules that do not affect the REIT qualification
rules directly but may otherwise affect us or our stockholders.
While the changes in the TCJA generally appear to be favorable with respect to REITs and their stockholders, the extensive
changes to non-REIT provisions in the Code may have unanticipated effects on us or our stockholders. Moreover, Congressional
leaders have recognized that the process of adopting extensive tax legislation in a short amount of time without hearings and
substantial time for review is likely to have led to drafting errors, issues needing clarification and unintended consequences that will
have to be revisited in subsequent tax legislation. At this point, although certain additional guidance has been provided by Treasury
and the IRS, it is not clear if or when Congress will address these issues or when the IRS will issue additional administrative guidance
on the changes made in the TCJA.
We urge you to consult with your own tax advisor with respect to the status of the TCJA and other legislative, regulatory or
administrative developments and proposals and their potential effect on an investment in shares of our common stock.
Dividends paid by REITs do not qualify for the reduced tax rates provided under current law.
Dividends paid by REITs are generally not eligible for the reduced 15% maximum tax rate for dividends paid to individuals
(20% for those with taxable income above certain thresholds that are adjusted annually under current law). The more favorable rates
applicable to regular corporate dividends could cause stockholders who are individuals to perceive investments in REITs to be
relatively less attractive than investments in the stock of non-REIT corporations that pay dividends to which more favorable rates
apply, which could reduce the value of the stocks of REITs. However, under the TCJA regular dividends from REITs are treated as
income from a pass-through entity and are eligible for a 20% deduction. As a result, our regular dividends will be taxed at 80% of an
individual’s marginal tax rate. The current maximum rate is 37% resulting in a maximum tax rate of 29.6% on our dividends.
Dividends from REITs as well as regular corporate dividends will also be subject to a 3.8% Medicare surtax for taxpayers with
modified adjusted gross income above $200,000 (if single) or $250,000 (if married and filing jointly).
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We may decide to borrow funds to satisfy our REIT minimum distribution requirements, which could adversely affect our
overall financial performance.
We may decide to borrow funds in order to meet the REIT minimum distribution requirements even if our management
believes that the then prevailing market conditions generally are not favorable for such borrowings or that such borrowings would not
be advisable in the absence of such tax considerations. If we borrow money to meet the REIT minimum distribution requirements or
for other working capital needs, our expenses will increase, our net income will be reduced by the amount of interest we pay on the
money we borrow and we will be obligated to repay the money we borrow from future earnings or by selling assets, any or all of
which may decrease future distributions to stockholders.
To maintain our qualification as a REIT, we may be forced to forego otherwise attractive opportunities, which may delay
or hinder our ability to meet our investment objectives and adversely affect the trading price of our common stock.
To maintain our qualification as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things,
the sources of our income, nature of our assets and the amounts we distribute to our stockholders. We may be required to make
distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have
funds readily available for distribution. Compliance with the REIT qualification requirements may hinder our ability to operate solely
on the basis of maximizing profits and adversely affect the trading price of our common stock.
If we fail to maintain our qualification as a REIT, we will be subject to tax on our income, and the amount of
distributions we make to our stockholders will be less.
We intend to maintain our qualification as a REIT under the Code. A REIT generally is not taxed at the corporate level on
income and gains that it distributes to its stockholders on a timely basis. We do not intend to request a ruling from the Internal
Revenue Service (the “IRS”), as to our REIT status. Qualification as a REIT involves the application of highly technical and complex
rules for which there are only limited judicial or administrative interpretations. The determination of various factual matters and
circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, new legislation,
regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a
REIT or the U.S. federal income tax consequences of such qualification, including changes with retroactive effect.
If we fail to qualify as a REIT in any taxable year:
we would not be allowed to deduct our distributions to our stockholders when computing our taxable income;
we would be subject to U.S. federal income tax (including any applicable alternative minimum tax in tax years
beginning before January 1, 2018) on our taxable income at regular corporate rates;
we generally would be disqualified from being taxed as a REIT for the four taxable years following the year during
which qualification was lost, unless entitled to relief under certain statutory provisions;
we would have less cash to make distributions to our stockholders; and
we might be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations
we may incur as a result of our disqualification.
Although our organization and current and proposed method of operation is intended to enable us to maintain our
qualification to be taxed as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our board
of directors to revoke our REIT election. Even if we maintain our qualification to be taxed as a REIT, we expect to incur some taxes,
such as state and local taxes, taxes imposed on certain subsidiaries and potential U.S. federal excise taxes.
We encourage you to read Exhibit 99.1-”Material U.S. Federal Income Tax Considerations” to this report for further
discussion of the tax issues related to an investment in us.
The ability of our Board of Directors to revoke our REIT election without stockholder approval may cause adverse
consequences to our stockholders.
Our Charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without the approval
of our stockholders, if it determines that it is no longer in our best interest to continue to maintain our qualification as a REIT. If we
cease to maintain our qualification as a REIT, we would become subject to U.S. federal income tax on our taxable income without the
benefit of the dividends paid deduction and would no longer be required to distribute most of our taxable income to our stockholders,
which may have adverse consequences on the total return to our stockholders.
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To maintain our qualification as a REIT, we must meet annual distribution requirements, which may result in our
distributing amounts that may otherwise be used for our operations.
To obtain the favorable tax treatment accorded to REITs, we generally are required each year to distribute to our stockholders
at least 90% of our REIT taxable income (excluding net capital gain), determined without regard to the deduction for distributions
paid. We are subject to U.S. federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible
excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (i) 85% of our
ordinary income, (ii) 95% of our capital gain net income and (iii) 100% of our undistributed income from prior years. These
requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets, and it is possible
that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we intend
to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our
earnings, it is possible that we might not always be able to do so.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
To maintain our qualification as a REIT, we must continually satisfy various tests regarding sources of income, nature and
diversification of assets, amounts distributed to stockholders and the ownership of shares of our capital stock. In order to satisfy these
tests, we may be required to forgo investments that might otherwise be made. Accordingly, compliance with the REIT requirements
may hinder our investment performance.
In particular, at least 75% of our total assets at the end of each calendar quarter must consist of real estate assets, government
securities, and cash or cash items. For this purpose, “real estate assets” generally include interests in real property, such as land,
buildings, leasehold interests in real property, stock of other entities that qualify as REITs, interests in mortgage loans secured by real
property, investments in stock or debt instruments during the one-year period following the receipt of new capital and regular or
residual interests in a real estate mortgage investment conduit. In addition, the amount of securities of a single issuer that we hold,
other than securities qualifying under the 75% asset test and certain other securities, must generally not exceed either 5% of the value
of our gross assets or 10% of the vote or value of such issuer’s outstanding securities.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are
sales or other dispositions of property, other than foreclosure property, held in inventory or primarily for sale to customers in the
ordinary course of business. It may be possible to reduce the impact of the prohibited transaction tax and the holding of assets not
qualifying as real estate assets for purposes of the REIT asset tests by conducting certain activities, or holding non-qualifying REIT
assets through a taxable REIT subsidiary (a “TRS”), subject to certain limitations as described below. To the extent that we engage in
such activities through a TRS, the income associated with such activities will be subject to full U.S. federal corporate income tax.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return
on any investment in our securities.
Our ability to dispose of property is restricted to a substantial extent as a result of our REIT status. Under applicable
provisions of the Code regarding prohibited transactions by REITs, we will be subject to a 100% tax on any gain recognized on the
sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity,
including IROP, but excluding a TRS, that is deemed to be inventory or property held primarily for sale to customers in the ordinary
course of trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a
trade or business depends on the particular facts and circumstances surrounding each property. No assurance can be given that any
particular property we own, directly or through any subsidiary entity, including IROP, but excluding a “TRS”, will not be treated as
inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
The use of TRSs would increase our overall tax liability.
Some of our assets may need to be owned or sold, or some of our operations may need to be conducted by TRSs. We do not
currently have significant operations through a TRS but may in the future. A TRS will be subject to U.S. federal and state income tax
on its taxable income. The after-tax net income of a TRS would be available for distribution to us. Further, we will incur a 100%
excise tax on transactions with a TRS that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by
a TRS exceeds an arm’s-length rental amount, such amount is potentially subject to the excise tax. We intend that all transactions
between us and any TRS we form will be conducted on an arm’s-length basis, and, therefore, any amounts paid by any TRS we form
to us will not be subject to the excise tax. However, no assurance can be given that no excise tax would arise from such transactions.
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If our operating partnership, IROP, is not treated as a partnership or disregarded entity for U.S. federal income tax
purposes, its income may be subject to taxation.
We intend to maintain the status of IROP as a partnership or disregarded entity for U.S. federal income tax purposes.
However, if the IRS were to successfully challenge the status of IROP as a partnership or disregarded entity for such purposes, it
would be taxable as a corporation. In such event, this would reduce the amount of distributions that IROP could make to us. This
would also result in our losing REIT status, and becoming subject to a corporate level tax on our own income. This would
substantially reduce our cash available to pay distributions and the yield on any investment in our securities. In addition, if any of the
partnerships or limited liability companies through which IROP owns its properties, in whole or in part, loses its characterization as a
partnership for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to
IROP. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.
Distributions to tax-exempt investors may be classified as unrelated business taxable income, or UBTI, and tax-exempt
investors would be required to pay tax on such income and to file income tax returns.
Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the sale of stock should
generally constitute UBTI to a tax-exempt investor. However, there are certain exceptions to this rule, including:
under certain circumstances, part of the income and gain recognized by certain qualified employee pension trusts
with respect to our stock may be treated as UBTI if our stock is predominately held by qualified employee pension
trusts, such that we are a “pension-held” REIT (which we do not expect to be the case);
part of the income and gain recognized by a tax-exempt investor with respect to our stock would constitute UBTI if
such investor incurs debt in order to acquire our common stock; and
part or all of the income or gain recognized with respect to our stock held by social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are
exempt from U.S. federal income taxation under Sections 501(c)(7), (9), (17) or (20) of the Code may be treated as
UBTI.
We encourage you to consult your own tax advisor to determine the tax consequences applicable to you if you are a tax-
exempt investor.
Distributions to foreign investors may be treated as an ordinary income distribution to the extent that it is made out of
current or accumulated earnings and profits.
In general, foreign investors will be subject to regular U.S. federal income tax with respect to their investment in our stock if
the income derived therefrom is “effectively connected” with the foreign investor’s conduct of a trade or business in the United States.
A distribution to a foreign investor that is not attributable to gain realized by us from the sale or exchange of a “U.S. real property
interest” within the meaning of the Foreign Investment in Real Property Tax Act of 1980, as amended, “FIRPTA” will be treated as an
ordinary income distribution to the extent that it is made out of current or accumulated earnings and profits (as determined for U.S.
federal income tax purposes). Generally, any ordinary income distribution will be subject to a U.S. withholding tax equal to 30% of
the gross amount of the distribution, unless this tax is reduced by the provisions of an applicable treaty.
Foreign investors may be subject to FIRPTA tax upon the sale of their shares of our stock.
A foreign investor disposing of a U.S. real property interest, including shares of stock of a U.S. corporation whose assets
consist principally of U.S. real property interests, is generally subject to FIRPTA tax on the gain recognized on the disposition. Such
FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is “domestically controlled.” A REIT is
“domestically controlled” if less than 50% of the REIT’s stock, by value, has been owned directly or indirectly by persons who are not
U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the
REIT’s existence. While we intend to qualify as “domestically controlled,” we cannot assure you that we will. If we were to fail to so
qualify, gain realized by foreign investors on a sale of shares of our stock would be subject to FIRPTA tax, unless the shares of our
stock were traded on an established securities market and the foreign investor did not at any time during a specified testing period
directly or indirectly own more than 10% of the value of our outstanding common stock.
Foreign investors may be subject to FIRPTA tax upon a capital gain dividend.
A foreign investor may be subject to FIRPTA tax upon the payment of any capital gain dividend by us if such dividend is
attributable to gain from sales or exchanges of U.S. real property interests, unless the shares of our stock were traded on an established
27
securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than
10% of the value of our outstanding common stock.
We encourage you to consult your own tax advisor to determine the tax consequences applicable to you if you are a foreign
investor.
We may make distributions consisting of both stock and cash, in which case stockholders may be required to pay income
taxes in excess of the cash distributions they receive.
We may make distributions that are paid in cash and stock at the election of each stockholder and may distribute other forms
of taxable stock dividends. Taxable stockholders receiving such distributions will be required to include the full amount of the
distributions as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax
purposes. As a result, stockholders may be required to pay income taxes with respect to such distributions in excess of the cash
received. If a stockholder sells the stock that it receives in order to pay this tax, the sales proceeds may be less than the amount
included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, in
the case of certain non-U.S. stockholders, we may be required to withhold federal income tax with respect to taxable dividends,
including taxable dividends that are paid in stock. In addition, if a significant number of our stockholders decide to sell their shares in
order to pay taxes owed with respect to taxable stock dividends, it may put downward pressure on the trading price of our stock.
If our operating partnership, IROP, were classified as a “publicly traded partnership” taxable as a corporation for U.S.
federal income tax purposes under the Code, we would cease to maintain our qualification as a REIT and would suffer other
adverse tax consequences.
We intend for IROP to be treated as a partnership for U.S. federal income tax purposes. If the IRS were to successfully
challenge the status of IROP as a partnership, however, IROP generally would be taxable as a corporation. In such event, we likely
would fail to maintain our status as a REIT for U.S. federal income tax purposes, and the resulting corporate income tax burden would
reduce the amount of distributions that IROP could make to us. This would substantially reduce the cash available to pay distributions
to our stockholders. In addition, if any of the partnerships or limited liability companies through which the operating partnership owns
its properties, in whole or in part, loses its characterization as a partnership and is not otherwise disregarded for U.S. federal income
tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the operating partnership. Such a
recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
Our stockholders may be restricted from acquiring or transferring certain amounts of our common stock.
Certain provisions of the Code and the stock ownership limits in our Charter may inhibit market activity in our capital stock
and restrict our business combination opportunities. In order to maintain our qualification as a REIT, five or fewer individuals, as
defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any
time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or
constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital
stock during at least 335 days of a taxable year. To help ensure that we meet these tests, our Charter restricts the acquisition and
ownership of shares of our stock.
Our Charter, with certain exceptions, authorizes our Board of Directors to take such actions as are necessary and desirable to
preserve our qualification as a REIT. Unless exempted by our Board of Directors, our Charter prohibits any person from beneficially
or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our
common stock or capital stock. Our Board of Directors may not grant an exemption from these restrictions to any proposed transferee
whose ownership in excess of ownership limits would result in our failing to maintain our qualification as a REIT. These restrictions
on transferability and ownership will not apply, however, if our Board of Directors determines that it is no longer in our best interest
to continue to maintain our qualification as a REIT.
Risks Related to Our Organization and Structure
The Maryland General Corporation Law prohibits certain business combinations, which may make it more difficult for us
to be acquired.
Under the Maryland General Corporation Law, “business combinations” between a Maryland corporation and an “interested
stockholder” or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested
stockholder became an interested stockholder. These business combinations include a merger, consolidation, share exchange, or in
circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is
28
defined as (i) any person who beneficially owns 10% or more of the voting power of the then outstanding voting stock of the
corporation; or (ii) an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question,
was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by
which the person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors
may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by
the board.
After the expiration of the five-year period described above, any business combination between the Maryland corporation and
an interested stockholder must generally be recommended by the board of directors of the corporation and approved by the affirmative
vote of at least:
80% of the votes entitled to be cast by holders of the then outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation, other than shares held by the
interested stockholder with whom or with whose affiliate the business combination is to be effected, or held by an
affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as
defined under the Maryland General Corporation Law, for their shares in the form of cash or other consideration in the same form as
previously paid by the interested stockholder for its shares. The Maryland General Corporation Law also permits various exemptions
from these provisions, including business combinations that are exempted by the board of directors before the time that the interested
stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has by resolution exempted business
combinations between us and any other person from these provisions of the Maryland General Corporation Law, provided that the
business combination is first approved by our board of directors and, consequently, the five year prohibition and the supermajority
vote requirements will not apply to such business combinations. As a result, any person approved by our board of directors will be
able to enter into business combinations with us that may not be in the best interests of our stockholders without compliance by us
with the supermajority vote requirements and other provisions of the statute. This resolution, however, may be altered or repealed in
whole or in part at any time. If this resolution is repealed, or our board of directors does not otherwise approve a business
combination, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any
offer.
Stockholders have limited control over changes in our policies and operations.
Our board of directors determines our major policies, including those regarding our investment objectives and strategies,
financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and
other policies without a vote of the stockholders. Under our Charter, and bylaws and the Maryland General Corporation Law, our
stockholders generally have a right to vote only on the following matters:
the election or removal of directors;
certain mergers, consolidations, statutory share exchanges and transfers of assets;
our dissolution;
adoption, amendment, alteration or repeal of provisions in our bylaws;
the amendment of our charter, except that our board of directors may amend our charter without stockholder
approval to:
change our name;
change the name or other designation or the par value of any class or series of stock and the aggregate par
value of our stock;
increase or decrease the aggregate number of our authorized shares;
increase or decrease the number of our shares of any class or series of stock that we have the authority to
issue; and
effect certain reverse stock splits.
All other matters are subject to the discretion of our board of directors.
29
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
Our Charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our
board of directors may, without stockholder approval, amend our Charter from time to time to increase or decrease the aggregate
number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue and classify or
reclassify any unissued shares of common or preferred stock into other classes or series of stock and set the preferences, rights and
other terms of the classified or reclassified shares. As a result, our board of directors may establish a series of common or preferred
stock that could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or
otherwise be in the best interest of our stockholders.
Because of our holding company structure, we depend on our operating partnership, IROP, and its subsidiaries for cash
flow; however, we will be structurally subordinated in right of payment to the obligations of IROP and its subsidiaries.
We are a holding company with no business operations of our own. Our only significant asset is and will be the partnership
interests in IROP. We conduct, and intend to continue to conduct, all of our business operations through IROP. Accordingly, our
only source of cash to pay our obligations is distributions from IROP and its subsidiaries of their net earnings and cash flows. We
cannot assure you that IROP or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to make
distributions to our stockholders from cash flows from operations. Each of IROP’s subsidiaries is a distinct legal entity and, under
certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from such entities. In addition, because
we are a holding company, your claims as stockholders will be structurally subordinated to all existing and future liabilities and
obligations of IROP and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those
of IROP and its subsidiaries will be able to satisfy your claims as stockholders only after all of our and IROP’s and its subsidiaries’
liabilities and obligations have been paid in full.
Our rights and the rights of our stockholders to recover on claims against our directors are limited, which could reduce
your and our recovery against them if they negligently cause us to incur losses.
The Maryland General Corporation Law provides that a director has no liability in such capacity if he performs his duties in
good faith, in a manner he reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like
position would use under similar circumstances. In addition, our directors and officers will not be liable to us or our stockholders for
monetary damages unless the director or officer actually received an improper benefit or profit in money, property or services, or is
adjudged to be liable to us or our stockholders based on a finding that his or her action, or failure to act, was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. We will indemnify and advance expenses
to our directors and officers to the maximum extent permitted by the Maryland General Corporation Law and we are permitted to
purchase and maintain insurance or provide similar protection on behalf of any directors, officers, employees and agents, against any
liability asserted which was incurred in any such capacity with us or arising out of such status.
Risks Relating to the Market for our Common Stock
The percentage of ownership of any of our common stockholders may be diluted if we issue new shares of common stock.
Stockholders have no rights to buy additional shares of stock if we issue new shares of stock. We may issue common stock,
convertible debt or preferred stock pursuant to a public offering or a private placement, to sellers of properties we directly or indirectly
acquire instead of, or in addition to, cash consideration. Because our decision to issue securities in any future offering will depend on
market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future
offerings. Any of our common stockholders who do not participate in any future stock issuances will experience dilution in the
percentage of the issued and outstanding stock they own.
Sales of our common stock, or the perception that such sales will occur, may have adverse effects on our share price.
We cannot predict the effect, if any, of future sales of common stock, or the availability of shares for future sales, on the
market price of our common stock. Sales of substantial amounts of common stock, including shares of common stock issuable upon
the exchange of units of our operating partnership, IROP, that we may issue from time to time, the sale of shares of common stock
held by our current stockholders and the sale of any shares we may issue under our long-term incentive plan, or the perception that
these sales could occur, may adversely affect prevailing market prices for our common stock.
30
An increase in market interest rates may have an adverse effect on the market price of our common stock.
One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution yield,
which is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase,
prospective investors may desire a higher distribution yield on our common stock or may seek securities paying higher dividends or
interest. The market price of our common stock likely will be based primarily on the earnings that we derive from rental income with
respect to our properties and our related distributions to stockholders, and not from the underlying appraised value of the properties
themselves. As a result, interest rate fluctuations and capital market conditions are likely to affect the market price of our common
stock, and such effects could be significant. For example, if interest rates rise without an increase in our distribution rate, the market
price of our common stock could decrease because potential investors may require a higher distribution yield on our common stock as
market rates on interest-bearing securities, such as bonds, rise.
Some of our distributions may include a return of capital for U.S. federal income tax purposes.
Some of our distributions may include a return of capital. To the extent that we decide to make distributions in excess of our
current and accumulated earnings and profits, such distributions would generally be considered a return of capital for U.S. federal
income tax purposes to the extent of the holder’s adjusted tax basis in its shares, and thereafter as gain on a sale or exchange of such
shares.
Future issuances of debt securities, which would rank senior to our common stock upon liquidation, or future issuances
of preferred equity securities, may adversely affect the trading price of our common stock.
In the future, we may issue debt or equity securities or incur other borrowings. Upon our liquidation, holders of our debt
securities, other loans and preferred stock will receive a distribution of our available assets before common stockholders. Any
preferred stock, if issued, likely will also have a preference on periodic distribution payments, which could eliminate or otherwise
limit our ability to make distributions to common stockholders. Common stockholders bear the risk that our future issuances of debt
or equity securities or our incurrence of other borrowings may negatively affect the trading price of our common stock.
The market prices for our common stock may be volatile.
The prices at which our common stock may sell in the public market may be volatile. Fluctuations in the market prices of our
common stock may not be correlated in a predictable way to our performance or operating results. The prices at which our common
stock trade may fluctuate as a result of factors that are beyond our control or unrelated to our performance or operating results.
We have not established a minimum dividend payment level and we cannot assure you of our ability to pay dividends in
the future or the amount of any dividends.
Our board of directors will determine the amount and timing of distributions. In making this determination, our directors will
consider all relevant factors, including REIT minimum distribution requirements, the amount of core funds from operation, restrictions
under Maryland law, capital expenditures and reserve requirements and general operational requirements. We cannot assure you that
we will be able to make distributions in the future or in amounts similar to our past distributions. We may need to fund distributions
through borrowings, returning capital or selling assets, which may be available only at commercially unattractive terms, if at all. Any
of the foregoing could adversely affect the market price of our common stock.
ITEM 1B. Unresolved Staff Comments
None.
31
ITEM 2.
Properties
We hold fee title to all of the apartment properties in our portfolio. The following table presents an overview of our portfolio as of
December 31, 2019.
Market
Atlanta, GA
Raleigh - Durham, NC
Louisville, KY
Tampa-St. Petersburg, FL
Columbus, OH
Memphis, TN
Indianapolis, IN
Dallas, TX
Charleston, SC
Oklahoma City, OK
Myrtle Beach, SC - Wilmington, NC
Orlando, FL
Charlotte, NC
St. Louis, MO
Baton Rouge, LA
Asheville, NC
Chattanooga, TN
Huntsville, AL
TOTAL
Property
Count Units (a)
Gross
Cost
Accumulated
Depreciation
Net Book
Value
Period End
Occupancy (b)
Average
Occupancy (c)
6
6
6
4
6
4
4
3
2
5
3
1
1
1
1
1
2
1
57
2,020 254,808
1,690 243,516
1,710 198,296
1,104 174,084
1,547 153,005
1,383 146,145
91,195
916
87,936
734
79,924
518
78,043
1,658
63,628
628
48,730
297
42,176
208
33,578
152
28,866
264
28,657
252
27,307
295
178
16,471
15,554 $ 1,796,365 $
(22,074 ) 232,734
(18,488 ) 225,028
(23,603 ) 174,693
(5,133 ) 168,951
(8,882 ) 144,123
(17,669 ) 128,476
82,839
79,498
71,994
66,617
60,098
43,927
38,079
28,850
27,318
25,700
24,287
14,718
(158,435 ) $ 1,637,930
(8,356 )
(8,438 )
(7,930 )
(11,426 )
(3,530 )
(4,803 )
(4,097 )
(4,728 )
(1,548 )
(2,957 )
(3,020 )
(1,753 )
94.7%
93.0%
88.9%
88.1%
92.2%
88.4%
94.0%
96.5%
93.2%
95.5%
90.4%
94.6%
97.1%
98.0%
84.5%
95.2%
97.3%
98.3%
92.5%
94.1%
93.0%
88.1%
89.4%
92.3%
89.5%
94.0%
94.9%
94.2%
95.0%
91.1%
93.7%
96.3%
96.7%
85.3%
97.1%
97.5%
97.9%
92.5%
Average Effective
Rent per
Occupied Unit (d)
1,188
1,189
999
1,226
1,030
1,138
1,024
1,207
1,306
677
1,047
1,484
1,565
1,584
889
1,168
988
994
1,088
$
(a) Units represent the total number of apartment units available for rent at December 31, 2019.
(b) Period end occupancy for each of our properties is calculated as (i) total units rented as of December 31, 2019 divided by (ii)
total units available for rent as of December 31, 2019, expressed as a percentage.
(c) Average occupancy represents the daily average occupancy of available units for the three-month period ended December 31,
2019.
(d) Average effective monthly rent, per unit, represents the average monthly rent for all occupied units for the three-month
period ended December 31, 2019.
Additional information on our consolidated properties is contained in “Schedule III - Real Estate and Accumulated Depreciation” in
this Annual Report on Form 10-K, which is incorporated herein by reference.
ITEM 3.
Legal Proceedings
We are subject to various 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 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.
ITEM 4. Mine Safety Disclosures
Not applicable.
32
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information; Holders
Our common stock is listed and traded on the NYSE under the symbol “IRT”. At the close of business on February 11, 2020, the
closing price for our common stock was $15.63 per share and there were 52 holders of record, one of which is the holder for all
beneficial owners who hold in street name.
Dividends
Our quarterly dividend rate is currently $0.18 per common share. Our Board of Directors reviews and declares the dividend rate
quarterly. Actual dividends paid by us will be affected by a number of factors, including, but not limited to, the revenues received
from our apartment communities, our operating expenses, the interest expense incurred on borrowings and unanticipated capital
expenditures. We expect to make future quarterly distributions to stockholders; however, future distributions will be at the discretion
of our Board of Directors and will depend on our actual funds from operations, our financial condition, capital requirements, the
annual distribution requirements under the REIT provisions of the Code (see "Business - Qualification as a Real Estate Investment
Trust" above) and such other factors as our Board of Directors deems relevant.
33
PERFORMANCE GRAPH
On August 13, 2013, our common stock commenced trading on the NYSE MKT. On July 31, 2017 we transferred the listing of
our common stock to the New York Stock Exchange (“NYSE”) from the NYSE MKT. The following graph compares the index of the
cumulative total shareholder return on our common shares for the measurement period beginning December 31, 2014 and ending
December 31, 2019 with the cumulative total returns of the National Association of Real Estate Investment Trusts (NAREIT) Equity
REIT index and the Russell 3000 Index. The following graph assumes that each index was 100 on the initial day of the relevant
measurement period and that all dividends were reinvested.
Unregistered Sales of Equity Securities
As of January 1, 2019, an aggregate of 881,107 common units in IROP were outstanding and held by unaffiliated entities or
persons who received the units in exchange for property contributions. We did not issue any units in IROP in calendar year 2019. As
previously disclosed, the units in IROP are subject to exchange agreements that permit the holders of the units to tender the units to us
for cash in an amount equal to the market price (based on a trailing average computation) of an equivalent number of shares of our
common stock at the time we receive notice of the exchange. We have the option, in lieu of paying cash, to settle the exchange for a
number of shares of our common stock equal to the number of units tendered for exchange. On December 27, 2019, we issued 9,616
shares of common stock in exchange for an equal number of units. Our issuance of the shares of common stock was exempt from
registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. As a result of the exchange at December 31, 2019
and at February 11, 2020, there remained outstanding 871,491 units held by unaffiliated third parties.
Issuer Purchases of Equity Securities
None.
34
Equity Compensation Plan Information
The following table sets forth certain information regarding our equity compensation plans as of December 31, 2019.
Plan Category
Equity compensation plans approved by security
holders
Equity compensation plans not approved by security
holders
Total
(a)
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants, and
Rights
(b)
Weighted
Average
Exercise Price
of Outstanding
Options
Warrants, and
Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column(a))
9,000 (1) $
9.35
3,058,457 (2)
-
9,000 (1)
n/a
-
3,058,457 (2)
(1)
Includes 9,000 shares of our common stock underlying stock appreciation rights or “SARs” outstanding under the incentive
award plan at December 31, 2019. This is the gross number of shares of our common stock with respect to which the SARs are
exercisable, not the net number of such shares which would actually be issued upon any exercise. Excludes 326,541 restricted
common stock awards that remained subject to forfeiture at December 31, 2019 because they are neither to be issued upon
exercise of outstanding options, warrants and rights nor available for future issuance.
(2) Assumes the reduction of the number of shares of our common stock remaining issuable under the long-term incentive plan at
December 31, 2019 by the number of shares of our common stock reported in column (a).
35
ITEM 6.
Selected Financial Data
The following table summarizes selected financial data about our company (dollars in thousands, except share and per share
data). The following selected financial data information should be read in conjunction with Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements, including the notes thereto,
included elsewhere herein.
2019
2018
As of and for the
years ended
December 31
2017
2016
2015
Operating Data:
Total revenue
Property operating expenses
Total expenses
Interest expense
Net income (loss)
Net income (loss) allocable to common shares
Earnings (loss) per share:
Basic
Diluted
Balance Sheet Data:
Investments in real estate, net
Total assets
Total indebtedness, net
Total liabilities
Total equity
Other Data:
Property portfolio occupancy
Common shares outstanding
Limited partnership units outstanding (1)
Total common shares and limited partnership units
outstanding
Cash distributions declared per common share/unit
$ 203,223 $ 191,232 $ 161,216 $ 153,388 $ 109,576
(46,281 )
(99,394 )
(23,553 )
30,156
28,242
(63,148 )
(113,726 )
(35,535 )
(9,555 )
(9,801 )
(76,363 )
(139,410 )
(36,006 )
26,610
26,288
(64,716 )
(115,791 )
(28,702 )
31,441
30,206
(79,568 )
(152,854 )
(39,226 )
46,354
45,896
$
$
0.51 $
0.51 $
0.30 $
0.30 $
0.41 $
0.41 $
(0.19 ) $
(0.19 ) $
0.78
0.78
$ 1,637,930 $ 1,548,153 $ 1,420,059 $ 1,197,845 $ 1,332,377
1,664,106 1,659,336 1,450,624 1,294,237 1,383,188
966,611
993,158
390,030
985,488
1,044,349 1,029,291
630,045
778,442
804,505
646,119
743,817
765,546
528,691
985,572
619,757
2019
2018
As of and for the
years ended
December 31
2017
2016
2015
92.5 %
92.5 %
94.0 %
94.5 %
93.0 %
91,070,637 89,184,443 84,708,551 68,996,070 47,070,678
881,107 3,011,351 2,908,949 3,154,931
871,491
91,942,128 90,065,550 87,719,902 71,905,019 50,225,609
0.7200
$
0.7200 $
0.7200 $
0.7200 $
0.7200 $
(1) Held by persons other than IRT and its subsidiaries.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help
provide an understanding of our business, financial condition and results of operations. This MD&A should be read in conjunction
with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in
this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that are
intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based upon the current beliefs and expectations of our management and are inherently
subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and
generally beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business
strategies and decisions that are subject to change. We assume no obligation to update or supplement forward-looking statements
because of subsequent events. Actual results may differ materially from the anticipated results discussed in these forward-looking
statements. Factors which may cause our actual results or performance to differ materially from those contemplated by forward-
looking statements include, but are not limited to, the risk the following:
• Unfavorable changes in economic conditions, either nationally or regionally in one or more of the markets in which we
operate, could adversely impact us;
• Short-term leases expose us to the effects of declining rents.
36
• Competition could limit our ability to lease apartments or increase or maintain rental income;
• Redevelopment risks could impact our profitability;
• Labor and materials required for maintenance, repair, renovation or capital expenditure may be more expensive than
anticipated;
• Competition could adversely affect our ability to acquire properties;
• Our acquisition strategy may not produce the cash flows expected;
• Failure to qualify as a REIT could have adverse consequences;
• Litigation risks could affect our business;
• A cybersecurity incident and other technology disruptions could negatively impact our business;
• Damage from catastrophic weather and other natural events could result in losses;
• Volatility in capital markets may result in fluctuations in our share price;
• Debt financing and other required capital may not be available to us or may only be available on adverse terms;
• Rising interest rates could both increase our borrowing costs, thereby adversely affecting our cash flows and the amounts
available for distribution to our shareholders, and decrease our share price, if investors seek higher yields through other
investments;
• Failure to hedge effectively against interest rates may adversely affect results of operations; and
• Additional factors as discussed in Item 1A. “Risk Factors”. Forward-looking statements and related uncertainties are also
included in the Notes to Consolidated Financial Statements in this report.
Overview
See Item 1. Business for an overview of our company.
Business Objective and Investment Strategies
See Item 1. Business for discussion regarding our business objective and investment strategies.
Recent Trends
An important part of our investment strategy is to strengthen our balance sheet and drive long-term growth and unlock value
through portfolio enhancements. Our value add initiative, which is comprised of renovations and upgrades at selected communities to
drive increased rental rates, is a core component of this strategy. As discussed earlier, as of December 31, 2019, we had identified
7,136 units across 23 of our communities for renovations and upgrades as part of value add initiative. As of December 31, 2019, we
had completed renovations and upgrades at 2,715 of the 7,136 units while achieving a return on total investment of 16.2%. We expect
to complete the remaining value add projects at the selected communities during 2020 and 2021. The momentum from our value add
initiative continued to build throughout 2019 and helped drive strong rental revenue growth at communities included in our value add
initiative. As we continue to execute on our value add initiative, we expect the momentum from 2019 to continue and for rental
revenue growth at our value add communities to continue to drive strong portfolio performance.
In 2019, we acquired three communities, totaling 806 units and exited three markets where we lack scale. These acquisitions
and dispositions represent the execution of our strategy to gain scale within desired submarkets. In 2020, subject to market conditions,
we intend to continue to seek opportunities to gain scale within our existing markets through acquisitions of communities which fit
within our investment strategy. We face competition for attractive investment opportunities from other real estate investors and, as a
result, we may be unable to acquire additional properties on desirable terms, or at all.
See Item 1. Business for an additional discussion regarding developments in our business during 2019.
37
Results of Operations
The following discussion is based on our Consolidated Financial Statements for the years ended December 31, 2019 and 2018.
Refer to Item 7, “Results of Operations” in our Annual Report of Form 10-K for the year ended December 31, 2018 for a comparison
of the year ended December 31, 2018 to the year ended December 31, 2017.
Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
SAME STORE PROPERTIES
2019
2018
Increase
(Decrease)
%
Change
NON SAME STORE PROPERTIES
%
Change
Increase
(Decrease)
2019
2018
CONSOLIDATED
Increase
(Decrease)
2018
%
Change
2019
49
93.2 %
49
13,397 13,397
93.3 %
Period-end Property
Data:
Number of properties
Number of units
Average occupancy
Average effective
monthly rent, per unit
Revenue:
Rental and other
property revenue
Expenses:
Property operating
expenses
66,303 64,563
Net Operating Income $ 105,252 $ 97,756 $
$ 1,064 $ 1,013 $
$ 171,555 $ 162,319 $
Other Revenue:
Other revenue
Corporate and other expenses:
Property management expenses
General and administrative expenses
Depreciation and amortization expense
Casualty related costs
Total corporate and other expenses
Interest expense
Other income (expense)
Net gains (losses) on sale of assets
Net income (loss)
Income allocated to noncontrolling interests
Net income (loss) available to common shares
Revenue
8
9
2,157 2,483
94.1 %
91.3 %
-0.1 %
(1 )
(326 )
-2.7 %
57
-11.1 %
58
-13.1 % 15,554 15,880
92.3 %
92.5 %
-2.9 %
(1 )
(326 )
0.2 %
-1.7 %
-2.1 %
0.2 %
0.0 %
51
5.1 % $ 1,123 $ 1,037 $
86
8.3 % $ 1,088 $ 1,035 $
53
5.2 %
9,236
5.7 % $ 31,065 $ 28,393 $
2,672
9.4 % $ 202,620 $ 190,712 $
11,908
6.2 %
1,740
7,496
2.7 % 13,265 11,800
7.7 % $ 17,800 $ 16,593 $
1,465
1,207
12.4 % 79,568 76,363
7.3 % $ 123,052 $ 114,349 $
3,205
8,703
4.2 %
7.6 %
$
603 $
520 $
83
16.0 %
7,726
6,963
12,745 10,817
52,815 45,221
46
-
73,286 63,047
(39,226 ) (36,006 )
-
144
35,211 10,650
46,354 26,610
(322 )
$ 45,896 $ 26,288 $
(458 )
763
1,928
7,594
(46 )
10,239
(3,220 )
11.0 %
17.8 %
16.8 %
-
16.2 %
8.9 %
(144 ) -100.0 %
24,561 230.6 %
74.2 %
19,744
42.2 %
(136 )
74.6 %
19,608
Rental and other property revenue. Rental and other property revenue increased $11.9 million to $202.6 million for the year
ended December 31, 2019 from $190.7 million for the year ended December 31, 2018. The increase was primarily attributable to a
$9.2 million increase in same store rental income driven by a 5.7% increase in average effective monthly rents compared to the prior
year period and a $2.7 million increase in our non same store portfolio.
Other revenue. Other revenue increased $0.1 million to $0.6 million for the year ended December 31, 2019 compared to $0.5
million for the year ended December 31, 2018.
Expenses
Property operating expenses. Property operating expenses increased $3.2 million to $79.6 million for the year ended
December 31, 2019 from $76.4 million for the year ended December 31, 2018. The increase was primarily due to a $1.7 million
increase in same store real estate operating expenses primarily due to an increase in real estate taxes and utilities and a $1.5 million
increase in non same store real estate operating expenses. The non same store real estate operating expense increase was due to the
number of properties included in each period being different as a result of the timing of property sales and acquisitions.
Property management expenses. Property management expenses increased $0.7 million to $7.7 million for the year ended
December 31, 2019 from $7.0 million for the year ended December 31, 2018. This was primarily due to an increase in software costs
for our property management company as the size of our property portfolio has grown.
38
General and administrative expenses. General and administrative expenses increased $2.0 million to $12.8 million for the year
ended December 31, 2019 from $10.8 million for the year ended December 31, 2018. This increase was primarily due to an increase in
personnel costs as the size of our corporate office has grown to support asset management functions including the oversight of our
value add initiative and general portfolio optimization.
Depreciation and amortization expense. Depreciation and amortization expense increased $7.6 million to $52.8 million for the
year ended December 31, 2019 from $45.2 million for the year ended December 31, 2018. The increase was attributable to a $5.8
million increase in depreciation expense from capital expenditures related to our value add initiative and a $3.6 million increase in
depreciation expense due to property acquisitions in 2018 and 2019.This was partially offset by a $1.9 million decrease in depreciation
expense due to property dispositions in 2018 and 2019.
Interest expense. Interest expense increased $3.2 million to $39.2 million for the year ended December 31, 2019 from $36.0
million for the year ended December 31, 2018. This was primarily due to a $80.6 million increase in the balance of our unsecured
credit facility and term loans from December 31, 2018 to December 31, 2019, which related to our investments in additional property
acquisitions and value add related capital expenditures.
Net gains (losses) on sale of assets. During the year ended December 31, 2019, four multi-family properties were sold resulting
in gains of $35.2 million. During the year ended December 31, 2018, two multi-family properties were sold resulting in gains of $10.7
million.
Non-GAAP Financial Measures
Funds from Operations and Core Funds from Operations
We believe that FFO and Core FFO (“CFFO”), each of which is a non-GAAP financial measure, are additional appropriate
measures of the operating performance of a REIT and us in particular. We compute FFO in accordance with the standards established
by the National Association of Real Estate Investment Trusts (“NAREIT”), as net income or loss allocated to common shares
(computed in accordance with GAAP), excluding real estate-related depreciation and amortization expense, gains or losses on sales of
real estate and the cumulative effect of changes in accounting principles. While our calculation of FFO is in accordance with
NAREIT’s definition, it may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be
comparable to FFO computations of such other REITs.
We compute CFFO by adjusting FFO to remove the effect of items that do not reflect ongoing property operations, including stock
compensation expense, depreciation and amortization of other items not added back in the computation of FFO, amortization of deferred
financing costs, acquisition and integration expenses, and other non-cash or non-operating gains or losses related to items such as debt
extinguishment costs we incur when we sell a property subject to secured debt, gains or losses on debt extinguishments, and acquisition
related debt extinguishment expenses. NAREIT does not provide guidelines for computing CFFO.
Our calculation of CFFO may differ from the methodology used for calculating CFFO by other REITs and, accordingly, our CFFO
may not be comparable to CFFO reported by other REITs. Our management utilizes FFO and CFFO as measures of our operating
performance, and believe they are also useful to investors, because they facilitate an understanding of our operating performance after
adjustment for certain non-cash or non-recurring items that are required by GAAP to be expensed but may not necessarily be indicative of
current operating performance and our operating performance between periods. Furthermore, although FFO, CFFO and other supplemental
performance measures are defined in various ways throughout the REIT industry, we believe that FFO and CFFO may provide us and our
investors with an additional useful measure to compare our financial performance to certain other REITs. Neither FFO nor CFFO is
equivalent to net income or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO and CFFO do
not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service
obligations or other commitments or uncertainties. Accordingly, FFO and CFFO do not measure whether cash flow is sufficient to fund all of
our cash needs, including principal amortization and capital improvements. Neither FFO nor CFFO should be considered as an alternative to
net income or any other GAAP measurement as an indicator of our operating performance or as an alternative to cash flow from operating,
investing, and financing activities as a measure of our liquidity.
39
Set forth below is a reconciliation of net income (loss) to FFO and Core FFO for the years ended December 31, 2019, 2018 and
2017 (in thousands, except share and per share information):
Funds From Operations:
Net income (loss)
Adjustments:
Real estate depreciation and amortization
Net (gains) losses on sale of assets
Funds From Operations
Core Funds From Operations:
Funds From Operations
Adjustments:
Stock-based compensation
Amortization of deferred financing costs
Acquisition and integration expenses
Other depreciation and amortization
Other expense (income)
(Gains) losses on extinguishment of debt
Debt extinguishment costs included in net
gains (losses) on sale of assets
Acquisition related debt extinguishment
expenses
Core Funds From Operations
For the Year
Ended
December 31, 2019
For the Year
Ended
December 31, 2018
For the Year
Ended
December 31, 2017
Amount
Per Share
(1)
Amount
Per Share
(1)
Amount
Per Share
(1)
$ 46,354 $
0.51 $ 26,610 $
0.30 $ 31,441 $
0.41
52,482
(42,628 )
$ 56,208 $
45,067
0.58
(11,561 )
(0.47 )
0.62 $ 60,116 $
34,097
0.51
(23,076 )
(0.13 )
0.68 $ 42,462 $
0.45
(0.30 )
0.56
$ 56,208 $
0.62 $ 60,116 $
0.68 $ 42,462 $
0.56
3,116
1,423
-
333
-
-
0.03
0.02
-
0.01
-
-
2,524
1,430
-
154
(52 )
-
0.03
0.02
-
-
-
-
1,967
1,469
1,342
104
(94 )
572
0.02
0.02
0.02
-
-
0.01
7,417
0.08
911
0.01
4,251
0.06
-
$ 68,497 $
-
-
0.76 $ 65,083 $
-
3,624
0.74 $ 55,697 $
0.04
0.73
(1) Based on 90,680,212, 88,289,110 and 76,291,465 weighted average shares and units outstanding for the years ended December 31, 2019, 2018,
and 2017, respectively.
Same Store Portfolio Net Operating Income
We believe that Net Operating Income (“NOI”), a non-GAAP financial measure, is a useful measure of our operating
performance. We define NOI as total property revenues less total property operating expenses, excluding depreciation and
amortization, casualty related costs, property management expenses, general administrative expenses, interest expense, and net gains
on sale of assets.
Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other
REITs. We believe that this measure provides an operating perspective not immediately apparent from GAAP operating income or net
income. We use NOI to evaluate our performance on a same store and non same store basis because NOI measures the core operations
of property performance by excluding corporate level expenses and other items not related to property operating performance and
captures trends in rental housing and property operating expenses. However, NOI should only be used as an alternative measure of our
financial performance.
We review our same store properties or portfolio at the beginning of each calendar year. Properties are added into the same
store portfolio if they were owned at the beginning of the previous year. Properties that have been sold or classified as held for sale
are excluded from the same store portfolio. The current same store portfolio is comprised of properties owned as of January 4, 2018.
As such, the table below does not include results for the year ended December 31, 2017 (in thousands).
40
Revenue:
Rental and other property revenue
Property Operating Expenses
Real estate taxes
Property insurance
Personnel expenses
Utilities
Repairs and maintenance
Contract services
Advertising expenses
Other expenses
Total operating expenses
Net operating income
NOI Margin
Average Occupancy
Average effective monthly rent, per unit
Reconciliation of Same-Store Net Operating
Income to Net Income (loss)
Same-store portfolio net operating income (a)
Non same-store net operating income
Property management income
Property management expenses
General and administrative expenses
Depreciation and amortization
Casualty related costs
Interest expense
Other income (expense)
Net gains (losses) on sale of assets
Net income (loss)
Twelve-Months Ended December 31 (a)
2019
2018
% change
$
171,555
$
162,319
5.7 %
5.4 %
-1.2 %
1.3 %
5.8 %
8.1 %
-7.0 %
5.1 %
-11.4 %
2.7 %
7.7 %
1.2 %
-0.1 %
5.1 %
20,885
3,401
16,320
11,007
5,973
4,526
1,825
2,366
66,303
105,252
$
19,810
3,443
16,107
10,403
5,524
4,869
1,736
2,671
64,563
97,756
61.4 %
93.2 %
$
1,064
60.2 %
93.3 %
1,013
105,252 $
17,800
603
(7,726 )
(12,745 )
(52,815 )
-
(39,226 )
-
35,211
46,354 $
97,756
16,593
520
(6,963 )
(10,817 )
(45,221 )
(46 )
(36,006 )
144
10,650
26,610
$
$
$
$
(a) Same store portfolio for the twelve months ended December 31, 2019 and 2018 includes 49 properties, which represent 13,397
units.
Liquidity and Capital Resources
Overview
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings,
fund and maintain investments, pay distributions and other general business needs. We believe our available cash balances, financing
arrangements and cash flows from operations will be sufficient to fund our liquidity requirements with respect to our existing portfolio
for the next 12 months and the foreseeable future.
Our primary cash requirements are to:
make investments and fund the associated costs, including expenditures, to continue our value add initiatives to improve
the quality and performance of our properties;
repay our indebtedness;
fund recurring maintenance necessary to maintain our properties;
pay our operating expenses; and
distribute a minimum of 90% of our REIT taxable income (determined without regard to the deduction for dividends paid
and excluding net capital gain) and to make investments in a manner that enables us to maintain our qualification as a
REIT.
41
We intend to meet our liquidity requirements primarily through a combination of one or more of the following:
the use of our cash and cash equivalents of $9.9 million as of December 31, 2019;
existing and future unsecured financing and financing secured directly or indirectly by the apartment properties in our
portfolio including advances under our unsecured credit facility;
cash generated from operating activities;
net cash proceeds from property sales, including sales undertaken as part of our capital recycling strategy and other sales;
and
proceeds from the sales of our common stock and other equity securities, including common stock that may be sold under
our at-the-market program.
We continue to seek to reduce our leverage ratio over time through the execution of various strategies. These strategies include
using the proceeds from sales of properties which are outside our core geographic footprint in the Southeastern United States or which
we believe have limited potential for further improvements to their operating results to repay a portion of our indebtedness or to
acquire new properties at a lower leverage and selectively raising capital through the sale of common stock under our at-the-market
program and re-investing the proceeds into our value add initiative in order to increase our portfolio’s gross asset value. We have
successfully continued to implement these strategies to reduce our leverage and reduce our exposure to short term indebtedness.
During 2019, we announced the continuation of our capital recycling initiative aimed to dispose of assets in markets
where we lack scale, in order to invest in attractive non-gateway markets where scale has been, or can be, achieved. As
part of this capital recycling initiative, we sold four properties for $154.5 million, in the aggregate, generating net cash
proceeds of $68.1 million, in the aggregate, after costs and repayment of property specific financing.
During 2019, we issued 1,717,291 shares of common stock under our at-the-market offering program at an average price
per share of $12.82, generating proceeds to us (net of approximately $0.4 million in commissions) of approximately $21.3
million. At December 31, 2019, approximately $93.5 million remained available for share issuances under our at-the-
market offering program.
42
Cash Flows
As of December 31, 2019 and 2018, we maintained cash, cash equivalents, and restricted cash of approximately $14.4 million
and $16.0 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net change in cash and cash equivalents, and restricted cash
Cash and cash equivalents, and restricted cash, beginning of period
Cash and cash equivalents, and restricted cash, end of the period
For the Years
Ended December 31
2018
2019
75,001 $
(106,396 )
29,783
(1,612 )
16,045
14,433 $
68,530 $
(229,457 )
162,353
1,426
14,619
16,045 $
$
$
2017
54,324
(191,709 )
125,594
(11,791 )
26,410
14,619
Our cash inflow from operating activities during the years ended December 31, 2019, 2018 and 2017 were primarily driven by
ongoing operations of our properties.
Our cash outflow from investing activities during the year ended December 31, 2019 was primarily driven by $128.9 million of
outflows related to three property acquisitions and capital expenditures of $45.6 million. This was partially offset by cash inflows of
$68.1 million related to four property dispositions. Our cash outflow from investing activities during the year ended December 31,
2018 was primarily driven by $215.8 million of outflows related to eight property acquisitions. Our cash outflow from investing
activities during the year ended December 31, 2017 was primarily driven by $221.8 million of outflows related to ten property
acquisitions. This was partially offset by $44.5 million of inflows related to four property sales.
Our cash inflow from financing activities during the year ended December 31, 2019 was primarily driven by net borrowings
under our unsecured credit facility and term loans totaling $80.6 million plus $21.0 million of proceeds from common stock issuances
partially offset by $64.7 million of distributions on our common stock. Our cash inflow from financing activities during the year ended
December 31, 2018 was primarily driven by proceeds from our unsecured credit facility and term loans of $400.0 million. This was
partially offset by $198.3 million of repayments of our unsecured credit facility and $52.5 million of distributions of our common
stock. Our cash inflow from financing activities during the year ended December 31, 2017 was primarily driven by $137.4 million of
inflows related to the issuance of common stock.
Capitalization
Refer to Item 8, Financial Statements and Supplementary Data, Note 4: Indebtedness and Note 6: Stockholder Equity and Non-
Controlling Interest, for information regarding our capitalization.
Contractual Obligations
The table below summarizes our contractual obligations as of December 31, 2019 (dollars in thousands):
Principal payments on outstanding debt
obligations
Interest payments on outstanding debt
obligations (1)
Operating lease obligations
Total
2020
2021
Payment due by Year
2023
2022
2024
Thereafter
Total
$
8,135 $ 76,085 $ 70,734 $ 293,689
$ 372,172 $ 170,363 $ 991,178
34,697
495
23,274
382
$ 43,327 $ 109,251 $ 100,920 $ 317,345
29,811
375
32,797
369
12,100
388
3,257 135,936
4,038
2,029
$ 384,660 $ 175,649 $ 1,131,152
(1) Our unsecured credit facility and term loans assume a 30-day LIBOR rate of 1.76% as of December 17, 2019.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the year ended December 31, 2019 that have or are likely to have a current
or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resource that is material to our interests.
43
Terms of Leases and Tenant Characteristics
The leases for our portfolio typically follow standard forms customarily used between landlords and tenants in the geographic
area in which the relevant property is located. Under such leases, the tenant typically agrees to pay an initial deposit (generally one
month’s rent) and/or associated application and move in-fees, and then pays rent on a monthly basis during the term of the lease. As
landlord, we are directly responsible for all real estate taxes, sales and use taxes, special assessments, property-level utilities, insurance
and building repairs, and other building operation and management costs. Individual tenants are generally responsible for the utility
costs of their unit. Our lease terms are generally for one year or less and average twelve months.
Our apartment tenant composition varies across the regions in which we operate, includes singles, roommates and family renters
and is generally reflective of the principal employers in the relevant region. Our apartment properties predominantly consist of one-
bedroom and two-bedroom units, although some of our apartment properties also have three-bedroom units.
Insurance
Our multifamily properties are covered by all risk property insurance covering 110% of the replacement cost for each building
and business interruption and rental loss insurance (covering up to twelve months of loss). On a case-by-case basis, based on an
assessment of the likelihood of the risk, availability and cost of insurance, and in accordance with standard market practice, we obtain
earthquake, windstorm, flood, terrorism and boiler and machinery insurance. We carry comprehensive liability insurance and umbrella
policies for each of our properties at levels which we believe are prudent in light of our business activities and are in accordance with
standard market practice. We seek certain extensions of coverage, valuation clauses, and deductibles in accordance with standard
market practice and availability. Although we may carry insurance for potential losses associated with our multifamily properties, we
may still incur losses due to uninsured risks, deductibles, co-payments or losses in excess of applicable insurance coverage and those
losses may be material.
Inflation
Our resident leases at our apartment communities allow, at the time of renewal, for adjustments in the rent payable thereunder,
and thus may enable us to seek rent increases. Almost all leases are for one year or less. The short-term nature of these leases
generally serves to reduce our risk to adverse effects of inflation.
Critical Accounting Estimates and Policies
We consider the accounting policies discussed below to be critical to an understanding of how we report our financial condition
and results of operations because their application places the most significant demands on the judgment and estimates of our
management.
Our financial statements are prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial
statements in conformity with GAAP requires management to make use of 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.
Revenue Recognition
We apply FASB ASC Topic 842, “Leases” with respect to our accounting for rental income. We primarily lease apartment 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, (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 combined into
rental and other property revenue in the consolidated statements of operations and prior period amounts have been adjusted to conform
to the current period presentation.
44
Investments in Real Estate
Allocation of Purchase Price of Acquired Assets
Effective January 1, 2018, FASB ASC Topic 805, “Business Combinations” was amended to clarify the definition of a business
by more clearly outlining the requirements for an integrated set of assets and activities to be considered a business and by establishing
a practical framework to determine when the integrated set of assets and activities is a business. Prior to January 1, 2018, the
properties we acquired were generally considered businesses and were accounted for as business combinations. Subsequent to January
1, 2018, we expect the properties we acquire to generally not be considered businesses and, therefore, to be accounted for as asset
acquisitions.
Under business combination accounting, the fair value of the real estate acquired is allocated to the acquired tangible assets,
generally consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value
of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based, in each case, on
their fair values. Transaction costs and fees incurred related to the acquisition are expensed as incurred. Under asset acquisition
accounting, the costs to acquire real estate, including transaction costs related to the acquisition, are accumulated and then allocated to
the individual tangible and intangible assets and liabilities acquired based upon their relative fair value. Under both business
combination and asset acquisition accounting, transaction costs and fees incurred related to the financing of an acquisition are
capitalized and amortized over the life of the related financing.
We estimate the fair value of acquired tangible assets (consisting of land, building and improvements), identified intangible
assets (consisting of in-place leases), and assumed debt at the date of acquisition, based on the evaluation of information and estimates
available at that date.
Impairment of Long-Lived Assets
Management evaluates the recoverability of its investment in real estate assets, including related identifiable intangible assets, in
accordance with FASB ASC Topic 360, “Property, Plant and Equipment”. This statement requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that recoverability of the assets is not assured.
Management 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.
Share-Based Compensation
We account for stock-based compensation in accordance with FASB ASC Topic 718, “Compensation - Stock Compensation”.
Any stock-based compensation awards granted are measured based on the grant-date fair value of the award and compensation
expense for the entire award is recognized on a straight-line basis over the requisite service period, which is the vesting period, for the
entire award.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We may be
exposed to interest rate changes primarily as a result of long-term debt used to maintain liquidity, fund capital expenditures and
expand our real estate investment portfolio and operations. Market fluctuations in real estate financing may affect the availability and
cost of funds needed to expand our investment portfolio. In addition, restrictions upon the availability of real estate financing or high
interest rates for real estate loans could adversely affect our ability to dispose of real estate in the future. We seek to limit the impact of
interest rate changes on earnings and cash flows and to lower our overall borrowing costs. We currently and may in the future use
derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets. The market risk
associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market
risk that may be undertaken. With regard to variable rate financing, we assess our interest rate cash flow risk by continually
identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating
hedging opportunities. We maintain risk management control systems to monitor interest rate cash flow risk attributable to both our
outstanding and forecasted debt obligations as well as our potential offsetting hedge positions. While this hedging strategy is designed
45
to minimize the impact on our net income and funds from operations of changes in interest rates, the overall returns on any investment
in our securities may be reduced. We currently have limited exposure to financial market risks.
We may also be exposed to credit risk in derivative contracts we may use. Credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us,
which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do
not have credit risk. We seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality
counterparties.
Interest Rate Risk and Sensitivity
Interest rates may be affected by economic, geo-political, monetary and fiscal policy, market supply and demand and other
factors generally outside our control, and such factors may be highly volatile. A change in market interest rates applicable to the fixed-
rate portion of our indebtedness affects the fair value, but it has no effect on interest incurred or cash flows. A change in market
interest rates applicable to the variable portion of our indebtedness affects the interest incurred and cash flows, but does not affect the
fair value.
As of December 31, 2019, our only interest rate sensitive assets or liabilities related to our principal amount of $991.2 million of
outstanding indebtedness, of which $504.9 million was fixed rate and $486.3 million was floating rate, was two float-to-fixed interest
rate swaps with a total notional amount of $300.0 million, and two interest rate collars with a total notional amount of $250.0 million.
As of December 31, 2018, our only interest rate sensitive assets or liabilities related to our principal amount of $991.4 million of
outstanding indebtedness, of which $585.7 million was fixed rate and $405.7 million was floating rate, was an individual interest rate
cap with a notional amount of $150.0 million and a float-to-fixed interest rate swap with a notional amount of $250.0 million. We
monitor interest rate risk routinely and seek to minimize the possibility that a change in interest rates would impact the interest
incurred and our cash flows. To mitigate such risk, we may use interest rate derivative contracts.
As of December 31, 2019, and 2018, the fair value of our fixed-rate indebtedness was $505.5 million and $577.1 million,
respectively. The fair value of our fixed rate indebtedness was estimated using a discounted cash flow analysis utilizing rates that we
believe a market participant would expect to pay for debt of a similar type and remaining maturity as if the debt was originated at
December 31, 2019 and 2018, respectively. As we expect to remain obligated on our fixed rate instruments to maturity and the
amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do
not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a
significant impact on our operations.
As of December 31, 2019, one of our interest rate swaps had an asset fair value of $1.0 million while our other interest rate swap
and interest rate collars had a combined liability fair value of $7.8 million. The fair values of our interest rate swaps and interest rate
collars were estimated using a discounted cash flow analysis based on forward interest rate curves. The impact of the interest rate
swaps and interest rate collars have been included in the table below.
The following table summarizes our indebtedness, and the impact to interest expense for a 12-month period, and the change in
the net fair value of our indebtedness assuming an instantaneous increase or decrease of 100 basis points in the LIBOR interest rate
curve (dollars in thousands):
Interest expense from variable-rate indebtedness
Fair value of fixed-rate indebtedness
Liabilities
Subject to
Interest
Rate Sensitivity
(a)
486,302 $
505,510
$
100 Basis Point
Increase
100 Basis Point
Decrease
1,474
(18,098 )
$
(1,377 )
18,927
(a) Unpaid balance of variable-rate indebtedness as of December 31, 2019 is shown. Fair value of fixed-rate indebtedness as of
December 31, 2019 is shown.
46
ITEM 8.
Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
OF INDEPENDENCE REALTY TRUST, INC.
(A Maryland Corporation)
48
Report of Independent Registered Public Accounting Firm ................................................................................................................................
51
Consolidated Balance Sheets as of December 31, 2019 and 2018 ........................................................................................................................
Consolidated Statements of Operations for the Three Years Ended December 31, 2019, 2018 and 2017 ...........................................................
52
Statement of Comprehensive Income (Loss) for the Three Years Ended December 31, 2019, 2018 and 2017 .................................... 53
54
Consolidated Statements of Changes in Equity for the Three Years Ended December 31, 2019, 2018 and 2017 ...............................................
55
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2019, 2018 and 2017 ..........................................................
Notes to Consolidated Financial Statements .........................................................................................................................................................
56
Supplemental Schedule
Schedule III: Real Estate and Accumulated Depreciation ...........................................................................................................................
74
47
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Independence Realty Trust, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Independence Realty Trust, Inc. and subsidiaries (the Company) as
of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), changes in equity,
and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement
schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated February 18, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of real estate assets for potential impairment
As discussed in Notes 2 and 3 to the consolidated financial statements, the Company had $1,637,930 thousand of investments in real
estate, net as of December 31, 2019. The Company evaluates the recoverability of real estate assets whenever events or changes in
circumstances indicate that the carrying amount of a real estate asset may exceed fair value.
We identified the evaluation of real estate assets for potential impairment as a critical audit matter. There is a high degree of
subjective and complex auditor judgement in evaluating the relevant events or changes in circumstances that may indicate the
carrying value of the asset may not be recoverable. In particular the judgements regarding the Company’s plans for the respective
assets, net operating income, occupancy rates, and the impact of changes in market conditions or other factors on the fair value of
the real estate asset. Changes in these judgments could have a significant impact on the determination of the recoverability of the
real estate assets.
48
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls
over the Company’s process to identify and evaluate events or changes in circumstances that may indicate the carrying amount of
the real estate may not be recoverable, including controls related to evaluation of external market conditions, determining the period
the Company will hold the real estate asset, net operating income and occupancy rates. We inquired of Company officials and
inspected documents including plans for the respective assets to evaluate the likelihood that a real estate asset would be sold prior to
the estimated holding period. We also performed independent evaluations, including examining property operating statements,
property rental rates, occupancy levels, and third-party market reports for 1) indications of a significant decrease in the fair value of
the real estate assets and 2) decreases in current net operating income of the real estate assets.
Assessment of the allocation of purchase price to acquired real estate assets
As discussed in Notes 2 and 3 to the consolidated financial statements, the Company acquired $129,344 thousand of real estate
assets that were accounted for as asset acquisitions during the year ended December 31, 2019. The Company determines the
allocation of the purchase price to land and building and improvements using the relative fair values in each asset acquisition.
We identified the evaluation of the relative fair value allocation of purchase price to acquired real estate assets as a critical audit
matter. There is a high degree of subjective and complex auditor judgment in evaluating the factors used in allocation of the
purchase price to land, and building and improvements. Specifically, those factors include the relevance and reliability of market
information including comparable land sales identified and replacement costs used to determine the building and improvements fair
value.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls
over the Company’s process to determine the relative fair values for land, and building and improvements including controls to
identify and select publicly available comparable land sales and to evaluate replacement cost inputs used to estimate the fair value of
building and improvements. For all asset acquisitions we involved valuation professionals with specialized skills and knowledge,
who assisted in the following procedures for the Company’s asset acquisitions:
‒
‒
compared the Company’s estimated fair value of land to a range of independently developed estimates based on publically
available and comparable land sales; and
compared the key inputs in the Company’s replacement cost analysis of building and improvement fair value to market data
such as industry guides used for developing replacement buildings.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.
Philadelphia, Pennsylvania
February 18, 2020
49
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Independence Realty Trust, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Independence Realty Trust, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of
operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended
December 31, 2019, and the related notes and financial statement schedule III (collectively, the consolidated financial statements), and
our report dated February 18, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 18, 2020
50
Independence Realty Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
ASSETS:
Investments in real estate:
Investments in real estate, at cost
Accumulated depreciation
Investments in real estate, net
Real estate held for sale
Cash and cash equivalents
Restricted cash
Other assets
Derivative assets
Intangible assets, net of accumulated amortization of $540 and $787, respectively
Total Assets
LIABILITIES AND EQUITY:
Indebtedness, net of unamortized deferred financing costs of $5,606 and $5,927,
respectively
Accounts payable and accrued expenses
Accrued interest payable
Dividends payable
Derivative liabilities
Other liabilities
Total Liabilities
Equity:
Stockholders’ equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized, 0 and 0 shares
issued and outstanding, respectively
Common stock, $0.01 par value; 300,000,000 shares authorized, 91,070,637 and
89,184,443 shares issued and outstanding, including 326,541 and 303,819 unvested
restricted common share awards, respectively
Additional paid in capital
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Total stockholders’ equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
As of
December 31,
2019
As of
December 31,
2018
$
$
$
$
1,796,365 $
(158,435 )
1,637,930
-
9,888
4,545
10,380
953
410
1,664,106 $
985,572 $
25,399
2,196
16,491
7,769
6,922
1,044,349
1,660,423
(112,270 )
1,548,153
77,285
9,316
6,729
8,802
8,307
744
1,659,336
985,488
22,815
719
16,162
-
4,107
1,029,291
-
-
911
765,992
(12,099 )
(141,525 )
613,279
6,478
619,757
1,664,106 $
892
742,429
2,016
(122,342 )
622,995
7,050
630,045
1,659,336
The accompanying notes are an integral part of these consolidated financial statements
51
Independence Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)
For the Years Ended December 31,
2018
2017
2019
REVENUE:
Rental and other property revenue
Other revenue
Total revenue
EXPENSES:
Property operating expenses
Property management expenses
General and administrative expenses
Acquisition and integration expenses
Depreciation and amortization expense
Casualty related costs
Total expenses
Interest expense
Other income (expense)
Net gains (losses) on sale of assets
Gain (loss) on extinguishment of debt
Acquisition related debt extinguishment expenses
Net income (loss):
(Income) loss allocated to noncontrolling interest
Net income (loss) allocable to common shares
Earnings (loss) per share:
Basic
Diluted
Weighted-average shares:
Basic
Diluted
$
202,620 $
603
203,223
190,712 $
520
191,232
160,497
719
161,216
79,568
7,726
12,745
-
52,815
-
152,854
(39,226 )
-
35,211
-
-
46,354
(458 )
45,896 $
76,363
6,963
10,817
-
45,221
46
139,410
(36,006 )
144
10,650
-
-
26,610
(322 )
26,288 $
64,716
6,006
9,526
1,342
34,201
-
115,791
(28,702 )
89
18,825
(572 )
(3,624 )
31,441
(1,235 )
30,206
0.51 $
0.51 $
0.30 $
0.30 $
0.41
0.41
$
$
$
89,799,238 87,086,585 73,338,219
90,417,486 87,376,991 73,599,869
The accompanying notes are an integral part of these consolidated financial statements.
52
Independence Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
Net income (loss)
Other comprehensive income (loss):
For the Years Ended December 31,
2018
2017
2019
$
46,354 $
26,610 $
31,441
Change in fair value of interest rate hedges
Realized (gains) losses on interest rate hedges reclassified to earnings
Total other comprehensive income
Comprehensive income (loss) before allocation to noncontrolling
interests
Allocation to noncontrolling interests
Comprehensive income (loss) allocable to common shares
$
(15,571 )
1,139
(14,432 )
31,922
(141 )
31,781 $
(1,382 )
(1,372 )
(2,754 )
23,856
(178 )
23,678 $
845
107
952
32,393
(1,244 )
31,149
The accompanying notes are an integral part of these consolidated financial statements.
53
Independence Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(Dollars in thousands, except share and per share data)
Par
Value
Preferred
Shares
Preferred
Shares
Par
Value
Common
Shares
Additional
Paid In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
Noncontrolling
Interests
Balance, December 31, 2016
Net income (loss)
Common dividends declared ($0.72 per share)
Other comprehensive income
Stock compensation expense
Repurchase of shares related to equity award tax withholding
Conversion of noncontrolling interest to common shares
Issuance of common shares, net
Issuance of noncontrolling interests
Distribution to noncontrolling interest declared ($0.72 per
unit)
Balance, December 31, 2017
Net income (loss)
Common dividends declared ($0.72 per share)
Other comprehensive income
Stock compensation expense
Repurchase of shares related to equity award tax withholding
Conversion of noncontrolling interest to common shares
Issuance of common shares, net
Distribution to noncontrolling interest declared ($0.72 per
unit)
Balance, December 31, 2018
Net income (loss)
Common dividends declared ($0.72 per share)
Other comprehensive income
Stock compensation expense
Repurchase of shares related to equity award tax withholding
Conversion of noncontrolling interest to common shares
Issuance of common shares, net
Distribution to noncontrolling interest declared ($0.72 per
unit)
Balance, December 31, 2019
- $
-
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
- $
Common
Shares
- 68,996,070 $
-
-
-
-
-
-
168,010
-
(59,631 )
-
-
64,202
- 15,539,900
-
-
-
-
-
1
(1 )
1
690 $ 564,633 $
-
-
-
1,967
(568 )
619
155 137,198
-
-
-
-
- 84,708,551 $
-
-
-
-
-
-
188,196
-
-
(38,712 )
- 2,130,244
- 2,196,164
-
-
- 89,184,443 $
-
-
-
-
-
-
209,215
-
(49,928 )
-
9,616
-
- 1,717,291
-
-
846 $ 703,849 $
-
-
-
2,558
(354 )
14,485
21,891
-
-
-
2
-
21
23
-
-
892 $ 742,429 $
-
-
-
3,165
(642 )
78
20,962
-
-
-
1
-
-
18
3,683 $
-
-
943
-
-
-
-
-
-
4,626 $
-
-
(2,610 )
-
-
-
-
-
2,016 $
-
-
(14,115 )
-
-
-
-
(62,181 ) $
30,206
(53,246 )
-
-
-
-
-
-
-
(85,221 ) $
26,288
(63,409 )
-
-
-
-
-
-
(122,342 ) $
45,896
(65,079 )
-
-
-
-
-
506,825 $
30,206
(53,246 )
943
1,968
(569 )
620
137,353
-
-
624,100 $
26,288
(63,409 )
(2,610 )
2,560
(354 )
14,506
21,914
-
622,995 $
45,896
(65,079 )
(14,115 )
3,166
(642 )
78
20,980
Total
Equity
21,866 $ 528,691
1,235 31,441
- (53,246 )
952
9
1,968
-
(569 )
-
-
(620 )
- 137,353
1,654
1,654
(2,125 )
(2,125 )
22,019 $ 646,119
322 26,610
- (63,409 )
(2,754 )
2,560
(354 )
-
- 21,914
-144
-
-
(14,506 )
(641 )
(641 )
7,050 $ 630,045
458 46,354
- (65,079 )
(317 ) (14,432 )
3,166
(642 )
-
- 20,980
-
-
(78 )
-
-
- 91,070,637 $
-
-
911 $ 765,992 $
-
(12,099 ) $
-
(141,525 ) $
-
613,279 $
(635 )
(635 )
6,478 $ 619,757
The accompanying notes are an integral part of these consolidated financial statements.
54
Independence Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income to cash flow from operating activities:
For the Years Ended December 31,
2018
2017
2019
$
46,354 $
26,610 $
31,441
Depreciation and amortization
Amortization of deferred financing costs, net
Stock compensation expense
Net (gains) losses on sale of assets
Net (gains) losses on extinguishment of debt
Amortization related to derivative instruments
Acquisition related debt extinguishment expenses
Changes in assets and liabilities:
Other assets
Accounts payable and accrued expenses
Accrued interest payable
Other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Acquisition of real estate properties
Disposition of real estate properties
Capital expenditures
Cash flow provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Proceeds from unsecured credit facility and term loan
Unsecured credit facility repayments
Mortgage principal repayments
Payments for deferred financing costs
Distributions on common stock
Distributions to noncontrolling interests
Payment for interest rate collars
Payments related to extinguishment of debt on acquisitions
Repurchase of shares related to equity award tax withholding
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents, and restricted cash
Cash and cash equivalents, and restricted cash, beginning of period
Cash and cash equivalents, and restricted cash, end of the period
Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheet
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash, end of period
Supplemental cash flow information:
Cash paid for interest
Supplemental disclosure of noncash investing and financing activities:
Decrease in noncontrolling interest from conversion of common limited
partnership units to shares of common stock
Distributions declared but not paid
Value of limited partnership units issued in acquisitions
Mortgage debt assumed
Initial measurement of operating lease right of use assets
Initial measurement of operating lease liabilities
Debt extinguishment costs included in net gains (losses) on sale of assets
Capital expenditure accrual
$
$
$
$
$
$
$
$
$
$
$
$
52,815
1,423
3,116
(35,211 )
-
690
-
1,344
3,490
1,542
(562 )
75,001
(128,908 )
68,137
(45,625 )
(106,396 )
20,981
234,059
(153,500 )
(4,284 )
(1,446 )
(64,745 )
(640 )
-
-
(642 )
29,783
(1,612 )
16,045
14,433 $
9,888 $
4,545
14,433 $
45,221
1,430
2,524
(10,650 )
-
(40 )
-
(514 )
3,284
469
196
68,530
(215,833 )
26,802
(40,426 )
(229,457 )
21,914
400,000
(198,262 )
(3,191 )
(890 )
(52,476 )
(658 )
(3,730 )
-
(354 )
162,353
1,426
14,619
16,045 $
9,316 $
6,729
16,045 $
34,201
1,464
1,968
(18,825 )
572
-
3,624
(1,267 )
1,578
(242 )
(190 )
54,324
(221,813 )
44,474
(14,370 )
(191,709 )
137,353
199,690
(145,685 )
(2,654 )
(2,089 )
(52,304 )
(2,119 )
(2,405 )
(3,624 )
(569 )
125,594
(11,791 )
26,410
14,619
9,316
6,729
16,045
37,531 $
36,002 $
27,368
78 $
16,491 $
- $
- $
2,812 $
3,176 $
7,417 $
804 $
14,506 $
16,162 $
- $
54,756 $
- $
- $
911 $
1,750 $
620
5,245
1,654
18,977
-
-
4,251
-
The accompanying notes are an integral part of these consolidated financial statements.
55
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(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
(“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 December 31, 2019, we owned and operated 57 (unaudited)
multifamily apartment properties, totaling 15,554 (unaudited) 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 consolidated financial statements have been prepared by management in accordance with generally accepted accounting
principles in the United States (“GAAP”). 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.
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 of which we are the primary beneficiary. 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 original 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 or to be released at our discretion
upon the occurrence of certain pre-specified events. As of December 31, 2019 and 2018, we had $4,545 and $6,729, respectively, of
restricted cash.
f. Investments in Real Estate
Investments in real estate are recorded at cost less accumulated depreciation. Costs, including internal 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 the sale of
the asset 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.
56
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
Allocation of Purchase Price of Acquired Assets
Effective January 1, 2018, FASB ASC Topic 805, “Business Combinations” was amended to clarify the definition of a business
by more clearly outlining the requirements for an integrated set of assets and activities to be considered a business and by establishing
a practical framework to determine when the integrated set of assets and activities is a business. Prior to January 1, 2018, the
properties we acquired were generally considered businesses and were accounted for as business combinations. Subsequent to January
1, 2018, we expect the properties we acquire to generally not be considered businesses and, therefore, to be accounted for as asset
acquisitions.
Under business combination accounting, the fair value of the real estate acquired is allocated to the acquired tangible assets,
generally consisting of land, building and tenant improvements, identified intangible assets, consisting of the value of above-market
and below-market leases for acquired in-place leases and the value of tenant relationships and liabilities, based, in each case, on their
fair values. Transaction costs and fees incurred related to the acquisition are expensed as incurred. Under asset acquisition accounting,
the costs to acquire real estate, including transaction costs related to the acquisition, are accumulated and then allocated to the
individual tangible and intangible assets and liabilities acquired based upon their relative fair value. Under both business combination
and asset acquisition accounting, transaction costs and fees incurred related to the financing of an acquisition are capitalized and
amortized over the life of the related financing.
We estimate the fair value of acquired tangible assets (consisting of land, building and improvements), identified intangible
assets (consisting of in-place leases), and assumed debt at the date of acquisition, based on the evaluation of information and estimates
available at that date.
The aggregate value of in-place leases is determined by evaluating various factors, including the terms of the leases that are in
place and assumed lease-up periods. During the year ended December 31, 2019 and 2018, we acquired in-place leases with a value of
$1,265 and $3,074, respectively, related to our acquisitions that are discussed further in Note 3: Investments in Real Estate. The value
assigned to these intangible assets is amortized over the assumed lease up period, typically six months. For the years ended
December 31, 2019, 2018 and 2017 we recorded $1,599, $3,433 and $1,536 of amortization expense for intangible assets,
respectively. For the years ended December 31, 2019, 2018, and 2017 we wrote-off fully amortized intangible assets of $1,846,
$4,153, and $0, respectively. Based on the intangible assets identified above, we expect to record amortization expense of intangible
assets of $410 for 2020.
Impairment of Long-Lived Assets
Management evaluates the recoverability of its investment in real estate assets, including related identifiable intangible assets, in
accordance with FASB ASC Topic 360, “Property, Plant and Equipment”. This statement requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that recoverability of the assets is not assured.
Management 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
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 years ended December 31, 2019, 2018 and 2017 we recorded
$51,216, $41,788 and $32,665 of depreciation expense, respectively. For the years ended December 31, 2019 and 2018, we wrote-off
fully depreciated fixed assets of $940 and $408, respectively.
57
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
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 apartment 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, (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 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.
The table below presents our revenues disaggregated by revenue source.
Rental revenue (1)
Other property revenue (2)
Other revenue (2)
Total revenue
For the year ended December 31,
2018
2017
2019
$
$
195,120
7,500
603
203,223
$
$
184,330
$
6,382
520
191,232 $
155,334
5,163
719
161,216
(1) Amounts include all revenue streams derived from rental income and other lease income, which are accounted for under
FASB ASC Topic 842.
(2) Amounts include revenue related to activities that are not considered components of a lease, including application fees and
administrative fees, as well as revenue not related to leasing activities, including vendor revenue sharing. All amounts are
accounted for under FASC ASC Topic 606.
Our portfolio of properties consists primarily of apartment communities geographically concentrated in the Southeastern United
States. North Carolina, Georgia, Tennessee, Kentucky, Florida, Ohio, and Texas comprised 15.76%, 13.46%, 10.92%, 9.51%, 9.47%,
9.10%, and 7.54%, respectively, of our rental revenue for the year ended December 31, 2019. We have no single customer that
accounts for 10% or more of revenue.
We make ongoing estimates of the collectability of our base rents, tenant reimbursements, and other service fees included within
rental and other property revenue. Effective January 1, 2019, if collectability is not probable, we adjust rental and other property
income for the amount of uncollectible 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 year ended December 31, 2018, we recorded bad debt expense of $644 within property operating
expenses in the consolidated statements of operations.
For the years ended December 31, 2019, 2018, and 2017, we recognized revenues of $156, $195, and $110, respectively, related
to recoveries of lost rental revenue due to natural disasters and other insurable events from our insurance providers.
Advertising Expenses
For the years ended December 31, 2019, 2018 and 2017, we incurred $2,350, $2,172, and $1,806 of advertising expenses,
respectively.
h. 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
58
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the
instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in our consolidated balance sheets are
categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in
FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with
the inputs to fair valuations of these assets and liabilities, are as follows:
Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the
measurement date. The types of assets carried at Level 1 fair value generally are equity securities listed in active markets.
As such, valuations of these investments do not entail a significant degree of judgment.
Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or
similar instruments in markets that are not active or for which all significant inputs are observable, either directly or
indirectly.
Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market
activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the
fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its
entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its
entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the asset or liability.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of
factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active
exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that
are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of
judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3.
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. 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. The following table summarizes the carrying amount and the fair value of our financial instruments as of the periods
indicated:
59
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
December 31, 2019
December 31, 2018
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
9,888
$
4,545
953
9,888 $
4,545
953
9,316 $
6,729
8,307
9,316
6,729
8,307
183,966
298,418
503,188
7,769
186,302
300,000
505,510
7,769
153,983
248,380
583,125
-
155,743
250,000
577,112
-
Financial Instrument
Assets
Cash and cash equivalents
Restricted cash
Derivative assets
Liabilities
Debt:
Unsecured credit facility
Unsecured term loans
Mortgages
Derivative liabilities
i. 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.
j. 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 years ended December 31, 2019, 2018 and 2017.
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.
For the year ended December 31, 2019, 69% of dividends were characterized as capital gain distributions, 16% were
characterized as ordinary income and 15% were characterized as return of capital. For the year ended December 31, 2018, 37% of
dividends were characterized as capital gain distributions, 39% were characterized as ordinary income and 24% were characterized as
return of capital. For the year ended December 31, 2017, 53% of dividends were classified as capital gain distributions, 36% of
dividends were characterized as ordinary income and 11% were characterized as return of capital.
k. Share-Based Compensation
We account for stock-based compensation in accordance with FASB ASC Topic 718, “Compensation - Stock Compensation”.
Any stock-based compensation awards granted are measured based on the grant-date fair value of the award and compensation
expense for the entire award is recognized on a straight-line basis over the requisite service period, which is the vesting period, for the
entire award.
l. Noncontrolling Interest
Our noncontrolling interest represents limited partnership units of our operating partnership that were issued in connection with
certain property acquisitions. We record limited partnership units issued in an acquisition at their fair value on the closing date of the
60
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
acquisition. The holders of the limited partnership units have the right to redeem their limited partnership units for either shares of our
common stock or for cash at our discretion. As the settlement of a redemption is in our sole discretion, we present noncontrolling
interest in our consolidated balance sheet within equity but separate from stockholders’ equity. Any noncontrolling interests that fail to
qualify as permanent equity will be presented as temporary equity and be carried at the greater of historical cost or their redemption
value.
m. 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 sheet 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 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.
n. 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 December 31, 2019, we had $2,812 of operating lease right-of-use assets and $3,176
of 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 $589 and
$416, respectively, of total operating lease expense for years ended December 31, 2019 and 2018, which is recorded within property
management expense and general and administrative expenses in our consolidated statements of operations.
o. Recent Accounting Pronouncements
Below is a brief description of recent accounting pronouncements that could have a material effect on our financial statements.
Adopted Within these Financial Statements
In May 2014, the FASB issued an accounting standard classified under FASB ASC Topic 606, “Revenue from Contracts with
Customers”. This accounting standard generally replaces existing guidance by requiring an entity to recognize the amount of revenue
to which it expects to be entitled for the transfer of promised goods or services to customers. This accounting standard applies to all
contracts with customers, except those that are within the scope of other Topics in the FASB ASC. Subsequently, the FASB issued
amendments to this accounting standard that provided further clarification. We adopted these accounting standard updates on January
1, 2018 using the modified retrospective approach. A majority of our revenue is derived from real estate lease contracts, which are
specifically excluded from the scope of these standards. The portion of our revenue that was impacted by these standards included
revenue recorded within the property revenue and other property revenue, and other revenue captions of our Consolidated Statements
of Operations. The adoption of these standards did not have a material impact on our consolidated financial statements and no
cumulative effect adjustment was recorded upon adoption.
61
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
In August 2016, the FASB issued an accounting standard classified under FASB ASC Topic 230, “Statement of Cash Flows”.
This accounting standard provides guidance on eight specific cash flow issues: (i) debt prepayment or debt extinguishment costs; (ii)
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the
effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from
the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned
life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions;
and (viii) separately identifiable cash flows and application of the predominance principle. Subsequently, the FASB issued
amendments to this accounting standard that required companies to include restricted cash and restricted cash equivalents with cash
and cash equivalents when reconciling the statement of cash flows. We adopted these standards as of January 1, 2018. The adoption of
this accounting standard resulted in an increase (decrease) in net cash used in investing activities of $942 and ($105) for the years
ended December 31, 2018, and 2017, respectively.
In January 2017, the FASB issued an accounting standard update under FASB ASC Topic 805, “Business Combinations” that
changed the definition of a business to assist entities with evaluating whether a set of transferred assets is a business. As a result, the
accounting for acquisitions of real estate could be impacted. The new definition will be applied prospectively to any transactions
occurring within the period of adoption. We adopted this standard on January 1, 2018. Management expects that the updated standard
will result in fewer acquisitions of real estate meeting the definition of a business and fewer acquisition-related costs being expensed
in the period incurred, with these costs instead being capitalized as part of the acquired asset.
In February 2017, the FASB issued an accounting standard update under FASB ASC Topic 610 “Other Income.” The
amendments in this update provided guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically,
GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment.
This new standard reduces the number of potential accounting models that might apply and clarified which model does apply in
various circumstances. Partial sales of nonfinancial assets are common in the real estate industry and include transactions in which the
seller retains an equity interest in the entity that owns the assets or has an equity interest in the buyer. We adopted this standard as of
January 1, 2018. While partial sales are common in the real estate industry, we have never participated in a transaction of this nature,
therefore, the adoption of this accounting standard had no impact on our consolidated financial statements.
In May 2017, the FASB issued an accounting standard update under FASB ASC Topic 718, “Compensation – Stock
Compensation.” The amendments in this update provided guidance about which changes to the terms or conditions of a share-based
payment award require an entity to apply modification accounting in Topic 718. As a result, the accounting for share-based payment
award transactions could be impacted. The updated standard was adopted by us on January 1, 2018. The new definition will be applied
prospectively to an award modified on or after the adoption date. The adoption of this accounting standard did not have a material
impact on our consolidated financial statements.
In August 2017, the FASB issued an accounting standard update under FASB ASC Topic 815, “Derivatives and Hedging.” The
amendments in this update provided guidance about the application of the hedge accounting guidance in current GAAP based on the
feedback received from preparers, auditors, and other stakeholders. 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
62
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
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
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. The adoption of these standards did not have a material
impact on our consolidated financial statements and no cumulative effect adjustment was recorded upon adoption.
NOTE 3: Investments in Real Estate
As of December 31, 2019, our investments in real estate consisted of 57 apartment properties (unaudited). The table below
summarizes our investments in real estate:
Land
Building
Furniture, fixtures and equipment
Total investment in real estate
Accumulated depreciation
Investments in real estate, net
Acquisitions
2019
234,050 $
1,453,052
109,263
1,796,365 $
(158,435 )
1,637,930 $
2018
209,111
1,384,810
66,502
1,660,423
(112,270 )
1,548,153
$
$
$
Depreciable Lives
(In years)
-
40
5-10
The below table summarizes the acquisitions for the year ended December 31, 2019:
Property Name
North Park
Rocky Creek
Thornhill
Total
Date of Purchase
04/30/2019
07/11/2019
10/01/2019
Atlanta, GA
Tampa, FL
Raleigh, NC
Market
Units
(unaudited)
Contract Price
224
264
318
806
$
$
28,000
48,000
52,925
128,925
63
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
The following table summarizes the aggregate fair value of the assets and liabilities associated with the properties acquired
during the year ended December 31, 2019, on the date of acquisition.
Description
Assets acquired:
Investments in real estate (a)
Accounts receivable and other assets
Intangible assets
Total assets acquired
Liabilities assumed:
Accounts payable and accrued expenses
Other liabilities
Total liabilities assumed
Estimated fair value of net assets acquired
Fair Value of Asset Acquired During the
Year Ended
December 31, 2019
$
$
$
$
127,908
170
1,266
129,344
644
312
956
128,388
(a) Includes $249 of property related acquisition costs capitalized during the year ended December 31, 2019.
On February 11, 2020, we acquired a 251-unit property located in Dallas, TX for a purchase price of $51,204.
The below table summarizes the acquisitions for the year ended December 31, 2018:
Property Name
Creekside Corners (1)
Hartshire Lakes (1)
The Chelsea
Avalon Oaks
Bridgeview
Collier Park
Waterford
Lucerne
Total
Date of Purchase
01/03/2018
01/03/2018
01/04/2018
02/27/2018
07/11/2018
07/26/2018
10/11/2018
11/07/2018
Market
Atlanta, GA
Indianapolis, IN
Columbus, OH
Columbus, OH
Tampa-St. Petersburg, FL
Columbus, OH
Atlanta, GA
Tampa-St. Petersburg, FL
Units
(unaudited)
Contract Price
444
272
312
235
348
232
260
276
2,379
$
$
43,901
27,597
36,750
23,000
43,000
21,200
30,500
47,000
272,948
(1) These properties were acquired as the last phase of our acquisition of a nine-community portfolio (the “HPI Portfolio”),
totaling 2,352 units (unaudited), which we agreed to acquire on September 3, 2017 for a total purchase price of $228,144
Dispositions
The below table summarizes the dispositions for the year ended December 31, 2019:
Property Name
Reserve at Eagle Ridge
Little Rock, AR Portfolio
Iron Rock
Total
Date of Sale
04/30/2019
07/18/2019
12/17/2019
Sale Price
Gain (loss) on sale (1)
$
$
42,000
56,500
56,000
154,500
$
$
12,294
2,220
20,683
35,197
(1) The gain (loss) for these properties is net of $7,417 of defeasance and debt prepayment premium costs.
64
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
The below table summarizes the dispositions for the year ended December 31, 2018:
Property Name
Aventine Greenville
Arbors at the Reservoir
Total
Date of Sale
12/20/2018
12/27/2018
Sale Price
Gain (loss) on sale (1)
$
$
52,500
24,800
77,300
$
$
(1) The gain (loss) for these properties is net of $911 of defeasance and debt prepayment premium costs.
The below table summarizes the dispositions for the year ended December 31, 2017:
Property Name
Copper Mill
Heritage Trace
Berkshire Square
Crossings
Total
Date of Sale
5/5/2017
6/1/2017
6/9/2017
11/28/2017
$
$
Sale Price
Gain (loss) on sale (1)
32,000
11,600
16,000
27,200
86,800
$
$
(1) The gain (loss) for these properties is net of $4,251 of defeasance and debt prepayment costs.
NOTE 4: Indebtedness
The following tables contains summary information concerning our indebtedness as of December 31, 2019:
6,119
4,445
10,564
15,595
(1,256 )
1,510
3,061
18,910
Debt:
Unsecured credit facility (1)
Unsecured term loans
Mortgages
Total Debt
Outstanding Principal
186,302
$
300,000
504,876
991,178
$
$
$
Unamortized
Debt Issuance
Costs
Carrying Amount Type
Weighted
Average Rate
(2,336 ) $
(1,582 )
(1,688 )
(5,606 ) $
183,966
298,418
503,188
985,572
Floating
Floating
Fixed
3.2%
3.1%
3.9%
3.5%
Weighted
Average
Maturity
(in years)
3.4
4.3
4.0
4.0
(1) The unsecured credit facility total capacity is $350,000, of which $186,302 was outstanding as of December 31, 2019.
Original maturities on or before December 31,
Debt:
Unsecured credit facility
Unsecured term loans
Mortgages
Total
$
$
2020
2022
2021
Thereafter
-
- $
- $
-
- 300,000
-
8,135
72,172 170,363
70,734 107,387
8,135 $ 76,085 $ 70,734 $ 293,689 $ 372,172 $ 170,363
2023
- $ 186,302 $
-
- $
-
76,085
2024
As of December 31, 2019 we were in compliance with all financial covenants contained in our indebtedness.
65
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
The following tables contains summary information concerning our indebtedness as of December 31, 2018:
Debt:
Unsecured credit facility (1)
Unsecured term loans
Mortgages
Total Debt
Outstanding Principal
155,743
$
250,000
585,672
991,415
$
$
$
Unamortized
Debt Issuance
Costs
Carrying Amount
Type
(1,760 ) $ 153,983
248,380
(1,620 )
(2,547 )
583,125
(5,927 ) $ 985,488
Floating
Floating
Fixed
Weighted
Average Rate
3.9%
4.0%
3.8%
3.9%
Weighted
Average
Maturity
(in years)
2.7
5.4
5.1
4.8
(1) The secured credit facility total capacity was $300,000, of which $155,743 was outstanding as of December 31, 2018.
Unsecured Credit Facility and Revolving Line of Credit
On September 17, 2015, we entered into a credit agreement with KeyBank National Association (“KeyBank”) with respect to a
$325,000 senior secured credit facility (the “Secured Credit Facility”). The Secured Credit Facility was subsequently amended on
December 21, 2016. The amended Secured Credit Facility had a total capacity of $312,500.
On May 1, 2017, we entered into a $300,000 unsecured credit facility (the “Unsecured Credit Facility”), refinancing and
terminating the previous Secured Credit Facility. We recognized the refinance as a partial extinguishment of our prior Secured Credit
Facility and recognized a loss on extinguishment of debt of $572.
On May 9, 2019, we entered into a new $350,000 unsecured credit facility that consists entirely of a revolving line of credit (the
“Unsecured Revolving Line of Credit”), refinancing and terminating the previous Unsecured Credit Facility. We have the right to
increase the aggregate amount of the Unsecured Revolving Line of Credit to up to $600,000. The maturity date on borrowings
outstanding under the Unsecured Revolving Line of Credit is May 9, 2023, subject to our option to extend the revolving commitment
for two additional 6-month periods under certain circumstances, including the payment of an extension fee. We may prepay the
Unsecured Revolving Line of Credit, in whole or in part, at any time without a prepayment fee or penalty. At our option, borrowings
under the Unsecured Revolving Line of Credit will bear interest at a rate equal to either (i) the 1-month LIBOR rate plus a margin of
125 to 200 basis points, or (ii) a base rate plus a margin of 25 to 100 basis points. The applicable margin is determined based upon our
total consolidated leverage ratio, as defined in the agreements. At the time of closing, based on our leverage ratio, the margin spread to
LIBOR was 155 basis points. We recognized the refinance as a modification of our prior unsecured credit facility and incurred
deferred financing costs of $1,129 associated with this transaction.
In addition to certain negative covenants, our Unsecured Revolving Line of Credit has financial covenants that require us to (i)
maintain a consolidated leverage ratio below thresholds described in the debt agreement, (ii) maintain a minimum consolidated fixed
charge coverage ratio, and (iii) maintain a minimum consolidated tangible net worth. Additionally, the covenants (i) limit (a) the
amount of distributions that IRT can make to a percentage of Funds from Operations (as such term is described in the debt agreement),
and (b) the amount of unhedged variable rate indebtedness that may be incurred by us, and (ii) require us to maintain a pool of
unencumbered properties with a total value of at least $100,000.
We may draw upon or pay down our Unsecured Revolving Line of Credit from time-to-time based on our cash needs.
Subsequent to December 31, 2019, we drew $62,000 associated with capital expenditures and a property acquisition.
Term Loans
On November 20, 2017, we entered into an agreement for a $100,000 unsecured term loan that matures in November 2024. We
incurred upfront deferred costs of $917 associated with this facility. In November 2019, the unsecured term loan was amended, which
reduced the interest spread. We incurred $257 of upfront deferred costs associated with the amendment. The interest rate on the
unsecured term loan is LIBOR plus a spread of 1.20% – 1.90% based on our consolidated leverage ratio.
On October 30, 2018, we entered into an agreement for a $200,000 unsecured term loan that matures in January 2024. We
incurred upfront deferred costs of $821 associated with this facility. The interest rate on the unsecured term loan is LIBOR plus a
66
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
spread of 1.20% – 1.90% based on our overall leverage ratio. At closing, the spread to LIBOR was 145 basis points. At closing, we
drew $150,000 under the loan. The remaining $50,000 was drawn in February 2019. We applied proceeds of both draws to reduce
outstanding borrowings under our Unsecured Credit Facility.
Mortgages
During the year ended December 31, 2019, in connection with three property dispositions, we extinguished property
mortgages totaling $76,512.
On January 3, 2018, in connection with the acquisition of our Hartshire Lakes property, we assumed a $16,000 loan secured by a
first mortgage on the property. The loan bears interest at a rate of 4.68% per annum, provides for monthly payments of interest only
through January 2019, when principal and interest payments will be due monthly based on a 30-year amortization schedule. The loan
matures January 2025. The loan was recorded at its fair value of $15,936 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.
On January 3, 2018, in connection with the acquisition of our Creekside Corners property, we assumed a $23,500 loan secured
by a first mortgage on the property. The loan bears interest at a rate of 4.56% per annum, provides for monthly payments of interest
only through January 2019, when principal and interest payments will be due monthly based on a 30-year amortization schedule. The
loan matures January 2025. The loan was recorded at its fair value of $23,426 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.
On October 11, 2018, in connection with the acquisition of our Waterford Landing property, we assumed a $15,500 loan
secured by a first mortgage on the property. The loan bears interest at a rate of 4.82% per annum, provides for monthly payments of
interest only through January 2019, when principal and interest payments will be due monthly based on a 30-year amortization
schedule. The loan matures January 2026. The loan was recorded at its fair value of $15,394 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.
During the year ended December 31, 2018, in connection with two property dispositions, we extinguished property mortgages
and made partial paydowns totaling $46,772.
NOTE 5: Derivative Financial Instruments
We have and may in the future 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.
The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of
December 31, 2019 and 2018:
Cash flow hedges:
Interest rate swap
Interest rate collars
Forward interest rate swap
Total
Interest rate swap
December 31, 2019
Fair Value of
Assets
Fair Value of
Liabilities Notional
December 31, 2018
Fair Value of
Assets
Fair Value of
Liabilities
Notional
$ 150,000 $
250,000
—
$ 400,000 $
953 $
—
—
953 $
— $ 150,000 $
4,330 250,000
—
3,439
7,769 $ 400,000 $
4,751 $
3,556
—
8,307 $
—
—
—
—
67
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
On June 24, 2016, we entered into an interest rate swap contract with a notional value of $150,000, 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 did not recognize any
ineffectiveness associated with this cash flow hedge through April 2017. On April 17, 2017, in conjunction with the refinancing of
our credit facility, we restructured our existing interest rate swap to remove the LIBOR floor. This resulted in a decrease in the strike
rate to 1.1325%. The notional value and maturity date remained the same. We designated the restructured 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. Upon our early adoption of accounting standard updates to ASC Topic 815, “Derivatives and Hedging,”
ineffectiveness is no longer measured or reported.
Interest rate collar
On October 17, 2018, we purchased an interest rate collar with an initial notional value of $100,000, a 2.50% cap and 2.25%
floor, and a maturity date of January 17, 2024. The notional value was adjusted to $150,000 in November 2018. We designated this
interest rate collar 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.
On November 17, 2017, in connection with our new $100,000 unsecured term loan, we purchased an interest rate collar with a
notional value of $100,000, a 2.00% cap and 1.25% floor, and a maturity date of November 17, 2024. We designated $50,000 of the
interest rate collar 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 using the hypothetical derivative method.
The other $50,000 notional value interest rate collar was accounted for as a freestanding derivative from inception. During the
year ended December 31, 2017, we recognized a $94 gain within other income (expense) in our consolidated statements of operations
reflecting the change in fair value of the instrument from its inception date through December 31, 2017. On January 4, 2018, we
designated this other $50,000 notional value interest rate collar as a cash flow hedge 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 using the hypothetical derivative method.
Forward interest rate swap
On May 9, 2019, we entered into a forward-starting interest rate swap contract with a notional value of $150,000 and a strike
rate of 2.176%. The forward interest rate swap has an effective date of June 17, 2021 and a maturity date of June 17, 2026. We
designated this forward 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.
Effective interest rate swaps and collars 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 collars that are considered effective hedges, we reclassified realized gains (losses) of $1,139, $1,372
and ($107) to earnings within interest expense for the years ended December 31, 2019, 2018 and 2017, respectively. For interest rate
swaps that are considered effective hedges, we expect $1,478 to be reclassified out of accumulated other comprehensive income to
earnings over the next 12 months.
NOTE 6: Stockholder Equity and Noncontrolling Interest
Stockholder Equity
On August 4, 2017, we entered into an At-the-Market Issuance Sales Agreement (the “ATM Sales Agreement”) with various
sales agents. Pursuant to the ATM Sales Agreement, we may offer and sell shares of our common stock, $0.01 par value per share,
having an aggregate offering price of up to $150,000, from time to time through the sales agents. The sales agents are entitled to
compensation in an agreed amount not to exceed 2.0% of the gross sales price per share for any shares sold from time to time under
the ATM Sales Agreement. We have no obligation to sell any of the shares under the ATM Sales Agreement and may at any time
suspend solicitations and offers under the ATM Sales Agreement. During the year ended December 31, 2019, 1,717,291 shares were
issued at an average price of $12.82 per share, resulting in $21,258 of net proceed, after deducting $434 of commissions. Pursuant to
the Sales Agreement $93,549 remained available for issuance as of December 31, 2019.
68
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
On September 11, 2017 in connection with the acquisition of the HPI Portfolio, we issued 12,500,000 shares of our common
stock at a public offering price of $9.25 per share. We also closed on the underwriters’ option to purchase an additional 1,875,000
shares of common stock at the public offering price. As a result of the offering and exercise or the underwriters’ option, we received
approximately $126,100 in net proceeds, after deducting the underwriting discount and offering expenses.
Our board of directors declared the following dividends in 2019:
Quarter
First quarter 2019
Second quarter 2019
Third quarter 2019
Fourth quarter 2019
Declaration Date
March 18, 2019
June 17, 2019
Record Date
Payment Date
March 29 2019
June 28, 2019
April 25, 2019
July 25, 2019
September 12, 2019 September 27, 2019 October 25, 2019
January 24, 2020
December 16, 2019 December 26, 2019
$
$
$
$
Our board of directors declared the following dividends in 2018:
Quarter
First quarter 2018
Second quarter 2018
Third quarter 2018
Fourth quarter 2018
Noncontrolling Interest
Declaration Date
March 13, 2018
June 13, 2018
September 17, 2018
December 13, 2018 December 27, 2018
Record Date
April 4, 2018
July 7, 2018
October 5, 2018
Payment Date
April 20, 2018
July 20, 2018
October 19, 2018
January 24, 2019
Dividend Declared
Per Share
0.18
0.18
0.18
0.18
Dividend Declared
Per Share
0.18
0.18
0.18
0.18
$
$
$
$
During 2019, holders of IROP units exchanged 9,616 units for 9,616 shares of our common stock. As of December 31, 2019,
871,491 IROP units held by unaffiliated third parties remain outstanding with a redemption value of $12,271, based on IRT’s stock
price of $14.08 as of December 31, 2019.
During 2018, holders of IROP units exchanged 2,130,244 units for 2,130,244 shares of our common stock. As of December 31,
2018, 881,107 IROP units held by unaffiliated third parties remain outstanding with a redemption value of $8,089, based on IRT’s
stock price of $9.18 as of December 31, 2018.
Our board of directors declared the following distributions on our operating partnership’s LP units during 2019:
Quarter
First quarter 2019
Second quarter 2019
Third quarter 2019
Fourth quarter 2019
Declaration Date
March 18, 2019
June 17, 2019
September 12, 2019
December 16, 2019
Record Date
March 29 2019
June 28, 2019
September 27, 2019
December 26, 2019
Payment Date
April 25, 2019
July 25, 2019
October 25, 2019
January 24, 2020
$
$
$
$
Dividend Declared
Per Share
0.18
0.18
0.18
0.18
Our board of directors declared the following distributions on our operating partnership’s LP units during 2018:
Quarter
First quarter 2018
Second quarter 2018
Third quarter 2018
Fourth quarter 2018
Declaration Date
March 13, 2018
June 13, 2018
September 17, 2018
December 13, 2018
Record Date
April 4, 2018
July 7, 2018
October 5, 2018
December 27, 2018
Payment Date
April 20, 2018
July 20, 2018
October 19, 2018
January 24, 2019
$
$
$
$
Dividend Declared
Per Share
0.18
0.18
0.18
0.18
NOTE 7: Equity Compensation Plans
In May 2016, our shareholders approved and our board of directors adopted an amended and restated Long Term Incentive Plan
(the “Incentive Plan”), which provides for the grants of awards to our directors, officers, employees, and consultants. The Incentive
Plan authorizes the grant of restricted or unrestricted shares of our common stock, performance share units (“PSUs”), non-qualified
69
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
and incentive stock options, restricted stock units (“RSUs”), stock appreciation rights (“SARs”), dividend equivalents and other stock-
or cash-based awards. In conjunction with the amendment, the number of shares of common stock issuable under the Incentive Plan
was increased to 4,300,000 shares and the term of the Incentive Plan was extended to May 12, 2026.
Under the Incentive Plan or predecessor incentive plans, we have granted restricted shares, SARs, and PSUs. For the years
ended December 31, 2019, 2018 and 2017 we recognized $3,166, $2,524 and $1,968 of stock compensation expense, respectively.
The restricted shares granted under the Incentive Plan generally vested over a three or four year period. In addition, we have
granted unrestricted shares to our directors. These awards generally vested immediately. A summary of restricted common share
awards activity is presented below.
2019
2018
2017
Weighted
Average Grant
Date Fair
Value Per
Share
Number of Shares
Number of Shares
Weighted
Average Grant
Date Fair
Value Per
Share
Number of Shares
Weighted
Average Grant
Date Fair
Value Per
Share
303,819 $
213,744
(174,367 )
(16,655 )
326,541 $
8.22
10.39
9.27
9.75
9.54
295,847 $
233,706
(175,555 )
(50,179 )
303,819 $
7.84
8.64
7.99
8.45
8.22
281,005 $
168,010
(142,748 )
(10,420 )
295,847 $
6.99
9.17
7.68
8.56
7.84
Balance, January 1,
Granted
Vested
Forfeited
Balance, December 31,
As of December 31, 2019, the unearned compensation cost relating to unvested restricted common share awards was $2,132,
which will be recognized over a weighted-average period of 2.3 years. The estimated fair value of restricted common share awards
vested during 2019, 2018, and 2017 was $1,836, $1,539, and $1,319, respectively.
A summary of the SARs activity of the Incentive Plan is presented below.
