INDEPENDENCE REALTY TRUST, INC. - Quarter Report: 2020 June (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 June 30, 2020


☐	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 July 27, 2020 there were 94,745,254 shares of the Registrant’s common stock issued and outstanding.

INDEPENDENCE REALTY TRUST, INC.

INDEX

		Page

PART I—FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	3

	Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2020 and June 30, 2019	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months ended June 30, 2020 and June 30, 2019	5

	Condensed Consolidated Statements of Changes in Equity for the Three and Six Months ended June 30, 2020 and June 30, 2019	6

	Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2020 and June 30, 2019	7

	Notes to Condensed Consolidated Financial Statements as of June 30, 2020	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Mine Safety Disclosures	28

Item 5.	Other Information	28

Item 6.	Exhibits	29

Signatures		30

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 June 30, 2020			As of December 31, 2019
ASSETS:
Investments in real estate:
Investments in real estate, at cost	$	1,864,182		$	1,796,365
Accumulated depreciation		(187,758	)		(158,435	)
Investments in real estate, net		1,676,424			1,637,930
Cash and cash equivalents		11,652			9,888
Restricted cash		6,509			4,545
Other assets		14,253			10,380
Derivative assets		—			953
Intangible assets, net of accumulated amortization of $147 and $540, respectively		74			410
Total Assets	$	1,708,912		$	1,664,106
LIABILITIES AND EQUITY:
Indebtedness, net of unamortized deferred financing costs of $4,932 and $5,606, respectively	$	1,008,911		$	985,572
Accounts payable and accrued expenses		28,748			25,399
Accrued interest payable		1,970			2,196
Dividends payable		11,423			16,491
Derivative liabilities		34,614			7,769
Other liabilities		6,860			6,922
Total Liabilities		1,092,526			1,044,349
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, 94,741,146 and 91,070,637 shares issued and outstanding, including 336,231and 326,541 unvested restricted common share awards, respectively		947			911
Additional paid-in capital		818,719			765,992
Accumulated other comprehensive income (loss)		(39,099	)		(12,099	)
Retained earnings (accumulated deficit)		(169,585	)		(141,525	)
Total stockholders’ equity		610,982			613,279
Noncontrolling interests		5,404			6,478
Total Equity		616,386			619,757
Total Liabilities and Equity	$	1,708,912		$	1,664,106

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 June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
REVENUE:
Rental and other property revenue	$	52,087		$	50,848		$	103,243		$	100,313
Other revenue		181			108			375			183
Total revenue		52,268			50,956			103,618			100,496
EXPENSES:
Property operating expenses		20,974			20,072			40,711			39,958
Property management expenses		2,077			2,062			4,233			3,875
General and administrative expenses		3,574			3,538			8,950			6,645
Depreciation and amortization expense		15,231			12,721			30,059			25,168
Abandoned deal costs		—			—			130			—
Casualty losses		411			—			411			—
Total expenses		42,267			38,393			84,494			75,646
Interest expense		(9,202	)		(9,849	)		(18,699	)		(19,570	)
Gain (loss) on sale of assets		—			12,142			—			12,142
Net income (loss):		799			14,856			425			17,422
Income allocated to noncontrolling interest		(10	)		(147	)		(8	)		(173	)
Net income (loss) allocable to common shares	$	789		$	14,709		$	417		$	17,249
Earnings per share:
Basic	$	0.01		$	0.16		$ 0.00			$	0.19
Diluted	$	0.01		$	0.16		$ 0.00			$	0.19
Weighted-average shares:
Basic		94,435,722			89,513,105			92,646,891			89,252,724
Diluted		95,092,860			90,019,909			93,550,425			89,902,637

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 June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
Net income (loss)	$	799		$	14,856		$	425		$	17,422
Other comprehensive income (loss):
Change in fair value of interest rate hedges		(1,973	)		(10,023	)		(25,395	)		(14,950	)
Realized gains (losses) on interest rate hedges reclassified to earnings		(1,405	)		467			(1,823	)		1,026
Total other comprehensive income (loss)		(3,378	)		(9,556	)		(27,218	)		(13,924	)
Comprehensive income (loss) before allocation to noncontrolling interests		(2,579	)		5,300			(26,793	)		3,498
Allocation to noncontrolling interests		19			(52	)		210			(34	)
Comprehensive income (loss)	$	(2,560	)	$	5,248		$	(26,583	)	$	3,464

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, 2019		91,070,637		$	911		$	765,992		$	(12,099	)	$	(141,525	)	$	613,279		$	6,478		$	619,757
Net income (loss)		—			—			—			—			(372	)		(372	)		(2	)		(374	)
Other comprehensive income (loss)		—			—			—			(23,651	)		—			(23,651	)		(189	)		(23,840	)
Stock compensation expense		183,940			2			2,642			—			—			2,644			—			2,644
Issuance of common shares, net		3,406,000			35			49,729			—			—			49,764			—			49,764
Repurchase of shares related to equity award tax withholding		(51,128	)		(1	)		(1,489	)		—			—			(1,490	)		—			(1,490	)
Conversion of noncontrolling interest to common shares		82,357			—			627			—			—			627			(627	)		—
Common dividends declared ($0.18 per share)		—			—			—			—			(17,148	)		(17,148	)		—			(17,148	)
Distribution to noncontrolling interest declared ($0.18 per unit)		—			—			—			—			—			—			(142	)		(142	)
Balance, March 31, 2020		94,691,806		$	947		$	817,501		$	(35,750	)	$	(159,045	)	$	623,653		$	5,518		$	629,171
Net income		—			—			—			—			789			789			10			799
Other comprehensive income		—			—			—			(3,349	)		—			(3,349	)		(29	)		(3,378	)
Stock compensation expense		49,340			—			1,250			—			—			1,250			—			1,250
Issuance of common shares, net		—			—			(32	)		—			—			(32	)		—			(32	)
Common dividends declared ($0.12 per share)		—			—			—			—			(11,329	)		(11,329	)		—			(11,329	)
Distribution to noncontrolling interest declared ($0.12 per unit)		—			—			—						—			—			(95	)		(95	)
Balance, June 30, 2020		94,741,146		$	947		$	818,719		$	(39,099	)	$	(169,585	)	$	610,982		$	5,404		$	616,386

	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 (loss)		—			—		—			(4,324	)		—			(4,324	)		(44	)		(4,368	)
Stock compensation expense		189,986			1		633			—			—			634			—			634
Issuance of common shares, net		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, net		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

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 Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	425		$	17,422
Adjustments to reconcile net income to cash flow from operating activities:
Depreciation and amortization		30,059			25,168
Amortization of deferred financing costs		723			701
Stock compensation expense		3,859			1,708
Gain on sale of assets		—			(12,142	)
Casualty losses		411			—
Amortization related to derivative instruments		579			231
Changes in assets and liabilities:
Other assets		(4,348	)		369
Accounts payable and accrued expenses		2,812			2,445
Accrued interest payable		(188	)		(27	)
Other liabilities		7			225
Net cash provided by operating activities		34,339			36,100
Cash flows from investing activities:
Acquisition of real estate properties		(50,618	)		(28,981	)
Disposition of real estate properties		—			20,761
Capital expenditures		(17,070	)		(19,932	)
Cash flow used in investing activities		(67,688	)		(28,152	)
Cash flows from financing activities:
Proceeds from unsecured credit facility and term loans		65,501			104,060
Unsecured credit facility repayments		(39,000	)		(79,000	)
Mortgage principal repayments		(3,835	)		(1,987	)
Payments for deferred financing costs		(50	)		(984	)
Proceeds from issuance of common stock		49,732			6,032
Distributions on common stock		(33,479	)		(32,316	)
Distributions to noncontrolling interests		(302	)		(323	)
Repurchase of shares related to equity award tax withholding		(1,490	)		(635	)
Cash flow provided by (used in) financing activities		37,077			(5,153	)
Net change in cash and cash equivalents, and restricted cash		3,728			2,795
Cash and cash equivalents, and restricted cash, beginning of period		14,433			16,045
Cash and cash equivalents, and restricted cash, end of the period	$	18,161		$	18,840
Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheet
Cash and cash equivalents	$	11,652		$	11,060
Restricted cash		6,509			7,780
Total cash, cash equivalents, and restricted cash, end of period	$	18,161		$	18,840

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 June 30, 2020

(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 (“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 June 30, 2020, we owned and operated 58 multifamily apartment properties, that contain 15,805 units across non-gateway U.S. markets, including Atlanta, Louisville, Memphis, and Raleigh. We own all of our assets and conduct substantially all of 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 Independence Realty Trust, Inc. and, as required by context, IROP and their subsidiaries.

NOTE 2: Summary of Significant Accounting Policies

a. Basis of Presentation

The 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, 2019 included in our 2019 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 the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 810, “Consolidation”, IROP is considered a variable interest entity to which we are the primary beneficiary. As our significant asset is our investment in IROP, substantially all of our assets and liabilities represent the assets and liabilities of IROP.

c. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

d. