Independence Realty Trust, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Independence Realty Trust, Inc. is a self-administered and self-managed real estate investment trust (REIT) that acquires, owns, operates, improves and manages multifamily apartment communities throughout the United States, focused primarily on high-growth Sun Belt markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

IRT’s business revolves around acquiring, owning, operating, and improving multifamily apartment communities, primarily in high-growth Sun Belt markets, aiming to generate reliable income and long-term value for its shareholders. The company is structured as a REIT, which means it is legally required to distribute most of its taxable income as dividends to shareholders each year.

Business Overview

Revenue Distribution:

IRT’s revenue is primarily derived from rental income generated by its multifamily properties. This is a very straightforward revenue model: collect rent from residents.

The main revenue drivers can be broken into 3 sub-segments:

  1. Same-Store Properties: These are properties that have been owned and operational for a full year, providing a consistent basis for evaluating performance.
  2. Non-Same Store Properties: This includes properties that have not been owned and operational for a full year, so growth in this segment will be attributable to new acquisitions.
  3. Development Properties: These are properties that have been or are being developed by IRT and may or may not be operational.

These three core segments allow for tracking progress and analyzing what is really driving the profitability for the company. For example, same-store properties track progress in a stabilized portfolio, and non-same-store properties track acquisitions.

The multi-family apartment sector, particularly in the Sun Belt, has been experiencing strong demand driven by factors such as in-migration and high home costs. This sector is currently characterized by strong demand and relatively low supply.

  • The REIT space has been going through a consolidation phase which causes prices to be volatile.
  • There are fears of a coming recession which may lead to job cuts and in turn cause lower demand for rental properties.

Competitive Landscape:

The multifamily REIT sector is very competitive. A lot of companies are looking at the same areas to invest. Also, there is strong competition from private property owners.

What Makes IRT Different:

IRT focuses on acquiring and operating in highly desirable Sun Belt markets. They focus on high-growth locations and property upgrades to attract and retain tenants. Also, a unique strategic decision made by the company is to focus on value-add investments over new construction. This approach also allows a faster return on investment.

Financial Analysis

Net Income

IRT’s net income has declined in both the 2022 and 2021 fiscal years. In 2022 net income stood at a loss of 17,000,000 which is way worse than a net income of 44,500,000 for 2021. It is quite clear that while their revenues are pretty high, due to significant expense (mostly financing), their income is negative, which is a cause of concern.

It’s important to note that the net income metric is significantly distorted by depreciation and other non-cash operating expenses, thus it may not present a true picture of the company’s profitability.

ROIC

The 2022 ROIC is quite low at 3.6% whereas 2021 had a healthy ROIC of 7.5%. This means the company is much less efficient at turning capital into profit than last year.

Other Financials

  • IRT had revenues of $716 million, $627 million and $476 million in the 2022, 2021 and 2020 fiscal years, respectively. As you can see, there is a nice trend in revenue growth.
  • Operating expenses have also increased at a much faster rate.
  • IRT spent around $30 million in capital expenditures in 2022 compared to about $2 million in 2021. This increased spending will be to improve existing properties.
  • IRT has significant long-term debt obligations as well as high amounts of accrued expenses.
  • Their overall debt is around 2.6 billion dollars, out of which about 450 million is unsecured debt and the rest are mortgages or from credit facilities.
  • They issued 150 million shares of stock to help fund the STAR merger in 2021.
  • They spent roughly 260 million on acquisitions.

Debt Profile

IRT has significantly higher debt than equity, which can put them in a vulnerable position if something goes wrong. However, most of the debt is a low interest rate. In the latest reports, they mention their average interest expense is about 3.9% which is very good. Still, because of market volatility, this could potentially affect how much they have to pay for debt when renewing or taking on new debt. Also, rising interest rates, means less people are going to take on loans, thus affecting demand and occupancy in their properties.

Recent Concerns / Controversies

Management has noted that high inflation has pushed up labor costs and operating expenses and those increases have affected margins and earnings. They are continuing to monitor those impacts closely to make sure they are not too detrimental to the business. Also, the company has been going through a merger with STAR. The pro forma financials, which combine the results of both companies, haven’t looked too good, showing depressed net income and ROIC.

  • The company’s CEO mentioned a potential for higher earnings for their company moving forward as the leases for properties acquired through the STAR merger will likely reset and earn more profits.
  • Another focus point is on the increased cash available to shareholders which is estimated to improve returns on investment.

Moat Analysis

Moat Rating: 2 / 5

IRT’s moat is a bit narrow and has a high chance of being eroded by competitors. Although the REIT business itself has high barriers to entry (which we will go into), not all REITs have an economic moat. Here’s a breakdown:

  • Intangible Assets (Brand, Patents, and Regulatory Licenses): They do not have a strong brand, no patents, and don’t depend on strict regulatory rules. So no moat here.
  • Switching costs: Since the tenants are not locked into contracts for too long, they will readily change companies if a better offer appears. So this will not create a moat.
  • Network Effects: There are no network effects in the rental business. You cannot be in more than one place at a time. No moat here.
  • Cost advantages: Location based cost advantages do appear as a source of advantage for the company. Their focus on high demand areas in the south means their prices can be higher. Also, when a company acquires and manages a property well, it can cut down on costs, further boosting its financial position. Having a good understanding of the specific market location also helps reduce operating costs by cutting down on inefficiencies. Also, the focus on value add over new construction helps drive up ROI. But such advantages are not too much of an edge. They may give a slight edge, but are not enough to prevent others from trying to replicate those same strategies. Thus, no real moat here.

Thus, IRT is rated a 2/5 because of some limited location based competitive advantages that might make it somewhat difficult for competitors to catch up, but the barriers to success are not insurmountable, and other factors affecting value are likely to outweigh that advantage.

Understandability Rating: 2 / 5

IRT has a straightforward business model. It acquires and manages properties, and then collects rent from its customers. However, the intricacies of its financial statements and the metrics needed to accurately analyze their success is something very complicated. Also, the real estate market is constantly evolving and requires constant vigilance on the part of the investor. So, we give it a 2/5 for understandability.

Balance Sheet Health Rating: 3 / 5

IRT has a moderate level of debt, which is primarily low-cost mortgages and credit facilities. The high debt is not desirable and puts it in a vulnerable state in a recession, but they do have a decent amount of assets that will likely retain their value over time, particularly in the Sun Belt. We will need to see future reports to see if management can effectively maneuver the business to reduce the high debt and increase profitability. Thus, we give them a balance sheet rating of 3/5.