2019
2018
2017
SARs
Weighted
Average
Exercise Price
SARs
Outstanding, January 1,
Granted
Expired
Exercised
Forfeited
Outstanding, December 31,
SARs exercisable at December 31,
195,000 $
—
—
(186,000 )
—
9,000 $
9,000
9.35
—
—
9.35
—
9.35
250,000 $
—
—
(55,000 )
—
195,000 $
195,000
Weighted
Average
Exercise Price
9.28
—
—
9.02
—
9.35
Weighted
Average
Exercise Price
9.15
$
—
—
8.78
9.35
9.28
$
SARs
337,000
—
—
(84,000 )
(3,000 )
250,000
160,000
As of December 31, 2019, our closing common stock price was $14.08. The exercise price of all outstanding SARs was $9.35.
Therefore, the total intrinsic value of SARs outstanding and exercisable at December 31, 2019 was $43. The weighted average
contractual life of outstanding and exercisable SARs is 0.1 years. As of December 31, 2019, there was no unearned compensation cost
relating to unvested SAR awards.
The PSUs granted under the Incentive Plan have a three-year performance period and are generally based on (1) market
performance as measured by total shareholder return for 70%-80% of the award and (2) a subjective performance condition tied to
achievement of specified individual criteria for 20%-30% of the award. The PSUs vest 50% upon the Compensation Committee’s
determination as to the satisfaction of the performance criteria (which shall be within two months of the last day of the performance
period) and 50% on the first anniversary of the last day of the performance period, subject to continued service through such dates. A
summary of PSU activity is presented below.
70
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
2019
2018
2017
Weighted
Average Grant
Date Fair
Value Per
Share
Number of Shares
Number of Shares
Weighted
Average Grant
Date Fair
Value Per
Share
Number of Shares
Weighted
Average Grant
Date Fair
Value Per
Share
453,748 $
263,929
—
717,677 $
7.04
8.35
—
7.52
150,980 $
302,768
—
453,748 $
7.12
7.00
—
7.04
—
150,980
—
150,980 $
—
7.12
—
7.12
Balance, January 1,
Granted (1)
Forfeited
Balance, December 31,
(1) PSUs granted reflects the number of awards assuming target performance. The actual number of awards earned is based
on actual performance during the three-year performance period and ranges from 0%-150% of target.
Subsequent to December 31, 2019, the compensation committee reviewed three-year performance through December 31, 2019
for the PSUs granted in 2017 and awarded 226,469 shares of stock (150% of the 150,980 target PSUs), which represented the
maximum numbers of shares that could be granted for both the market performance and subjective performance portions of the
awards. Half of the shares awarded under the 2017 PSUs vested immediately while the other half vest on December 31, 2020.
Our assumptions used in computing the fair value of the PSUs at the dates of their respective awards, using the Monte Carlo
method, were as follows:
Dividend yield
Volatility (a)
Expected term
2019
7.6%
21.0%
2.8 years
For the year ended December 31,
2018
8.2%
28.0%
2.9 years
2017
8.1%
27.0%
2.8 years
(a) This represents the volatility assumption used for IRT. The volatility assumptions used for our peer group and the
NAREIT Mortgage Index ranged from 15% to 41%.
The Company estimates future expenses associated with PSUs outstanding at December 31, 2019 to be $2,649, which will be
recognized over a weighted-average period of 2.5 years.
Subsequent to December 31, 2019, our compensation committee awarded 134,198 restricted stock awards valued at a weighted-
average price of $14.35, or $1,926 in the aggregate. These awards vest over a 2 or 3-year period.
NOTE 8: Related Party Transactions and Arrangements
On December 20, 2016, we completed our management internalization, which consisted of two parts: (i) our acquisition of our
former external advisor and (ii) our acquisition of substantially all assets and the assumption of certain liabilities relating to the
multifamily property management business of our former external advisor, including property management contracts relating to
apartment properties owned by us with our former external advisor and third parties. Given our relationship with our former external
advisor prior to our management internalization, we considered our former external advisor a related party. Below are related party
transactions between IRT and our former external advisor.
Fees and Expenses Paid to Our Former External Advisor
For the years ended December 31, 2019, 2018 and 2017, we incurred costs of $0, $0 and $727, respectively, with respect to a
shared services agreement with our former external advisor, under which our former external advisor provided us with certain back
office support services. The term of the shared services agreement was from December 21, 2016 to June 20, 2017, and the associated
fees are included within general and administrative expenses in our consolidated statements of operations.
71
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
Property Management Fees Earned from our Former External Advisor
On December 20, 2016, in connection with our management internalization, we acquired property management agreements with
respect to each of our properties from our former property manager, which was affiliated with our former external advisor. Subsequent
to this transaction, we earned $0, $63, and $257, respectively, of property management fees from our former external advisor for the
years ended December 31, 2019, 2018, and 2017.
Village at Auburn Acquisition
In June 2017, we acquired Village at Auburn, a 328-unit property in Raleigh-Durham, NC for $42,950 from a joint venture, of
which an affiliate of our former external advisor was a controlling member.
NOTE 9: Earnings (Loss) Per Share
The following table presents a reconciliation of basic and diluted earnings (loss) per share for the years ended December 31,
2019, 2018 and 2017:
Net Income (loss)
(Income) loss allocated to non-controlling interests
Net Income (loss) allocable to common shares
Weighted-average shares outstanding—Basic
Dilutive securities
Weighted-average shares outstanding—Diluted
Earnings (loss) per share—Basic
Earnings (loss) per share—Diluted
For the Years Ended December 31,
2018
2017
2019
$
$
$
46,354 $
(458 )
45,896
89,799,238
618,249
90,417,486
0.51 $
0.51 $
26,610 $
(322 )
26,288
87,086,585
290,406
87,376,991
0.30 $
0.30 $
31,441
(1,235 )
30,206
73,338,219
261,650
73,599,869
0.41
0.41
Certain IROP units totaling 871,491, 881,107, and 3,011,351 for the years ended December 31, 2019, 2018 and 2017,
respectively, were excluded from the earnings (loss) per share computation because their effect would have been anti-dilutive.
NOTE 10: Quarterly Financial Data (Unaudited)
The following table summarizes our quarterly financial data which, in the opinion of management, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations:
March 31
June 30
September 30 December 31
For the Three-Month Periods Ended
2019
Total revenue
Net income (loss)
Net income (loss) allocable to common shares
Total earnings (loss) per share—Basic (1)
Total earnings (loss) per share—Diluted (1)
2018
Total revenue
Net income (loss)
Net income (loss) allocable to common shares
Total earnings (loss) per share—Basic (1)
Total earnings (loss) per share—Diluted (1)
49,540 $
2,566
2,540
0.03 $
0.03 $
50,956 $
14,856
14,709
0.16 $
0.16 $
51,299 $
4,912
4,863
0.05 $
0.05 $
45,755 $
3,500
3,412
0.04 $
0.04 $
46,889 $
3,545
3,509
0.04 $
0.04 $
48,779 $
4,836
4,787
0.05 $
0.05 $
51,428
24,020
23,784
0.26
0.26
49,809
14,729
14,580
0.16
0.16
$
$
$
$
$
$
72
(1) The summation of quarterly per share amounts may not equal the full year amounts due to rounding.
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2019
(Dollars in thousands, except share and per share data)
NOTE 11: SEGMENT REPORTING
We have identified one operating segment and have determined that we have one reportable segment. As a group, our executive
officers act as the Chief Operating Decision Maker (“CODM”). The CODM reviews operating results to make decisions about all
investments and resources and to assess performance for the entire company. Our portfolio consists of one reportable segment,
investments in real estate through the mechanism of ownership. The CODM manages and reviews our operations as one unit.
Resources are allocated without regard to the underlying structure of any investment, but rather after evaluating such economic
characteristics as returns on investment, leverage ratios, current portfolio mix, degrees of risk, income tax consequences and
opportunities for growth.
NOTE 12: COMMITMENTS AND CONTINGENCIES
Litigation
We are subject to various 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 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.
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.
Lease Obligations
We lease office space in Philadelphia, PA and Chicago, IL. As of December 31, 2019, the annual minimum rent due pursuant to
these leases for each of the next five years and thereafter is estimated to be $495, $369, $375, $382, $388, and $2,029 respectively
73
Independence Realty Trust
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 2019
(Dollars in thousands)
Initial Cost
Cost of
Improvements,
Gross Carrying
Amount
Accumulated Encumbrances
Depreciation-
Land Building Land Building Land
Building Building
(Unpaid
Principal)
Year of
Acquisition
Property
Name
Crestmont
Runaway Bay
Windrush
Heritage Park
Raindance
Augusta
Invitational
Kings Landing
Walnut Hill
Lenox Place
Stonebridge Crossing
Bennington Pond
Prospect Park
Brookside
Jamestown
Oxmoor
Meadows
Bayview Club
Arbors River Oaks
Aston
Avenues at Craig Ranch
Bridge Pointe
Creekstone at RTP
Fountains Southend
Fox Trails
Lakeshore on the Hill
Millenia 700
Miller Creek at German Town
Pointe at Canyon Ridge
St James at Goose Creek
Talison Row at Daniel Island
Trails at Signal Mountain
Vue at Knoll Trail
Waterstone at Brier Creek
Waterstone Big Creek
Westmont Commons
Lakes at Northdale
Haverford Place
South Terrace
Cherry Grove
Kensington Commons
Schirm Farms
Riverchase
Live Oak Trace
Tides at Calabash
Brunswick Point
Creekside Corners
Hartshire Lakes
The Chelsea
Avalon Oaks
Bridgeview
Collier Park
Waterford Landing
Lucerne
North Park
Rocky Creek
Thornhill
Total Investment in Real Estate
Location
Marietta, GA
Indianapolis, IN
Edmond, OK
Oklahoma, OK
Oklahoma, OK
Oklahoma, OK
Oklahoma, OK
Creve Coeur, MO
Cordova, TN
Raleigh, NC
Memphis, TN
Groveport, OH
Louisville, KY
Louisville, KY
Louisville, KY
Louisville, KY
Louisville, KY
Indianapolis, IN
Memphis, TN
Wake Forest, NC
McKinney, TX
Huntsville, AL
Durham, NC
Charlotte, NC
Plano, TX
Chattanooga, TN
Orlando, FL
Memphis, TN
Atlanta, GA
Goose Creek, SC
Daniel Island, SC
Chattanooga, TN
Dallas, TX
Raleigh, NC
Alpharetta, GA
Asheville, NC
Tampa, FL
Lexington, KY
Durham, NC
North Myrtle Beach,
SC
Canal Winchester, OH
Canal Winchester, OH
Indianapolis, IN
Baton Rouge, LA
Wilmington, NC
Wilmington, NC
Lithonia, GA
Bargersville, IN
Columbus, OH
Columbus, OH
Tampa, FL
Grove City, OH
McDonough, GA
Brandon, FL
Stockbridge, GA
Tampa, FL
Raleigh, NC
$ 3,254 $
3,079
1,677
4,234
3,503
1,296
1,924
2,513
2,230
3,480
3,100
2,400
2,837
3,947
7,034
7,411
6,857
2,525
2,100
3,450
5,500
1,500
5,376
4,368
5,700
925
5,500
3,300
11,100
3,780
5,480
1,200
3,100
4,200
7,600
2,750
3,898
3,927
5,621
13,017 $
12,318
7,464
12,232
10,051
9,930
16,852
29,873
25,251
20,482
26,223
14,828
11,193
16,503
27,730
47,095
30,030
22,506
19,045
34,333
42,054
14,306
32,727
37,254
21,944
10,212
41,752
53,504
36,995
27,695
41,409
12,895
6,077
34,651
61,971
25,225
25,543
10,100
36,923
- $ 5,723 $ 3,254 $
1,279
3,079
-
841
1,677
-
2,772
4,234
-
2,127
3,503
-
1,127
1,296
-
2,012
1,924
-
1,193
2,513
-
1,632
2,230
-
1,156
3,480
-
6,429
3,100
-
1,290
2,400
-
2,837
828
-
3,947
-
1,134
7,034
- 10,029
7,411
7,820
-
6,857
2,410
-
2,525
1,743
-
2,100
2,794
-
3,450
702
-
5,500
806
-
1,500
665
-
5,376
627
-
4,368
554
-
5,700
2,398
-
925
949
-
5,500
1,478
-
-
3,300
537
7,091 11,100
-
3,780
-
5,480
-
1,200
-
3,100
-
4,200
-
7,600
-
2,750
-
3,898
-
3,927
-
5,621
-
874
686
1,126
357
546
519
682
1,006
1,412
6,715
18,740 $
13,597
8,305
15,004
12,178
11,057
18,864
31,066
26,883
21,638
32,652
16,118
12,021
17,637
37,759
54,915
32,440
24,249
21,839
35,035
42,860
14,971
33,354
37,808
24,342
11,161
43,230
54,041
44,086
28,569
42,095
14,021
6,434
35,197
62,490
25,907
26,549
11,512
43,638
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
550
16,365
3,400
23,040
3,960
21,847
1,460
18,044
1,060
27,806
1,880
12,650
2,150
30,033
6,140
41,771
3,070
25,170
2,739
34,148
4,189
19,607
10,671
36,564
2,325
19,231
2,867
28,459
3,114
45,521
2,848
25,454
15,669
32,098
40,245
12,282
$ 234,050 $ 1,453,052 $ — $ 109,263 $ 234,050 $ 1,562,315 $
550
996
3,400
2,337
3,960
2,359
1,460
794
1,060
444
1,880
436
2,150
1,819
6,140
4,486
3,070
960
2,739
450
1,306
4,189
4,611 10,671
2,325
543
2,867
982
3,114
1,981
521
2,848
119 15,669
48 12,282
15,369
20,703
19,488
17,250
27,362
12,214
28,214
37,285
24,210
33,698
18,301
31,953
18,688
27,477
43,540
24,933
31,979
40,197
(5,590 ) $
(2,717 )
(1,417 )
(2,816 )
(2,267 )
(1,878 )
(3,048 )
(4,728 )
(4,101 )
(3,158 )
(4,941 )
(2,506 )
(1,662 )
(2,490 )
(6,205 )
(7,634 )
(4,590 )
(3,222 )
(2,764 )
(3,851 )
(4,712 )
(1,753 )
(3,680 )
(4,097 )
(2,946 )
(1,342 )
(4,803 )
(5,863 )
(5,945 )
(3,288 )
(4,642 )
(1,678 )
(780 )
(3,843 )
(6,739 )
(2,957 )
(2,056 )
(1,022 )
(3,788 )
(1,099 )
(1,496 )
(1,468 )
(1,107 )
(1,548 )
(722 )
(1,709 )
(2,504 )
(1,310 )
(1,679 )
(1,014 )
(1,415 )
(719 )
(867 )
(1,328 )
(427 )
(336 )
(168 )
(158,435 ) $
(6,113 )
(8,978 )
—
—
—
—
—
(20,263 )
(18,650 )
(15,991 )
(19,370 )
(11,375 )
(9,230 )
(13,455 )
(22,880 )
(35,815 )
(24,245 )
—
—
(25,050 )
(30,941 )
—
(21,713 )
(22,582 )
—
—
(28,252 )
—
—
—
(31,640 )
—
—
(16,040 )
(49,224 )
—
—
—
—
—
—
—
—
—
—
(18,828 )
(23,169 )
(15,780 )
—
—
—
—
(15,292 )
—
—
—
—
(504,876 )
2011
2012
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2018
2018
2018
2018
2018
2018
2018
2018
2019
2019
2019
74
Investments in Real Estate
Balance, beginning of period
Additions during period:
Acquisitions
Improvements to land and building
Deductions during period:
Dispositions of real estate
Asset write-offs
Balance, end of period:
Accumulated Depreciation
Balance, beginning of period
Depreciation expense
Dispositions of real estate
Asset write-off
Balance, end of period:
December 31, 2019
For the year ended
December 31, 2018
(a)
December 31, 2017
$
1,745,640 $
1,504,156 $
1,319,350
127,908
45,623
270,220
41,587
(121,865 )
(941 )
1,796,365 $
(69,915 )
(408 )
1,745,640 $
$
241,071
14,368
(70,633 )
—
1,504,156
December 31, 2019
For the year ended
December 31, 2018
(a)
December 31, 2017
$
$
120,202 $
50,955
(11,781 )
(941 )
158,435 $
84,097 $
41,652
(5,139 )
(408 )
120,202 $
60,719
32,586
(9,208 )
—
84,097
(a) Includes properties classified as held for sale as of December 31, 2018.
75
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
reports under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Under the supervision of our chief executive officer and chief financial officer and with the participation of our disclosure
committee, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period
covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer determined that our
disclosure controls and procedures are effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control – Integrated Framework (2013 Framework). Based on this assessment, management believes that, as of
December 31, 2019, our internal control over financial reporting is effective.
Our independent registered public accounting firm has issued an attestation report on our internal control over financial
reporting. This report is included as part of Item 8 in this annual report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting or in other factors during our last fiscal quarter that
have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
Other Information
On February 17, 2020, the Compensation Committee (the “Compensation Committee”) of our Board of Directors approved
the grant of equity awards, effective March 2, 2020 (the “Grant Date”), under our Amended and Restated 2016 Long Term Incentive
Plan (the “2016 Plan”), to each of (a) Scott F. Schaeffer, our Chairman and Chief Executive Officer, (b) James J. Sebra, our Chief
Financial Officer and Treasurer, (c) Farrell M. Ender, our President, (d) Jessica K. Norman, our General Counsel and Secretary, and
(e) Jason R. Delozier, our Chief Accounting Officer.
The number of shares subject to each executive’s awards (at target levels of performance) will be determined by dividing the
grant date value by the volume weighted average closing price for Company stock for the 20 trading days immediately preceding the
Grant Date. The grant date values for Messrs. Schaeffer, Sebra and Ender remain the same as in 2019, at $2,000,000, $800,000 and
$800,000, respectively. The grant date value for Ms. Norman and Mr. Delozier are $300,000 and $176,000, respectively. In each
case, 75% of the executive’s grant date value will be allocated to performance-based awards and 25% will be allocated to time-vested
awards.
