INDEPENDENCE REALTY TRUST, INC. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019


☐	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	26-4567130
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1835 Market Street, Suite 2601 Philadelphia, PA	19103
(Address of Principal Executive Offices)	(Zip Code)

(267) 270-4800

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock		IRT		NYSE

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, 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	☒	Accelerated filer	☐

Non-Accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark 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 Exchange Act). Yes ☐ No ☒

As of October 28, 2019 there were 90,894,656 shares of the Registrant’s common stock issued and outstanding.

INDEPENDENCE REALTY TRUST, INC.

INDEX

		Page

PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2019 and September 30, 2018	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2019 and September 30, 2018	5

	Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months ended September 30, 2019 and September 30, 2018	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2019 and September 30, 2018	8

	Notes to Condensed Consolidated Financial Statements as of September 30, 2019	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	Mine Safety Disclosures	29

Item 5.	Other Information	30

Item 6.	Exhibits	30

Signatures		31

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Independence Realty Trust, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited and dollars in thousands, except share and per share data)

	As of September 30, 2019			As of December 31, 2018
ASSETS:
Investments in real estate:
Investments in real estate, at cost	$	1,732,392		$	1,660,423
Accumulated depreciation		(145,075	)		(112,270	)
Investments in real estate, net		1,587,317			1,548,153
Real estate held for sale		32,381			77,285
Cash and cash equivalents		6,587			9,316
Restricted cash		8,960			6,729
Other assets		16,439			8,802
Derivative assets		982			8,307
Intangible assets, net of accumulated amortization of $412 and $787, respectively		351			744
Total Assets	$	1,653,017		$	1,659,336
LIABILITIES AND EQUITY:
Indebtedness, net of unamortized deferred financing costs of $5,686 and $5,927, respectively	$	979,330		$	985,488
Accounts payable and accrued expenses		32,249			22,815
Accrued interest payable		794			719
Dividends payable		16,460			16,162
Derivative liabilities		12,415			—
Other liabilities		7,399			4,107
Total Liabilities		1,048,647			1,029,291
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, 90,894,656 and 89,184,443 shares issued and outstanding, including 328,875 and 303,819 unvested restricted common share awards, respectively		909			892
Additional paid-in capital		762,933			742,429
Accumulated other comprehensive income (loss)		(17,097	)		2,016
Retained earnings (accumulated deficit)		(148,977	)		(122,342	)
Total stockholders’ equity		597,768			622,995
Noncontrolling interests		6,602			7,050
Total Equity		604,370			630,045
Total Liabilities and Equity	$	1,653,017		$	1,659,336

The accompanying notes are an integral part of these condensed consolidated financial statements.

Independence Realty Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited and dollars in thousands, except share and per share data)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
REVENUE:
Rental and other property revenue	$	51,057		$	48,644		$	151,370		$	140,994
Other revenue		242			135			425			429
Total revenue		51,299			48,779			151,795			141,423
EXPENSES:
Property operating expenses		20,546			19,792			60,504			56,913
Property management expenses		1,901			1,661			5,776			4,936
General and administrative expenses		3,113			2,578			9,758			8,184
Depreciation and amortization expense		13,434			10,783			38,602			33,590
Total expenses		38,994			34,814			114,640			103,623
Interest expense		(9,783	)		(9,129	)		(29,353	)		(26,063	)
Other income		—			—			—			144
Gain on sale of assets		2,390			—			14,532			—
Net income:		4,912			4,836			22,334			11,881
Income allocated to noncontrolling interest		(49	)		(49	)		(222	)		(173	)
Net income allocable to common shares	$	4,863		$	4,787		$	22,112		$	11,708
Earnings per share:
Basic	$	0.05		$	0.05		$	0.25		$	0.14
Diluted	$	0.05		$	0.05		$	0.25		$	0.13
Weighted-average shares:
Basic		90,027,540			87,702,078			89,513,834			86,559,294
Diluted		90,691,368			88,046,311			90,234,840			86,818,337

The accompanying notes are an integral part of these condensed consolidated financial statements.

Independence Realty Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	4,912		$	4,836		$	22,334		$	11,881
Other comprehensive income (loss):
Change in fair value of interest rate hedges		(5,633	)		1,072			(20,583	)		5,959
Realized (gains) losses on interest rate hedges reclassified to earnings		251			(382	)		1,277			(862	)
Total other comprehensive income (loss)		(5,382	)		690			(19,306	)		5,097
Comprehensive income (loss) before allocation to noncontrolling interests		(470	)		5,526			3,028			16,978
Allocation to noncontrolling interests		5			(54	)		(29	)		(108	)
Comprehensive income (loss)	$	(465	)	$	5,472		$	2,999		$	16,870

The accompanying notes are an integral part of these condensed consolidated financial statements.

Independence Realty Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

(Unaudited and dollars in thousands, except share information)

	Common Shares			Par Value Common Shares		Additional Paid In Capital			Accumulated Other Comprehensive Income (loss)			Retained Earnings (Deficit)			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2018		89,184,443		$	892	$	742,429		$	2,016		$	(122,342	)	$	622,995		$	7,050		$	630,045
Net income		—			—		—			—			2,540			2,540			26			2,566
Other comprehensive income		—			—		—			(4,324	)		—			(4,324	)		(44	)		(4,368	)
Stock compensation expense		189,986			1		633			—			—			634			—			634
Issuance of common shares		510,000			5		5,304			—			—			5,309			—			5,309
Repurchase of shares related to equity award tax withholding		(49,636	)		—		(635	)		—			—			(635	)		—			(635	)
Common dividends declared ($0.18 per share)		—			—		—			—			(16,318	)		(16,318	)		—			(16,318	)
Distribution to noncontrolling interest declared ($0.18 per unit)		—			—		—			—			—			—			(159	)		(159	)
Balance, March 31, 2019		89,834,793		$	898	$	747,731		$	(2,308	)	$	(136,120	)	$	610,201		$	6,873		$	617,074
Net income		—			—		—			—			14,709			14,709			147			14,856
Other comprehensive income		—			—		—			(9,461	)		—			(9,461	)		(95	)		(9,556	)
Stock compensation expense		32,155			—		1,099			—			—			1,099			—			1,099
Issuance of common shares		65,704			1		722			—			—			723			—			723
Repurchase of shares related to equity award tax withholding		(234	)		—		—			—			—			—			—			—
Common dividends declared ($0.18 per share)		—			—		—			—			(16,128	)		(16,128	)		—			(16,128	)
Distribution to noncontrolling interest declared ($0.18 per unit)		—			—		—			—			—			—			(159	)		(159	)
Balance, June 30, 2019		89,932,418		$	899	$	749,552		$	(11,769	)	$	(137,539	)	$	601,143		$	6,766		$	607,909
Net income		—			—		—			—			4,863			4,863			49			4,912
Other comprehensive income		—			—		—			(5,328	)		—			(5,328	)		(54	)		(5,382	)
Stock compensation expense		(10,591	)		—		704			—			—			704			—			704
Issuance of common shares		972,887			10		12,684			—			—			12,694			—			12,694
Repurchase of shares related to equity award tax withholding		(58	)		—		(7	)		—			—			(7	)		—			(7	)
Common dividends declared ($0.18 per share)		—			—		—			—			(16,301	)		(16,301	)		—			(16,301	)
Distribution to noncontrolling interest declared ($0.18 per unit)		—			—		—			—			—			—			(159	)		(159	)
Balance, September 30, 2019		90,894,656		$	909	$	762,933		$	(17,097	)	$	(148,977	)	$	597,768		$	6,602		$	604,370

The accompanying notes are an integral part of these condensed consolidated financial statements.

Independence Realty Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

(Unaudited and dollars in thousands, except share information)

	Common Shares			Par Value Common Shares		Additional Paid In Capital			Accumulated Other Comprehensive Income		Retained Earnings (Deficit)			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2017		84,708,551		$	846	$	703,849		$	4,626	$	(85,221	)	$	624,100		$	22,019		$	646,119
Net income		—			—		—			—		3,412			3,412			88			3,500
Other comprehensive income		—			—		—			3,264		—			3,264			(83	)		3,181
Stock compensation expense		194,622			1		469			—		—			470			—			470
Repurchase of shares related to equity award tax withholding		(41,912	)		-		(345	)		—		—			(345	)		—			(345	)
Conversion of noncontrolling interest to common shares		2,112,136			21		14,287			—		—			14,308			(14,308	)		—
Common dividends declared ($0.18 per share)		—			—		—			—		(15,772	)		(15,772	)		—			(15,772	)
Distribution to noncontrolling interest declared ($0.18 per unit)		—			—		—			—		—			—			(163	)		(163	)
Balance, March 31, 2018		86,973,397		$	868	$	718,260		$	7,890	$	(97,581	)	$	629,437		$	7,553		$	636,990
Net income (loss)		—			—		—			—		3,509			3,509			36			3,545
Other comprehensive income		—			—		—			1,213		—			1,213			13			1,226
Stock compensation expense		5,868			1		933			—		—			934			—			934
Issuance of common shares		61,656			1		455			—		—			456			—			456
Repurchase of shares related to equity award tax withholding		3,200			—		8			—		—			8			—			8
Common dividends declared ($0.18 per share)		—			—		—			—		(15,690	)		(15,690	)		—			(15,690	)
Distribution to noncontrolling interest declared ($0.18 per unit)		—			—		—			—		—			—			(162	)		(162	)
Balance, June 30, 2018		87,044,121		$	870	$	719,656		$	9,103	$	(109,762	)	$	619,867		$	7,440		$	627,307
Net income (loss)		—			—		—			—		4,787			4,787			49			4,836
Other comprehensive income		—			—		—			685		—			685			5			690
Stock compensation expense		(2,858	)		—		586			—		—			586			—			586
Issuance of common shares		1,861,508			19		18,729			—		—			18,748			—			18,748
Repurchase of shares related to equity award tax withholding		—			—		(17	)		—		—			(17	)		—			(17	)
Conversion of noncontrolling interest to common shares		18,108			—		198			—		—			198			(198	)		—
Common dividends declared		—			—		—			—		(15,949	)		(15,949	)		—			(15,949	)
Distribution to noncontrolling interest declared		—			—		—			—		—			—			(158	)		(158	)
Balance, September 30, 2018		88,920,879			889		739,152			9,788		(120,924	)		628,905			7,138			636,043

The accompanying notes are an integral part of these condensed consolidated financial statements

Independence Realty Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

	For the Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	22,334		$	11,881
Adjustments to reconcile net income to cash flow from operating activities:
Depreciation and amortization		38,602			33,590
Amortization of deferred financing costs		1,052			1,078
Stock compensation expense		2,400			1,966
Gain on sale of assets		(14,532	)		—
Amortization related to derivative instruments		495			(52	)
Changes in assets and liabilities:
Other assets		460			59
Accounts payable and accrued expenses		8,476			8,659
Accrued interest payable		63			291
Other liabilities		7			(157	)
Net cash provided by (used in) operating activities		59,357			57,315
Cash flows from investing activities:
Acquisition of real estate properties		(80,079	)		(154,082	)
Disposition of real estate properties		38,731			—
Capital expenditures		(33,825	)		(28,348	)
Cash flow (used in) provided by investing activities		(75,173	)		(182,430	)
Cash flows from financing activities:
Proceeds from unsecured credit facility and term loans		161,060			169,000
Unsecured credit facility repayments		(110,500	)		(22,000	)
Mortgage principal repayments		(3,347	)		(2,402	)
Payments for deferred financing costs		(1,054	)		(16	)
Proceeds from issuance of common stock		18,726			19,204
Distributions on common stock		(48,443	)		(36,527	)
Distributions to noncontrolling interests		(482	)		(499	)
Repurchase of shares related to equity award tax withholding		(642	)		(354	)
Cash flow provided by (used in) financing activities		15,318			126,406
Net change in cash and cash equivalents, and restricted cash		(498	)		1,291
Cash and cash equivalents, and restricted cash, beginning of period		16,045			14,619
Cash and cash equivalents, and restricted cash, end of the period	$	15,547		$	15,910
Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheet
Cash and cash equivalents	$	6,587		$	7,645
Restricted cash		8,960			8,265
Total cash, cash equivalents, and restricted cash, end of period	$	15,547		$	15,910

The accompanying notes are an integral part of these condensed consolidated financial statements.

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and 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, or 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 September 30, 2019, we owned and operated 57 multifamily apartment properties, totaling 15,536 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 (“IROP”), of which we are the sole general partner.

As used herein, the terms “we,” “our” and “us” refer to IRT and, as required by context, IROP, and their subsidiaries.

NOTE 2: Summary of Significant Accounting Policies

a. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in the United States (“GAAP”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2018 included in our 2018 Annual Report on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.

b. Principles of Consolidation

The consolidated financial statements reflect our accounts and the accounts of IROP and 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. 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 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, such as real estate taxes and insurance, or to be released at our discretion upon the occurrence of certain pre-specified events. As of September 30, 2019, and December 31, 2018, we had $8,960 and $6,729, respectively, of restricted cash.

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and dollars in thousands, except share and per share data)

f. Investments in Real Estate

Investments in real estate are recorded at cost less accumulated depreciation. 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 management commits to a plan to sell, an active program to locate a buyer has been initiated, the sale 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.

Allocation of Purchase Price of Acquired Assets

The properties we acquire are generally accounted for as asset acquisitions. 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 assets and liabilities acquired based upon their relative fair value. 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. The value assigned to this intangible asset is amortized over the assumed lease up period, typically six months. During the three and nine months ended September 30, 2019, we acquired in-place leases with a value of $448 and $764, respectively, as part of related property acquisitions that are discussed further in Note 3. For the three and nine months ended September 30, 2019, we recorded $307 and $1,157, respectively, of amortization expense for intangible assets. For the three and nine months ended September 30, 2018, we recorded $567 and $2,900, respectively, of amortization expense for intangible assets. For the three and nine months ended September 30, 2019, we wrote-off fully amortized intangible assets of $0 and $1,532, respectively. For the three and nine months ended September 30, 2018, we wrote-off fully amortized intangible assets of $1,641 and $4,155, respectively. As of September 30, 2019, we expect to record additional amortization expense on current in-place intangible assets of $276 for the remainder of 2019.

Impairment of Long-Lived Assets

Management evaluates the recoverability of our investment in real estate assets, including related identifiable intangible assets, in accordance with FASB ASC Topic 360, “Property, Plant and Equipment”. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that recoverability of the assets is not assured.

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 Expense

Depreciation expense for real estate assets is computed using a straight-line method based on a life of 40 years for buildings and improvements and five to ten years for equipment and fixtures. For the three and nine months ended September 30, 2019, we recorded $13,127 and $37,445 of depreciation expense, respectively. For the three and nine months ended September 30, 2018, we recorded $10,216 and $30,690 of depreciation expense, respectively.

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and 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.

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. For the three and nine months ended September 30, 2019, we adjusted rental and other property income by $285 and $819, respectively, for uncollectible rental 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 three and nine months ended September 30, 2018, we recorded bad debt expense of $236 and $286, respectively, within property operating expenses in the consolidated statements of operations.

For the three and nine months ended September 30, 2019, we recognized revenues of $80 and $103, respectively, related to recoveries of lost rental revenue due to natural disasters and other insurable events from our insurance providers. For the three and nine months ended September 30, 2018, we recognized revenues of $65 and $171, respectively, related to recoveries of lost rental revenue due to natural disasters and other insurable events from our insurance providers.

Advertising Expenses

In accordance with FASB ASC Topic 720, “Other Expenses”, we expense the costs of advertising as incurred. For the three and nine months ended September 30, 2019, we incurred $612 and $1,763 of advertising expenses, respectively. For the three and nine months ended September 30, 2018, we incurred $577 and $1,674 of advertising expenses, respectively.

h. 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 sheets 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 fair value of 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.

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and dollars in thousands, except share and per share data)

i. Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in 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, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.

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 term loans 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

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and dollars in thousands, except share and per share data)

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. There were no transfers between levels in the fair value hierarchy for the nine months ended September 30, 2019. The following table summarizes the carrying amount and the fair value of our financial instruments as of the periods indicated:

	As of September 30, 2019				As of December 31, 2018
Financial Instrument	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Cash and cash equivalents	$	6,587	$	6,587	$	9,316	$	9,316
Restricted cash		8,960		8,960		6,729		6,729
Derivative assets		982		982		8,307		8,307

Liabilities
Debt:
Unsecured credit facility		153,915		156,303		153,983		155,743
Term loans		298,594		300,000		248,380		250,000
Mortgages		526,821		528,140		583,125		577,112
Derivative liabilities		12,415		12,415		—		—

j. 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.

k. 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 September 30, 2019, we had $2,928 of operating lease right-of-use assets and $3,206 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 $154 and $433, respectively, of total operating lease expense during the three and nine months ended September 30, 2019, which is recorded within property management expense and general and administrative expenses in our consolidated statements of operations.

l. Income Taxes

We have elected to be taxed as a REIT beginning with the taxable year ended December 31, 2011. Accordingly, we recorded no income tax expense for the three and nine months ended September 30, 2019 and 2018.

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.

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and dollars in thousands, except share and per share data)

m. 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 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 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. We adopted the new standard on January 1, 2019. As we have not issued share-based payments to non-employees since prior to our management internalization, the adoption of this standard has not had an effect on our consolidated financial statements.

NOTE 3: Investments in Real Estate

As of September 30, 2019, our real estate portfolio consisted of 57 apartment properties with 15,536 units. The table below summarizes our investments in real estate:

	As of September 30, 2019			As of December 31, 2018			Depreciable Lives (In years)
Land	$	221,767		$	209,111			—
Building		1,412,855			1,384,810			40
Furniture, fixtures and equipment		97,770			66,502		5-10
Total investment in real estate	$	1,732,392		$	1,660,423
Accumulated depreciation		(145,075	)		(112,270	)
Investments in real estate, net	$	1,587,317		$	1,548,153

As of September 30, 2019, we owned one property that was classified as held for sale. The 300-unit property held for sale, Iron Rock, is located in Austin, TX and had a net carrying value of $32,381 as of September 30, 2019.

We had three properties classified as held for sale as of December 31, 2018.

Acquisitions

The below table summarizes our acquisitions for the nine months ended September 30, 2019.

Property Name	Date of Purchase	Location	Units		Contract Price
North Park	4/30/2019	Atlanta, GA		224	$	28,000
Rocky Creek	7/11/2019	Tampa, FL		264	$	48,000
Total				488	$	76,000

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and dollars in thousands, except share and per share data)

The following table summarizes the aggregate relative fair value of the assets and liabilities associated with the properties acquired during the nine-month period ended September 30, 2019, on the date of acquisition, accounted for under FASB ASC Topic 805-50-15-3.

Description	Fair Value of Assets Acquired During The Nine Months Ended September 30, 2019
Assets acquired:
Investments in real estate (a)	$	75,429
Other assets		128
Intangible assets		764
Total assets acquired	$	76,321
Liabilities assumed:
Accounts payable and accrued expenses	$	345
Other liabilities		166
Total liabilities assumed		511
Estimated fair value of net assets acquired	$	75,810

(a)

Included $193 of property related acquisition costs capitalized during the nine months ended September 30, 2019.

In October 2019, we acquired a 318-unit property located in Raleigh, NC for a purchase price of $52,925.

Dispositions

The below table summarizes our dispositions for the nine months ended September 30, 2019.

Property Name	Date of Sale	Sale Price		Gain (loss) on sale (1)
Reserve at Eagle Ridge	4/30/2019	$	42,000	$	12,294
Little Rock, AR Portfolio	7/18/2019	$	56,500	$	2,230
Total		$	98,500	$	14,524

(1)

The gain (loss) for these properties is net of $5,233 of debt prepayment premium costs.

NOTE 4: Indebtedness

The following tables contain summary information concerning our indebtedness as of September 30, 2019:

Debt:	Outstanding Principal		Unamortized Debt Issuance Costs			Carrying Amount		Type	Weighted Average Rate	Weighted Average Maturity (in years)
Unsecured credit facility (1)	$	156,303	$	(2,388	)	$	153,915	Floating	3.5%		3.6
Unsecured term loans		300,000		(1,406	)		298,594	Floating	3.5%		4.6
Mortgages		528,713		(1,892	)		526,821	Fixed	3.8%		4.3
Total Debt	$	985,016	$	(5,686	)	$	979,330		3.7%		4.3

(1)

The total capacity under the unsecured credit facility is $350,000, of which $156,303 was outstanding as of September 30, 2019.

	Original maturities on or before December 31,
Debt:	2019		2020		2021		2022		2023		Thereafter
Unsecured credit facility	$	—	$	—	$	—	$	—	$	156,303	$	—
Unsecured term loans		—		—		—		—		—		300,000
Mortgages		1,602		8,135		76,033		70,700		107,202		265,041
Total	$	1,602	$	8,135	$	76,033	$	70,700	$	263,505	$	565,041

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and dollars in thousands, except share and per share data)

As of September 30, 2019, we were in compliance with all financial covenants contained in documents governing our indebtedness.

The following table contains summary information concerning our indebtedness as of December 31, 2018:

Debt:	Outstanding Principal		Unamortized Debt Issuance Costs			Carrying Amount		Type	Weighted Average Rate	Weighted Average Maturity (in years)
Unsecured credit facility (1)	$	155,743	$	(1,760	)	$	153,983	Floating	3.9%		2.7
Unsecured term loans		250,000		(1,620	)		248,380	Floating	4.0%		5.4
Mortgages		585,672		(2,547	)		583,125	Fixed	3.8%		5.1
Total Debt	$	991,415	$	(5,927	)	$	985,488		3.9%		4.8

(1)

The total capacity under the unsecured credit facility was $300,000, of which $155,743 was outstanding as of December 31, 2018.

Unsecured Credit Facility

On May 9, 2019, we closed on 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.

Mortgages

On April 30, 2019, we extinguished a property mortgage in the amount of $18,850 in connection with a property disposition.

On July 18, 2019, we extinguished two property mortgages in the amounts of $20,527 and $14,235, respectively, in connection with two property dispositions.

NOTE 5: Derivative Financial Instruments

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of September 30, 2019 and December 31, 2018:

	As of September 30, 2019						As of December 31, 2018
	Notional		Fair Value of Assets		Fair Value of Liabilities		Notional		Fair Value of Assets		Fair Value of Liabilities
Cash flow hedges:
Interest rate swap	$	150,000	$	982	$	—	$	150,000	$	4,751	$	—
Interest rate collars		250,000		—		6,617		250,000		3,556		—
Forward interest rate swap		—		—		5,798		—		—		—
Total	$	400,000	$	982	$	12,415	$	400,000	$	8,307	$	—

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 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

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and dollars in thousands, except share and per share data)

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 caps are reported in accumulated other comprehensive income, and the fair value of these hedge agreements is included in other assets or other liabilities.

For our interest rate swap and collars that are considered highly effective hedges, we reclassified realized gains of $251 and $1,277 to earnings within interest expense for the three and nine months ended September 30, 2019, respectively, and we expect $370 to be reclassified out of accumulated other comprehensive income to earnings over the next 12 months.

NOTE 6: Stockholder Equity and Noncontrolling Interests

Stockholder Equity

On March 18, 2019, our board of directors declared a distribution of $0.18 per share, which was paid on April 25, 2019 to common shareholders of record as of March 29, 2019.

On June 17, 2019, our board of directors declared a distribution of $0.18 per share, which was paid on July 25, 2019 to common shareholders of record as of June 28, 2019.

On September 12, 2019, our board of directors declared a distribution of $0.18 per share, which was paid on October 25, 2019 to common shareholders of record as of September 27, 2019.

During the three and nine months ended September 30, 2019, we also paid $0 and $209, respectively, of dividends on restricted common share awards that vested during the period.

During the three months ended September 30, 2019, we issued an aggregate of 972,887 shares under our At-the-Market Issuance Sales Agreement entered into in August 4, 2017, with various sales agents (the “ATM Sales Agreement”) at a weighted average price of $13.45, resulting in $12,763 of net proceeds, after deducting $260 of commissions. During the nine months ended September 30, 2019, we issued an aggregate of 1,548,591 shares under the ATM Sales Agreement at a weighted average price of $12.59, resulting in $18,842 of net proceeds, after deducting $385 of commissions. Pursuant to the ATM Sales Agreement $96,014 remained available for issuance as of September 30, 2019.

Noncontrolling Interest

During the three and nine months ended September 30, 2019, no IROP unitholders exchanged any units for shares of our common stock or cash.

As of September 30, 2019, 881,107 IROP units held by unaffiliated third parties remain outstanding.

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and dollars in thousands, except share and per share data)

On March 18, 2019, our board of directors declared a distribution of $0.18 per unit, which was paid on April 25, 2019 to IROP unitholders of record as of March 29, 2019.

On June 17, 2019, our board of directors declared a distribution of $0.18 per unit, which was paid on July 25, 2019 to IROP unitholders of record as of June 28, 2019.

On September 12, 2019, our board of directors declared a distibution of $0.18 per unit, which was paid on October 25, 2019 to IROP unitholders of record as of September 27, 2019.

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 grants of awards to our employees, officers, directors, trustees, consultants or advisors (and those of our affiliates). The Incentive Plan authorizes the grant of restricted or unrestricted shares of our common stock, performance-based restricted share units (“PSUs”), non-qualified and incentive stock options, restricted stock units, 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, and PSUs, to our employees and employees of our former advisor. These awards generally vested over a three or four year period. In addition, we have granted unrestricted shares to our non-employee directors. These awards generally vested immediately.

On February 6, 2019, our compensation committee awarded, to our non-executive officer employees, 92,925 restricted stock awards, valued at $10.35 per share, or $962 in the aggregate. These restricted stock awards vest over a three-year period. On March 7, 2019, our compensation committee awarded, to our named executive officers, 87,975 restricted stock awards and 263,929 PSUs. The restricted stock awards vest over a four-year period and were valued at $10.23 per share, or $900 in the aggregate. The number of PSUs earned will be based on attainment of certain performance criteria over a three-year period, the actual number of shares issuable ranging between 0% and 150% of the number of PSUs granted. The aggregate grant date fair value of the PSUs was $2,203.

On May 23, 2019, our compensation committee granted stock under the Incentive Plan such that our non-employee directors received an aggregate of 32,844 shares of our common stock, valued at $360 using out closing stock price of $10.96. These awards vested immediately.

NOTE 8: Earnings Per Share

The following table presents a reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2019 and 2018:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	4,912		$	4,836		$	22,334		$	11,881
Income allocated to noncontrolling interest		(49	)		(49	)		(222	)		(173	)
Net income allocable to common shares		4,863			4,787			22,112			11,708
Weighted-average shares outstanding—Basic		90,027,540			87,702,078			89,513,834			86,559,294
Weighted-average shares outstanding—Diluted		90,691,368			88,046,311			90,234,840			86,818,337
Earnings per share—Basic	$	0.05		$	0.05		$	0.25		$	0.14
Earnings per share—Diluted	$	0.05		$	0.05		$	0.25		$	0.13

Certain IROP units and unvested shares were excluded from the earnings per share computation because their effect would have been anti-dilutive, totaling 881,107 for the three and nine months ended September 30, 2019, and 881,107 and 962,066 for the three and nine months ended September 30, 2018, respectively.

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2019

(Unaudited and dollars in thousands, except share and per share data)

NOTE 9: Other Disclosures

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.

Loss Contingencies

We record an accrual for loss contingencies when a loss is probable and the amount of the loss can be reasonably estimated. Management reviews these accruals quarterly and makes revisions based on changes in facts and circumstances. When a loss contingency is not both probable and reasonably estimable, management does not accrue the loss. However, if the loss (or an additional loss in excess of an earlier accrual) is at least a reasonable possibility and material, then management discloses a reasonable estimate of the possible loss, or range of loss, if such reasonable estimate can be made. If we cannot make a reasonable estimate of the possible loss, or range of loss, then a statement to that effect is disclosed.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 report 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 report and they may also be incorporated by reference in this report 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 our 2018 Annual Report on Form 10-K, and in other of our public filings with the SEC, among others, 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 report. 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.

Overview

Our Company

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 September 30, 2019, we owned and operated 57 multifamily apartment properties that contain 15,536 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. 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. As of September 30, 2019, we had approximately 444 employees who provided real estate operations, leasing, financial, accounting, acquisition, disposition, development, and other support functions.

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.

Property Portfolio

As of September 30, 2019, we owned 57 multifamily apartment properties, totaling 15,536 units, as summarized below by market.


(Dollars in thousands, except per unit data)	As of September 30, 2019									For the Three Months Ended September 30, 2019
Market	Number of Properties		Units		Gross Real Estate Assets		Period End Occupancy			Average Effective Monthly Rent per Unit		Net Operating Income		% of NOI
Atlanta, GA		6		2,020	$	253,062		93.4	%	$	1,163	$	4,495		14.8	%
Raleigh - Durham, NC		5		1,372		190,618		92.8	%		1,199		3,175		10.4	%
Louisville, KY		6		1,710		196,882		88.9	%		1,004		3,027		10.0	%
Memphis, TN		4		1,383		144,311		90.5	%		1,143		2,941		9.7	%
Columbus, OH		6		1,547		152,162		92.5	%		1,011		2,603		8.6	%
Tampa-St. Petersburg, FL		4		1,104		171,537		90.2	%		1,212		2,331		7.7	%
Oklahoma City, OK		5		1,658		77,369		96.2	%		671		1,950		6.4	%
Indianapolis, IN		4		916		91,010		94.4	%		1,014		1,571		5.2	%
Dallas, TX		3		734		86,952		94.8	%		1,206		1,503		4.9	%
Myrtle Beach, SC - Wilmington, NC		3		628		63,301		93.3	%		1,053		1,363		4.5	%
Charleston, SC		2		518		79,852		94.0	%		1,314		1,128		3.7	%
Orlando, FL		1		297		48,613		93.9	%		1,488		853		2.8	%
Charlotte, NC		1		208		42,139		95.7	%		1,573		687		2.3	%
Asheville, NC		1		252		28,615		97.6	%		1,152		615		2.0	%
Austin, TX (a)		1		300		36,230		93.0	%		1,329		556		1.8	%
Chattanooga, TN		2		295		27,195		97.6	%		980		467		1.5	%
St. Louis, MO		1		152		33,548		92.8	%		1,472		463		1.5	%
Huntsville, AL		1		178		16,422		98.3	%		974		359		1.2	%
Baton Rouge, LA		1		264		28,804		84.9	%		901		326		1.1	%
Total/Weighted Average		57		15,536	$	1,768,622		92.8	%	$	1,084	$	30,413		100.0	%

(a)

Market includes one property which has been classified as held for sale as of September 30, 2019.

As of September 30, 2019, our same-store portfolio consisted of 49 multifamily apartment properties, totaling 13,397 units. See “Non-GAAP Financial Measures – Same Store Portfolio Net Operating Income” below for our methodology for determining our same store portfolio and definitions and reconciliations related to our net operating income and net operating income margin.

Value Add

Value add initiatives, comprised of renovations and upgrades at selected communities to drive increased rental rates, remain a core component of our growth strategy for 2019 and beyond. In 2018, we identified 3,929 units across 12 properties for renovations as part of our Phase I and II value add initiative. In July 2019, we identified eight additional properties totaling 2,402 units to represent Phase III of our value add initiative. In total, we are renovating 20 of our properties comprising 6,331 units or 41% of our total units as of September 30, 2019.

As of September 30, 2019, we were renovating 14 properties and had completed 2,364 of the 4,553 units at these 14 properties. We expect to substantially complete the remaining Phase I and II unit renovations in the first half of 2020. We expect to commence renovations at the Phase III units during the remainder of 2019 and first half of 2020.

Capital Recycling

Our capital recycling program consists of disposing of assets in markets where we lack scale and/or markets where management believes that long term growth outlook is not as attractive relative to other markets.

In April 2019, we sold a 370-unit property located in Chicago, IL for $42.0 million. We recorded a gain of $12.3 million for this property, which is net of $2.0 million of debt extinguishment costs. In July 2019, we sold two properties in Little Rock, AR for $56.5 million. We recorded a gain of $2.2 million associated with these properties, which is net of $3.2 million of debt extinguishment costs.

In April 2019, we purchased a 224-unit property located in Atlanta, GA for $28.0 million. In July 2019, we purchased a 264-unit property located in Tampa, FL for $48.0 million.

In October 2019, we purchased a 318-unit property located in Raleigh, NC for $52.9 million.

New Unsecured Credit Facility

On May 9, 2019, we closed on a new $350.0 million 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 and term loan agreement. We have the right to increase the aggregate amount of the unsecured revolving line of credit to up to $600.0 million. 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. At the time of closing and at September 30, 2019, based on our leverage ratio, the margin spread to LIBOR was 155 basis points.

Results of Operations

Three Months Ended September 30, 2019 compared to the Three Months Ended September 30, 2018

	SAME STORE PROPERTIES												NON SAME STORE PROPERTIES												CONSOLIDATED
(Dollars in thousands)	Three Months Ended September 30,												Three Months Ended September 30,												Three Months Ended September 30,
	2019			2018			Increase (Decrease)			% Change			2019			2018			Increase (Decrease)			% Change			2019			2018			Increase (Decrease)			% Change
Property Data:
Number of properties	49			49									8			9				(1	)		-11.1	%	57			58				(1	)		-1.7	%
Number of units		13,397			13,397									2,139			2,463			(324	)		-13.2	%		15,536			15,860			(324	)		-2.0	%
Average occupancy		93.4	%		93.4	%		0.0	%	n/a				94.3	%		93.9	%		0.4	%	n/a				93.5	%		93.5	%		0.0	%	n/a
Average effective monthly rent, per unit		1,078			1,020			58			5.7	%		1,126			1,043			83			8.0	%		1,084			1,024			61			5.9	%
Revenue:
Rental and other property revenue	$	43,686		$	40,975		$	2,711			6.6	%	$	7,371		$	7,669		$	(298	)		-3.9	%	$	51,057		$	48,644		$	2,413			5.0	%
Expenses:
Property operating expenses		17,268			16,547			721			4.4	%		3,278			3,245			33			1.0	%		20,546			19,792			754			3.8	%
Net Operating Income	$	26,418		$	24,428		$	1,990			8.1	%	$	4,093		$	4,424		$	(331	)		-7.5	%	$	30,511		$	28,852		$	1,659			5.8	%

Other Revenue:
Other revenue																									$	242		$	135		$	107			79.3	%
Corporate and other expenses:
Property management expenses																										1,901			1,661			240			14.4	%
General and administrative expenses																										3,113			2,578			535			20.8	%
Depreciation and amortization expense																										13,434			10,783			2,651			24.6	%
Total corporate and other expenses																										18,448			15,022			3,426			22.8	%
Interest expense																										(9,783	)		(9,129	)		(654	)		7.2	%
Gains on sale of assets																										2,390			—			2,390		nm
Net income																										4,912			4,836			76			1.6	%
Income allocated to noncontrolling interests																										(49	)		(49	)		—			0.0	%
Net income available to common shares																									$	4,863		$	4,787		$	76			1.6	%

Revenue

Rental and other property revenue. Rental and other property revenue increased $2.5 million to $51.1 million for the three months ended September 30, 2019 from $48.6 million for the three months ended September 30, 2018. The increase was primarily attributable to a $2.7 million increase in same store rental and other property revenue driven by a 5.7% increase in average effective monthly rents compared to the prior year period. This was partially offset by a $0.2 million decrease in non same store rental and other property revenue compared to the prior year period. The non same store rental and other property revenue decrease was due to the number of properties included in each period being different as a result of the timing of property sales and acquisitions.

Other revenue. Other revenue increased $0.1 million to $0.2 million for the three months ended September 30, 2019 compared to $0.1 million for the three months ended September 30, 2018.

Expenses

Property operating expenses. Property operating expenses increased $0.7 million to $20.5 million for the three months ended September 30, 2019 from $19.8 million for the three months ended September 30, 2018. The increase was due to a $0.7 million increase in same store property operating expenses primarily driven by higher property taxes.

Property management expenses. Property management expenses increased $0.2 million to $1.9 million for the three months ended September 30, 2019 from $1.7 million for the three months ended September 30, 2018. This was primarily due to an increase in compensation expense, software costs, and travel costs for our property management function as we have increased both the number of personnel and the use of technology to drive future operating efficiencies.

General and administrative expenses. General and administrative expenses increased $0.5 million to $3.1 million for the three months ended September 30, 2019 from $2.6 million for the three months ended September 30, 2018. This increase was primarily due to an increase in compensation expense 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 $2.6 million to $13.4 million for the three months ended September 30, 2019 from $10.8 million for the three months ended September 30, 2018. The increase was attributable to a $1.5 million increase in depreciation expense from capital expenditures related to our value add program for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 and an increase of $0.9 million related to six property acquisitions since the beginning of the three month period beginning September 30, 2018.

Interest expense. Interest expense increased $0.7 million to $9.8 million for the three months ended September 30, 2019 from $9.1 million for the three months ended September 30, 2018. This is primarily due to a $105.3 million increase in the balance of our unsecured credit facility and term loans from September 30, 2018 to September 30, 2019, which related to our investments in additional property acquisitions and value add related capital expenditures.

Nine Months Ended September 30, 2019 compared to the Nine Months Ended September 30, 2018

	SAME STORE PROPERTIES												NON SAME STORE PROPERTIES												CONSOLIDATED
(Dollars in thousands)	Nine Months Ended September 30,												Nine Months Ended September 30,												Nine Months Ended September 30,
	2019			2018			Increase (Decrease)			% Change			2019			2018			Increase (Decrease)			% Change			2019			2018			Increase (Decrease)			% Change
Property Data:
Number of properties	49			49									8				9			(1	)		-11.1	%	57				58			(1	)		-1.7	%
Number of units		13,397			13,397									2,139			2,463			(324	)		-13.2	%		15,536			15,860			(324	)		-2.0	%
Average occupancy		93.3	%		93.7	%		-0.4	%	n/a				95.1	%		94.2	%		0.8	%	n/a				93.6	%		93.8	%		-0.2	%	n/a
Average effective monthly rent, per unit		1,058			1,005			52			5.2	%		1,083			1,052			31			3.0	%		1,061			1,011			50			4.9	%
Revenue:
Rental and other property revenue	$	128,280		$	121,626		$	6,654			5.5	%	$	23,090		$	19,368		$	3,722			19.2	%	$	151,370		$	140,994		$	10,376			7.4	%
Expenses:
Property operating expenses		50,510			48,956			1,554			3.2	%		9,994			7,957			2,037			25.6	%		60,504			56,913			3,591			6.3	%
Net Operating Income	$	77,770		$	72,670		$	5,100			7.0	%	$	13,096		$	11,411		$	1,685			14.8	%	$	90,866		$	84,081		$	6,785			8.1	%

Other Revenue:
Other revenue																									$	425		$	429		$	(4	)		-0.9	%
Corporate and other expenses:
Property management expenses																										5,776			4,936			840			17.0	%
General and administrative expenses																										9,758			8,184			1,574			19.2	%
Depreciation and amortization expense																										38,602			33,590			5,012			14.9	%
Total corporate and other expenses																										54,136			46,710			7,426			15.9	%
Interest expense																										(29,353	)		(26,063	)		(3,290	)		12.6	%
Other income																										—			144			(144	)	nm
Gains on sale of assets																										14,532			—			14,532		nm
Net income																										22,334			11,881			10,453			88.0	%
Income allocated to noncontrolling interests																										(222	)		(173	)		(49	)		-28.3	%
Net income available to common shares																									$	22,112		$	11,708		$	10,404			88.9	%

Revenue

Rental and other property revenue. Rental and other property revenue increased $10.4 million to $151.4 million for the nine months ended September 30, 2019 from $141.0 million for the nine months ended September 30, 2018. The increase was primarily attributable to a $6.7 million increase in same store rental and other property revenue driven by a 5.2% increase in average effective monthly rents compared to the prior year period partially offset by a 30 basis point decrease in average occupancy compared to the prior year and a $3.7 million increase in non same store rental and other property revenue. The non same store rental and other property revenue 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.

Other revenue. Other revenue remained consistent at $0.4 million for the nine months ended September 30, 2019 and 2018.

Expenses

Property operating expenses. Property operating expenses increased $3.6 million to $60.5 million for the nine months ended September 30, 2019 from $56.9 million for the nine months ended September 30, 2018. The increase was due to a $1.6 million increase in same store property operating expenses primarily driven by higher property taxes and a $2.0 million increase in our non

same store property operating expenses. The non same store property operating expenses 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 $0.9 million to $5.8 million for the nine months ended September 30, 2019 from $4.9 million for the nine months ended September 30, 2018. This was primarily due to an increase in compensation expense, software costs, and travel costs for our property management function as we have increased both the number of personnel and the use of technology to drive future operating efficiencies.

General and administrative expenses. General and administrative expenses increased $1.6 million to $9.8 million for the nine months ended September 30, 2019 from $8.2 million for the nine months ended September 30, 2018. This increase was primarily due to an increase in compensation expense 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 $5.0 million to $38.6 million for the nine months ended September 30, 2019 from $33.6 million for the nine months ended September 30, 2018. The increase was attributable to a $4.2 million increase in depreciation expense driven by capital expenditures from our value add program for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 and a $1.0 million increase in depreciation expense due to 2019 capital recycling activity.

Interest expense. Interest expense increased $3.3 million to $29.4 million for the nine months ended September 30, 2019 from $26.1 million for the nine months ended September 30, 2018. This is primarily due to a $105.3 million increase in the balance of our unsecured credit facility and term loans from September 30, 2018 to September 30, 2019, which related to our investments in additional property acquisitions and value add related capital expenditures.

Non-GAAP Financial Measures

Funds from Operations (FFO) and Core Funds from Operations (CFFO)

We believe that FFO and CFFO, each of which is a non-GAAP financial measure, are appropriate supplemental measures of the operating performance of a REIT and IRT in particular.

We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss (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. We calculate CFFO as FFO, adjusted for stock compensation expense, depreciation and amortization of items that are not added back in the computation of FFO, amortization of deferred financing costs, and other non-cash or non-operating gains or losses related to items such as defeasance costs that we incur when we sell a property subject to secured debt, asset sales, debt extinguishments, and acquisition-related debt extinguishment expenses.

Our calculations of FFO and CFFO may differ from the methodology for calculating FFO, CFFO and similar supplemental measures utilized by other REITs and, accordingly, may not be comparable to FFO, CFFO or similar measures as calculated by other REITs. Our management utilizes FFO and CFFO as measures of our operating performance, and we believe they are also useful to investors because they facilitate an understanding of our operating performance after adjustment for certain non-cash or non-operating items that are required by GAAP to be expensed and facilitate comparison of our current operating performance to prior reporting 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 provide investors with additional useful measures to compare our financial performance to the performance of 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. Neither FFO nor CFFO should be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

Set forth below is a reconciliation of net income (loss) to FFO and CFFO for the three and nine months ended September 30, 2019 and 2018 (in thousands, except share and per share information):

	For the Three Months Ended September 30, 2019						For the Three Months Ended September 30, 2018
	Amount			Per Share (1)			Amount		Per Share (2)
Funds From Operations (FFO):
Net income (loss)	$	4,912		$	0.05		$	4,836	$	0.05
Adjustments:
Real estate depreciation and amortization		13,313			0.15			10,738		0.13
Net (gains) losses on sale of assets excluding debt extinguishment costs		(5,594	)		(0.06	)		—		—
FFO	$	12,631		$	0.14		$	15,574	$	0.18
Core Funds From Operations (CFFO):
FFO	$	12,631		$	0.14		$	15,574	$	0.18
Adjustments:
Stock compensation expense		692			0.01			563		0.01
Amortization of deferred financing costs		351			—			309		—
Other depreciation and amortization		121			—			45		—
Debt extinguishment costs included in net gains (losses) on sale of assets		3,204			0.04			—		—
CFFO	$	16,999		$	0.19		$	16,491	$	0.19

	For the Nine Months Ended September 30, 2019						For the Nine Months Ended September 30, 2018
	Amount			Per Share (1)			Amount			Per Share (2)
Funds From Operations (FFO):
Net income (loss)	$	22,334		$	0.25		$	11,881		$	0.14
Adjustments:
Real estate depreciation and amortization		38,306			0.42			33,489			0.38
Net (gains) losses on sale of assets excluding debt extinguishment costs		(19,765	)		(0.22	)		—			—
FFO	$	40,875		$	0.45		$	45,370		$	0.52
Core Funds From Operations (CFFO):
FFO	$	40,875		$	0.45		$	45,370		$	0.52
Adjustments:
Stock compensation expense		2,400			0.03			1,966			0.02
Amortization of deferred financing costs		1,052			0.01			1,078			0.01
Other depreciation and amortization		296			—			101			—
Other expense (income)		—			—			(52	)		—
Debt extinguishment costs included in net gains (losses) on sale of assets		5,233			0.06			—			—
CFFO	$	49,856		$	0.55		$	48,463		$	0.55

(1)

Based on 90,908,646 and 90,394,941 weighted-average shares and units outstanding for the three and nine months ended September 30, 2019, respectively.

(2)

Based on 88,585,940 and 87,870,135 weighted-average shares and units outstanding for the three and nine months ended September 30, 2018, respectively.

Same Store Portfolio Net Operating Income

We believe that Net Operating Income (“NOI”), a non-GAAP financial measure, is an additional useful supplemental measure of our operating performance. We define NOI as total property revenues less total property operating expenses, excluding interest expenses, depreciation and amortization, acquisition expenses, property management expenses, and general and administrative expenses. 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 operating income and net income as determined in accordance with GAAP. 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, financing 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 supplemental 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 are classified as held for sale are excluded from the same store portfolio.

