2023-06-12 06:53:09 ET
Summary
- Independence Realty Trust is a multi-family residential REIT with a strong balance sheet and robust liquidity.
- IRT recently increased its dividend, which is well-covered and has room for further growth.
- I rate the company as a "Hold" due to valuation concerns, though the company is still a good one.
Introduction
If you have read my previous articles , you would know that write mainly about dividend stocks. I am not particularly biased towards any individual sector; in fact, my past 3 articles are on companies from varying sectors - a triple net lease REIT , a mortgage REIT and a hospitality REIT . The only thing they have in common is that they are dividend paying stocks. Likewise, the focus of this article, Independence Realty Trust (IRT), is a dividend stock as well. I noticed that coverage on the stock seems a bit thin, with just 6 articles on it last year and a further 2 this year. In this article, I will evaluate the company on several metrics, before deciding if the company would be a good addition to my portfolio of dividend-paying stocks.
The Business
Independence Realty Trust is a multi-family residential REIT focused on acquiring, owning, operating, improving and managing multi-family apartment communities. Instead of targeting gateway markets, which are major metropolitan cities such as New York, Los Angeles, Chicago, San Francisco and Boston, the company focuses on non-gateway markets with the aim of capitalizing on the potential growth and opportunities in such cities which have a less dense population.
As at 31 March 2023, the company's portfolio comprised over 35,000 units spread across 119 communities. These properties are located in a range of states, but are predominantly focused on the Sun Belt region, with 71% of the company's net operating income (NOI) coming from these states. In particular, 2 cities - Atlanta and Dallas - account for slightly over a quarter of the company's NOI. The company also has a "Value Add Initiative" program, whereby the company renovates existing units to increase rental rates. The company has renovated close to 6,000 units thus far, generating a 19.1% return on investment. Under this initiative, the company has a further19,000 units in its pipeline, which the company expects will provide close to $800 million in shareholder value.
Q1 2023 Earnings & FY 2023 Outlook
The company's latest results are for the first quarter of 2023, released at the end of April. The company reported a net income of $8.6 million for the period, a decrease from the $74.6 million recorded in the same period last year. Earnings per share ((EPS)) stood at $0.04/share compared to $0.34/share in Q1 2022. However, it should be noted that the Q1 2022 results included a gain on the sale of real estate amounting to $94 million. If this item was excluded, the company would have reported a loss for Q1 2022.
In terms of comparable figures, the company reported an 8.2% growth in its NOI compared to Q1 2022. While the portfolio's average occupancy saw a slight decrease to 93.1%, the decline was offset by a notable increase of 10.8% in its average rental rate, demonstrating the company's ability in capturing a higher rental income from its properties. The company also saw its NOI margin increase by 40 basis points to 63.3% for the quarter.
The company's adjusted funds from operations (AFFO), or Core Funds From Operations (CFFO) as the company calls it, increased by 8.3% to $0.27/share. AFFO, or CFFO in this case, is a key measure of a REIT's financial performance as it reflects the cash generated by the company.
Looking ahead, the company maintained its outlook for the FY 2023, with expectations for EPS between $0.23/share and $0.27/share and AFFO/CFFO between $1.12/share and $1.16/share.
Balance Sheet
As at Q1 2023, the company had approximately $2.6 billion in debt, of which the vast majority (97%) was either fixed rate debt or hedged. This reduces the company's vulnerability to interest rate fluctuations and ensures a level of predictability in its cash flows. Additionally, less than 10% of this debt is due within the next 2 years, with approximately $254 million scheduled for repayment within that timeframe. Given the current uncertain macro-economic environment, this is certainly a favorable situation for the company as it allows the company the financial flexibility to allocate its capital.
In terms of liquidity, the company's total liquidity stands at $327 million, comprising $12 million in cash with the remaining accessible through an unsecured credit facility. All things considered, the company is well-positioned to cover its liabilities for the next few years due to its favorable debt schedule and robust liquidity. This allows the company to meet its financial obligations as well as provide the company with the capacity to weather any short-term disruptions.
The company reported a net debt to EBITDA ratio of 7.3x, down from 7.6x the same period last year. This reduction is part of the company's continuing efforts to reduce its leverage. The company has set a target of reaching a mid-6x net debt to EBITDA ratio by the end of the year, and management reiterated during the earnings call that the company expects to meet that target. To give some perspective, the company's net debt to EBITDA ratio stood at 8.2x at the end of 2020, showing how management has actively sought to reduce its leverage.
Dividend
In its latest announcement last month, Independence Realty Trust declared a quarterly dividend of $0.16/share for Q2 2023, representing a 14% increase compared to the $0.14/share dividend declared in Q1 2023.
To provide some context to the company's dividend history, the company used to pay a monthly dividend of $0.06/share (or $0.72/share annually) as far back as 2014. However, in 2018, the company transitioned to a quarterly dividend of $0.18/share while maintaining the same annual dividend payout. When the pandemic hit in 2020, the company, like many other REITs, cut its quarterly dividend by a third to $0.12/share. This reduced dividend was maintained throughout 2021, and it was only in Q2 2022 that the company increased its dividend to $0.14/share.
With the recently declared dividend of $0.16/share, the annualized dividend for the company stands at $0.64/share. Considering the current share price of $18.33, this translates to a forward dividend yield of approximately 3.50%. In order to assess the stability and sustainability of the company's dividends, the payout ratio is a key measure to consider. Assuming a AFFO/CFFO at the lower end of the projected range for FY 2023 at $1.12/share, the annualized dividend of $0.64/share gives a payout ratio of approximately 57%. Even if the dividend were to be increased to the previous level of $0.72/share annually, the payout ratio would only be slightly increased to 64%.
Considering the low dividend payout ratio, along with the fact that the company has only recently increased its dividends, there doesn't appear to be much risk of the company needing to cut its dividends in the near future. In fact, the company may very well increase its dividends back to its historical amount of $0.72/share annually, which would certainly be welcome news for investors.
Share Price and Valuation
The company is currently trading at a forward price-to-adjusted funds from operations (P/AFFO) multiple of 17.65, which is 18% higher than the sector median for other multi-family residential REITs, which stands at 14.92. This indicates that the company is currently trading at a premium compared to its peers in the sector. Additionally, the Seeking Alpha quant rating for the company's valuation is a "D", implying that the company is trading at a relatively less attractive valuation.
Looking at a chart of the company's historical share price, it can be observed that the company has already recovered from its post-pandemic drop. Year-to-date, the company has risen over 10%, and is close to reaching the highs of the year achieved in February. In fact, the company has risen by close to 25% since its lows in March.
Conclusion
To conclude, Independence Realty Trust is a multi-family residential REIT focused primarily in the Sun Belt region. The company has shown solid growth in recent years, with its "Value Add Initiative" set to provide further value to shareholders. The company also has a strong balance sheet with robust liquidity. This ensures that the company has the financial flexibility to navigate the uncertainties of the current macro-economic environment. The company has also recently increased its dividend, which is amply covered and has room for further increases.
However, the company is currently trading at a premium compared to its peers. In fact, in just 3 months, the company has seen an increase of approximately 25% in its share price. Hence, while I believe the company is a good company with bright prospects for the future, I rate this company as a "Hold" as the current valuation is not an attractive one for me. That being said, every individual is different and someone else looking at the same information as I do might rate the company a "Buy" instead.
For further details see:
Independence Realty Trust: A Solid Residential REIT Despite Valuation Concerns