76
While the performance-based awards continue to take the form of performance share units, the time-vested awards will be
issued as restricted share units, rather than as restricted stock. Consequently, the Compensation Committee approved the issuance of
the time-vested awards using a new form of Restricted Share Unit Grant Agreement (the “RSU Grant Agreement”).
The RSU Grant Agreement sets forth the vesting, settlement and other terms of restricted share units granted under the 2016
Plan. Pursuant to the RSU Grant Agreement, restricted share units vest in equal annual installments over a fixed period of time
following the date of grant (which is four years for the five executive’s awards), subject to accelerated vesting upon death, disability,
termination without cause within one year following a change in control, or “retirement” (as defined below), provided the award
recipient executes and does not revoke a release of claims. Dividend equivalents will be accrued with respect to the restricted share
units and will vest on the same terms as the units to which they relate. “Retirement” is defined for this purpose as voluntary separation
following (i) completion of at least 15 years of service with the company or its related entities (including, for this purpose, RAIT
Financial Trust), (ii) attainment of age 55, and (iii) attainment of a combination of age and years of service at least equal to 70. In
addition, a separation will only be considered a “retirement” if the award recipient provides at least six months’ advance notice to the
company and, if requested, enters into a non-competition and non-solicitation agreement with a duration of up to three years. This
definition of “retirement” is substantially identical to the definition used by the company in its prior performance share unit awards.
The Compensation Committee approved the issuance of the performance-based awards using a new form of Performance
Share Unit Award Grant Agreement (the “PSU Grant Agreement”), which differs from the preexisting form in that “retirement”
during the performance period no longer results in a pro-ration of the number of units. Rather, upon a “retirement”, all performance
share units subject to the award will remain outstanding and will be earned (or not) based on actual performance during the three-year
performance period. The other terms of the PSU Grant Agreement remain substantially unchanged and provide for performance
criteria weighted 70% towards the company’s relative total shareholder return over the performance period and 30% towards the
Compensation Committee’s subjective evaluation of the award recipient’s performance over the performance period. The number of
performance share units earned will depend on actual performance and may vary between 0 and 150% of the target number of units
initially subject to the award. Fifty percent of performance share units earned will vest on each of (i) the date on which the
Compensation Committee makes a determination as to the satisfaction of the performance criteria (which date shall be within two
months of the last day of the performance period) and (ii) the first anniversary of the last day of the performance period, in each case
based on the award recipient’s continued service through such dates.
In the event of the award recipient’s death, disability, termination without cause or for good reason or “retirement” following
the performance period, but during the subsequent service-based vesting period, vesting will accelerate. In the event of the award
recipient’s death, disability, termination without cause or for good reason during the performance period, the performance period will
be abbreviated and any units earned based on performance during that abbreviated period will be immediately vested. In the event of
the award recipient’s retirement during the performance period, the units will remain outstanding for the full performance period and
all units earned at the end of the performance period will be immediately vested.
The foregoing descriptions of the RSU Grant Agreement and PSU Grant Agreement are qualified in their entireties by
reference to the Form of Restricted Share Unit Grant Agreement and Form of Performance Share Unit Award Grant Agreement filed
as Exhibits to this Annual Report on Form 10-K and incorporated herein by reference.
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item will be set forth in our definitive proxy statement with respect to our 2020 annual meeting
of stockholders, and is incorporated herein by reference.
ITEM 11. Executive Compensation
The information required by this item will be set forth in our definitive proxy statement with respect to our 2020 annual meeting
of stockholders, and is incorporated herein by reference.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth in our definitive proxy statement with respect to our 2020 annual meeting
of stockholders, and is incorporated herein by reference.
77
ITEM 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item will be set forth in our definitive proxy statement with respect to our 2020 annual meeting
of stockholders, and is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
The information required by this item will be set forth in our definitive proxy statement with respect to our 2020 annual meeting
of stockholders, and is incorporated herein by reference.
ITEM 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
PART IV
1.
Consolidated Financial Statements
Index to Consolidated Financial Statements
Independence Realty Trust, Inc.
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2019 and 2018.
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017.
Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018 and 2017.
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017.
Notes to Consolidated Financial Statements.
2.
Financial Statement Schedules
Schedule III: Real Estate and Accumulated Depreciation
All other schedules are not applicable.
3.
Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
Exhibit
EXHIBIT INDEX
Description
3.1
Articles of Restatement of Independence Realty Trust, Inc., dated as of August 20, 2013, incorporated by reference to
Exhibit 3.1 to IRT’s Current Report on Form 8-K filed on August 20, 2013.
3.2
Amended and Restated Bylaws of IRT, dated as of October 30, 2019, incorporated by reference to Exhibit 3.2 to IRT’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.
4.1
Exchange Rights Agreement dated as of August 28, 2014 among IRT, IROP and the limited partners named therein,
incorporated by reference to Exhibit 4.6 to IRT’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2014.
4.2
Exchange Rights Agreement dated as of December 30, 2014 among IRT, IROP and the limited partners named therein,
incorporated by reference to Exhibit 4.1.9 to IRT’s Annual Report on Form 10-K for the fiscal year ended December
31, 2014 (the “2014 10-K”).
4.3
Fifth Amended and Restated Agreement of Limited Partnership of IROP, dated as of March 3, 2017, incorporated by
78
reference to Exhibit 4.1.12 to the 2016 10-K.
EXHIBIT INDEX
4.4
Exchange Rights Agreement dated June 30, 2017, incorporated by reference to Exhibit 4.1.13 to IRT’s Annual Report
4.5
10.1
10.2
10.3
on Form 10-K for the fiscal year ended December 31, 2017.
Description of Independence Realty Trust, Inc.’s Securities, filed herewith.
At-the-Market Issuance Agreement dated August 4, 2017, among Independence Realty Trust, Inc., Independence Realty
Operating Partnership, LP, Citigroup Global Markets Inc., Robert W. Baird & Co. Incorporated, Capital One Securities,
Inc., KeyBanc Capital Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Stifel, Nicolaus &
Company, Incorporated, incorporated by reference to Exhibit 1.1 to IRT’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2017.
Independence Realty Trust, Inc. Long Term Incentive Plan Form of Stock Appreciation Rights Award Certificate
adopted January 31, 2014, incorporated by reference to Exhibit 10.1 to IRT’s Current Report on Form 8-K filed on
February 6, 2014 (the “2/6/14 Form 8-K”).*
IRT 2016 Long Term Incentive Plan, as amended and restated as of May 12, 2016 incorporated by reference to Exhibit
10.1 to IRT’s Current Report on Form 8-K filed on May 17, 2016.*
10.4
Amendment No. 1 dated as of May 2, 2017 to the IRT Long Term Incentive Plan, incorporated by reference to Exhibit
10.9 to IRT’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (the “2017 Q1 10-Q”).*
10.5
Notice of Amendment of Outstanding Awards as of May 2, 2017, incorporated by reference to Exhibit 10.10 to the
2017 Q1 10-Q.
10.6
Term Loan Agreement dated as of November 20, 2017 by and among Independence Realty Operating Partnership, LP
and the subsidiary borrowers named therein, collectively, as borrower, KeyBank National Association (“KeyBank”), as
an initial lender thereunder together with the other lenders named therein, KeyBank, as administrative agent, Capital
One, National Association (“Capital One”) and The Huntington National Bank (“HNB”), as co-syndication agents, and
KeyBank Capital Markets (“KeyBank Markets”), Capital One and HNB, as joint bookrunners and KeyBank Markets,
Capital One and HNB, as joint lead arrangers, incorporated by reference to Exhibit 10.1to IRT’s Current Report on
Form 8-K filed on November 21, 2017.
10.7
Employment Agreement, dated December 20, 2016, by and between IRT and Scott F. Schaeffer, incorporated by
reference to Exhibit 10.4 to the 12/22/16 Form 8-K.*
10.8
Employment Agreement, dated December 20, 2016, by and between IRT and James J. Sebra, incorporated by reference
to Exhibit 10.5 to the 12/22/16 Form 8-K. *
10.9
Employment Agreement, dated December 20, 2016, by and between IRT and Farrell M. Ender, incorporated by
reference to Exhibit 10.6 to the 12/22/16 Form 8-K. *
10.10
Form of 2017 Cash Bonus Award Grant Agreement adopted as of February 28, 2017, incorporated by reference to
Exhibit 10.3 to the 2017 Q1 10-Q. *
10.11
Form of 2017 Performance Share Unit Award Grant Agreement adopted as of February 28, 2017, incorporated by
reference to Exhibit 10.4 to the 2017 Q1 10-Q. *
10.12
Form of Restricted Stock Award Certificate for Eligible Officers adopted as of February 28, 2017, incorporated by
reference to Exhibit 10.5 to the 2017 Q1 10-Q.*
10.13
Form of Restricted Stock Award Certificate for Non-Eligible Officers of IRT adopted as of February 28, 2017,
incorporated by reference to Exhibit 10.6 to the 2017 Q1 10-Q.*
10.14
Form of Restricted Stock Award Certificate for Non-Eligible Officers of RAIT Financial Trust adopted as of February
28, 2017, incorporated by reference to Exhibit 10.7 to the 2017 Q1 10-Q.*
10.15
Term Loan Agreement dated as of October 30, 2018 by and among IROP and the subsidiary borrowers named therein,
collectively, as borrower, KeyBank National Association (“KeyBank”), as an initial lender thereunder together with the
other lenders named therein, KeyBank, as administrative agent, Citibank, N.A. (“Citibank”), as syndication agent,
Citibank and KeyBank Capital Markets (“KeyBank Markets”), as joint bookrunners and Citibank and KeyBank
Markets, as joint lead arrangers, incorporated by reference to Exhibit 10.1 to IRT’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2018.
10.16
Summary of Non-Employee Director Compensation, filed herewith.*
79
EXHIBIT INDEX
Form of Cash Bonus Award Grant Agreement under the Independence Realty Trust, Inc. 2016 Long Term Incentive
Plan, incorporated by reference to Exhibit 10.23 to IRT’s Annual Report on Form 10-K for the year ended December
31, 2018.*
Form of Performance Share Unit Award Grant Agreement under the Independence Realty Trust, Inc. 2016 Long Term
Incentive Plan, incorporated by reference to Exhibit 10.24 to IRT’s Annual Report on Form 10-K for the year ended
December 31, 2018.*
Form of Restricted Stock Award Certificate for Eligible Officers under the Independence Realty Trust, Inc. 2016 Long
Term Incentive Plan, incorporated by reference to Exhibit 10.25 to IRT’s Annual Report on Form 10-K for the year
ended December 31, 2018.*
Amended and Restated Credit Agreement dated as of May 9, 2019, by and among Independence Realty Operating
Partnership, LP and the subsidiary borrowers named therein, collectively, as borrower, Citibank, N.A. (“Citibank”) and
KeyBank National Association (“KeyBank”), as the initial lenders, issuing lenders and swing loan lenders, the other
lending institutions party thereto, KeyBank, as administrative agent, Citibank and the Huntington National Bank
("HNB") as Co-Syndication Agents, Bank of American, N.A., Capital One, National Association, Citizens Bank, NA,
Comerica Bank, PNC Bank, National Association, Regions Bank and Suntrust Bank as Co-Documentation Agents,
Citibank and KeyBanc Capital Markets (“KeyBanc Capital”) as Joint Bookrunners and Citibank, KeyBanc Capital and
HNB as Joint Lead Arrangers, incorporated by reference to Exhibit 10.1 to IRT’s Current Report on Form 8-K filed on
May 9, 2019.
Form of Indemnification Agreement for IRT directors and executive officers, together with the schedule required by
Instruction 2 of Item 601 of Regulation S-K, listing the parties to substantially identical agreements, incorporated by
reference to Exhibit 10.7 to IRT’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.
Amendment No. 2 dated as of October 23, 2019 to the Independence Realty Trust, Inc. Long Term Incentive Plan
(Amended and Restated as of May 12, 2016), incorporated by reference to Exhibit 10.1 to IRT’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2019.
First Amendment dated as of June 18, 2019 to the Term Loan Agreement dated as of November 20, 2017 by and among
Independence Realty Operating Partnership, LP and the subsidiary borrowers named therein, collectively, as borrower,
KeyBank National Association (“KeyBank”), as an initial lender thereunder together with the other lenders named
therein, KeyBank, as administrative agent, Capital One, National Association (“Capital One”) and The Huntington
National Bank (“HNB”), as co-syndication agents, and KeyBank Capital Markets (“KeyBank Markets”), Capital One
and HNB, as joint bookrunners and KeyBank Markets, Capital One and HNB, as joint lead arrangers, filed herewith.
Second Amendment dated as of November 21, 2019 to the Term Loan Agreement dated as of November 20, 2017 by
and among Independence Realty Operating Partnership, LP and the subsidiary borrowers named therein, collectively, as
borrower, KeyBank National Association (“KeyBank”), as an initial lender thereunder together with the other lenders
named therein, KeyBank, as administrative agent, Capital One, National Association (“Capital One”) and The
Huntington National Bank (“HNB”), as co-syndication agents, and KeyBank Capital Markets (“KeyBank Markets”),
Capital One and HNB, as joint bookrunners and KeyBank Markets, Capital One and HNB, as joint lead arrangers, filed
herewith.
First Amendment dated as of June 18, 2019 to the Term Loan Agreement dated as of October 30, 2018 by and among
IROP and the subsidiary borrowers named therein, collectively, as borrower, KeyBank National Association
(“KeyBank”), as an initial lender thereunder together with the other lenders named therein, KeyBank, as administrative
agent, Citibank, N.A. (“Citibank”), as syndication agent, Citibank and KeyBank Capital Markets (“KeyBank Markets”),
as joint bookrunners and Citibank and KeyBank Markets, as joint lead arrangers, filed herewith.
Form of Independence Realty Trust, Inc. 2016 Long Term Incentive Plan Restricted Share Unit Grant Agreement (for
2020 and later awards), filed herewith.*
Form of Independence Realty Trust, Inc. 2016 Long Term Incentive Plan Performance Share Unit Award Grant
Agreement (for 2020 and later awards), filed herewith.*
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
21.1
Subsidiaries of IRT, filed herewith.
23.1
31.1
Consent of KPMG LLP, filed herewith.
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed
80
herewith.
EXHIBIT INDEX
31.2
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed
herewith.
32.1
32.2
99.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
Material U.S. Federal Income Tax Considerations filed herewith.
101
The following materials, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets as of December 31, 2019 and December 31, 2018, (ii) Consolidated Statements of Operations for the
years ended December 31, 2019, 2018 and 2017. (iii) Consolidated Statements of Equity for the years ended December
31, 2019, 2018 and 2017, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018,
and 2017, and (v) notes to the consolidated financial statements as of December 31, 2019, filed herewith.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of
Form 10-K.
ITEM 16. Form 10-K Summary
None.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 18, 2020
By: /S/ SCOTT F. SCHAEFFER
Scott F. Schaeffer
Chairman of the Board and Chief Executive Officer
INDEPENDENCE REALTY TRUST, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Date
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
Name
Title
/S/ SCOTT F. SCHAEFFER
Scott F. Schaeffer
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/S/ JAMES J. SEBRA
James J. Sebra
/S/ JASON R. DELOZIER
Jason R. Delozier
/S/ WILLIAM C. DUNKELBERG
William C. Dunkelberg
/S/ RICHARD D. GEBERT
Richard D. Gebert
/S/ MACK D. PRIDGEN III
Mack D. Pridgen III
/S/ RICHARD H. ROSS
Richard H. Ross
/S/ DEFOREST B. SOARIES, JR.
DeForest B. Soaries, Jr.
/S/ MELINDA H. MCCLURE
Melinda H. McClure
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
82
DIRECTORS
Scott F. Schaeffer
Chairman & Chief Executive Officer
William C. Dunkelberg
Independent Director
Richard D. Gebert
Independent Director
Chairman - Audit Committee
Melinda H. McClure
Lead Independent Director
Chairman - Nominating & Governance
Committee
Mack D. Pridgen III
Independent Director
Richard H. Ross*
Director
DeForest B. Soaries Jr.
Independent Director
Chairman - Compensation Committee
EXECUTIVE OFFICERS
Scott F. Schaeffer
Chairman & Chief Executive Officer
Farrell M. Ender
President
James J. Sebra
Chief Financial Officer & Treasurer
Jessica K. Norman
Executive Vice President, General
Counsel & Secretary
Jason R. Delozier
Chief Accounting Officer
TRANSFER AGENT
American Stock Transfer
& Trust Company
6201 15th Avenue
Brooklyn, NY 11219
tel 1.800.937.5449
www.amstock.com
INVESTOR RELATIONS CONTACT
Ted McHugh and Lauren Tarola
Edelman Financial Communications
& Capital Markets
tel 212.277.4322
IRT@edelman.com
investors.irtliving.com
INDEPENDNET REGISTERED
ACCOUNTING FIRM
KPMG LLP
1601 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Pepper Hamilton LLP
300 Two Logan Square
Eighteenth & Arch Streets
Philadelphia, PA 19103-2799
COMMON STOCK LISTED
IRT’s shares of Common Stock are
traded on the New York Stock Exchange
under the symbol “IRT”.
CERTIFICATIONS
The Company’s Chief Executive Officer
has submitted to the New York Stock
Exchange
certification
the annual
required by Section 303A.12(a) of the
NYSE Company Manual. In addition, the
Company has filed with the Securities
and Exchange Commission as exhibits
to its Form 10-K for the fiscal year ended
December 31, 2019, the certifications of
its Chief Executive Officer and Chief
Financial Officer required pursuant to
Section 302 of the Sarbanes-Oxley Act
relating to the quality of its public
disclosure.
*Mr. Ross will retire upon the expiration of his term.
W W W . I R T L I V I N G . C O M | N Y S E: I R T