Set forth below is a reconciliation of same store net operating income to net income (loss) available to common shares for the three and nine months ended September 30, 2019 and 2018 (in thousands, except per unit data):

	Three Months Ended September 30, (a)									Nine Months Ended September 30, (a)
	2019			2018			% change			2019			2018			% change
Revenue:
Rental and other property revenue	$	43,686		$	40,975			6.6	%	$	128,280		$	121,626			5.5	%
Property Operating Expenses
Real estate taxes		5,299			4,749			11.6	%		16,034			14,592			9.9	%
Property insurance		865			820			5.5	%		2,537			2,626			-3.4	%
Personnel expenses		4,282			4,188			2.2	%		12,315			12,176			1.1	%
Utilities		2,860			2,621			9.1	%		8,148			7,803			4.4	%
Repairs and maintenance		1,812			1,714			5.7	%		4,869			4,357			11.8	%
Contract services		1,099			1,223			-10.1	%		3,452			3,709			-6.9	%
Advertising expenses		466			460			1.3	%		1,362			1,363			-0.1	%
Other expenses		585			772			-24.2	%		1,793			2,330			-23.0	%
Total property operating expenses		17,268			16,547			4.4	%		50,510			48,956			3.2	%
Net operating income	$	26,418		$	24,428			8.1	%	$	77,770		$	72,670			7.0	%
NOI Margin		60.5	%		59.6	%		0.9	%		60.6	%		59.7	%		0.9	%
Average Occupancy		93.4	%		93.4	%		0.0	%		93.3	%		93.7	%		-0.4	%
Average effective monthly rent, per unit	$	1,078		$	1,020			5.7	%	$	1,058		$	1,005			5.2	%
Reconciliation of Same-Store Net Operating Income to Net Income (Loss)
Same-store portfolio net operating income (a)	$	26,418		$	24,428					$	77,770		$	72,670
Non same-store net operating income		4,093			4,424						13,096			11,411
Other revenue		242			135						425			429
Property management expenses		(1,901	)		(1,661	)					(5,776	)		(4,936	)
General and administrative expenses		(3,113	)		(2,578	)					(9,758	)		(8,184	)
Depreciation and amortization		(13,434	)		(10,783	)					(38,602	)		(33,590	)
Interest expense		(9,783	)		(9,129	)					(29,353	)		(26,063	)
Other income (expense)		—			—						—			144
Net gains (losses) on sale of assets		2,390			—						14,532			—
Net income (loss)	$	4,912		$	4,836					$	22,334		$	11,881

(a)

Same store portfolio for the three and nine months ended September 30, 2019 and 2018 included 49 properties containing 13,397 units.

Liquidity and Capital Resources

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 twelve 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.

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 equivalent of $6.6 million as of September 30, 2019;

•

existing and future unsecured financing, including advances under our unsecured credit facility, and financing secured directly or indirectly by the apartment properties in our portfolio;

•

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.

Cash Flows

As of September 30, 2019 and 2018, we maintained cash and cash equivalents, and restricted cash of approximately $15.5 million and $15.9 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Nine Months Ended September 30,
	2019			2018
Cash flow from operating activities	$	59,357		$	57,315
Cash flow from investing activities		(75,173	)		(182,430	)
Cash flow from financing activities		15,318			126,406
Net change in cash and cash equivalents, and restricted cash		(498	)		1,291
Cash and cash equivalents, and restricted cash, beginning of period		16,045			14,619
Cash and cash equivalents, and restricted cash, end of the period	$	15,547		$	15,910

The increase in our cash flow from operating activities during the nine months ended September 30, 2019 was primarily driven by higher net operating income from our property portfolio.

Our cash outflow from investing activities during the nine months ended September 30, 2019 was primarily due to two property acquisitions and capital expenditures partially offset by three property dispositions. Our cash outflow from investing activities during the nine months ended September 30, 2018 was primarily due to six property acquisitions and capital expenditures.

Our cash inflow from financing activities during the nine months ended September 30, 2019 was primarily due to draws on our unsecured credit facility and term loans related to the acquisition of two properties and issuances of common stock under our ATM Sales Agreement, partially offset by repayments of our unsecured credit facility, dividends on our common stock, and distributions on noncontrolling interests. Our cash inflow from financing activities during the nine months ended September 30, 2018 was primarily due to draws on our current and previous credit facilities related to the acquisitions of six properties, partially offset by dividends on our common stock and distributions on noncontrolling interests.

Contractual Commitments

Our Annual Report on Form 10-K for the year ended December 31, 2018 filed on February 22, 2019 includes a table of contractual commitments as of December 31, 2018. There were no material changes to these commitments since the filing of our Annual Report on Form 10-K. See the updated debt maturity schedule included in Note 4 in the Notes to the Consolidated Financial Statements.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements during the nine months ended September 30, 2019 that have or are reasonably 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 resources that are material to our interests.

Critical Accounting Estimates and Policies

Our 2018 Annual Report on Form 10-K contains a discussion of our critical accounting policies. Effective January 1, 2019, we adopted several new accounting pronouncements and revised our accounting policies as described in Note 2 to the Consolidated Financial Statements included in Part I, Item 1 of this report. Management discusses our critical accounting policies and management’s judgments and estimates with the audit committee of our board of directors.

Item 3.

Qualitative and Quantitative Disclosure About Market Risk.

Our 2018 Annual Report on Form 10-K contains a discussion of qualitative and quantitative market risks. There have been no material changes in quantitative and qualitative market risks during the nine months ended September 30, 2019 from the disclosures included in our 2018 Annual Report on Form 10-K.

Item 4.

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, or 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.

Effective as of September 30, 2019, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation referred to above during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings.

Item 1A.

Risk Factors.

There have not been any material changes from the risk factors previously disclosed in Item 1A—“Risk Factors” in our 2018 Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

None.

Item 5.

Other Information.

On October 30, 2019, our board of directors amended and restated our Bylaws to provide that our stockholders, by the affirmative vote of a majority of all votes entitled to be cast on the matter, shall have the power to make and adopt new Bylaws or to amend, alter or repeal the Bylaws. The amendment to the Bylaws is effective immediately. Prior to the amendment, our board of directors had the exclusive power to amend the Bylaws. Following the amendment, our board of directors and our stockholders have the concurrent power to amend the Bylaws.

The foregoing summary description of the amendment to the Bylaws is not intended to be complete and is qualified in its entirety by reference to the full text of the amended and restated Bylaws, which is attached as Exhibit 3.2 to this Form 10-Q and is incorporated herein by reference

Item 6.

Exhibits.

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

3.2		Amended and Restated Bylaws of Independence Realty Trust, Inc., filed herewith.

10.1*		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), filed herewith.

31.1		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

101		The following materials, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018, (iii) Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018, (iv) Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2019, (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 and (vi) notes to the condensed consolidated financial statements as of September 30, 2019.

104		Cover Page Interactive Data File (embedded within the Inline XBRL document).

* Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements 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.

	Independence Realty Trust, Inc.

Date: October 31, 2019	By:	/s/ Scott f. Schaeffer
		Scott F. Schaeffer
		Chairman of the Board and Chief Executive Officer
		(Principal Executive Officer)

Date: October 31, 2019	By:	/s/ James J. Sebra
		James J. Sebra
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

Date: October 31, 2019	By:	/s/ Jason R. Delozier
		Jason R. Delozier
		Chief Accounting Officer
		(Principal Accounting Officer)