March 08, 2018 - 1:40pm EST by
2018 2019
Price: 8.60 EPS .77 .90
Shares Out. (in M): 88 P/E 11.8 9.5
Market Cap (in $M): 754 P/FCF 0 0
Net Debt (in $M): 775 EBIT 0 0
TEV ($): 1,529 TEV/EBIT 0 0

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Independence Realty Trust (IRT) is a Class B owning multifamily REIT whose stock has been crushed by higher rates this year.  While the entire apartment REIT space has dropped 10% year to date, IRT has fallen by almost 20% from its peak just 3 months ago.  It is a smaller cap name at a $750mm market cap, and carries a bit higher leverage, but it now appears to be the cheapest name on both a cap rate basis and an FFO basis compared to all of its peers (both small and large cap).


Overall, rates are a concern, but using a cap rate of 6% on its current properties in 18-24 months would put the stock at $14 per share (and implies roughly a 15.8x multiple of 2020 FFO).  That is upside of 70% with dividends. In this we assume 3.25% 10 year treasury rates.


On the downside, should rates spike to 4% and cap rates 7-7.5%, IRT would trade to $7.50 to $8.50 on 2018 figures, but could still perform well in a couple years.   With a healthy $0.72 annual dividend and the stock already beaten up, there appears quite a reasonable margin of safety even in a continued unfriendly rate environment.  We would point out that should inflation become a real concern, IRT’s leases are adjusted annually, meaning asset values should over time adjust to higher rates.


Financial Summary




IRT is a smaller cap REIT with $1.6BB in total assets.  They operate in non-coastal areas from the South and Texas, up through the Midwestern states.


The company was spun out of RAIT five years ago, and still suffers from prior management taint (the Cohens whose reputation for poorly managing overleveraged REITs is well known).  The management contract wasn’t finally terminated until December 2016, and the internalization costs meant a dilutive equity issuance in late 2016. The Cohens have zero involvement today.


Efforts to de-lever from 12.4x Debt/ EBITDA at year end 2015, to 8.8x today also meant another equity raise last September 2017 (proceeds also to fund an acquisition).  While there might be one more over the next couple years, the company is quite adamant that they won’t issue any more expensive stock to pay off cheap debt (clearly not a great strategy).  That is, we don’t expect a deal below $10 a share (they lamented the last deal at $9.25).


With target leverage of 7.5x Debt/EBITDA, they are pretty close to their goal anyway, and anticipate getting there in two years perhaps with just an At-The-Money issuance program, organic NOI growth, and a renovation program that should be highly accretive to deployed capital (more on that later).


As for the company’s assets, IRT has been recycling out of Class C apartment units and continues to focus on non-gateway (ie, non-coastal) Class B markets.  The market in the past few years has generally shunned the Class B/C assets/REITs, and instead focused on Class A premier coastal properties (the big cap Avalon Bay’s and EQR’s of the world).  


2015 was the peak year in terms of apartment same store NOI growth for these names, with growth rates exceeding 5% for most bigger names in top markets.  Now however, overbuilding has taken SS NOI way down for almost every name in the industry, with EQR now forecasting only 0.75% SS NOI growth in 2018, AVB at 2% today, UDR at 1.9% rent growth.  BRG actually had negative SS NOI growth in Q4, and was only up 1.6% in Q4 last year by excluding 2 problematic properties in Dallas.


On the other hand, with less supply growth in IRT’s markets, the company grew SS NOI by 4.8% last year, and expects 3-4% in 2018.  


Given that most of the new development has been occurring in the premier Class A markets, now appears to be an opportune time to invest in the Class B names.  Overall, IRT’s markets are seeing better population growth, more job growth, with less competitive development than the rest of the country. Here is a good slide:


Here is another one on apartment supply: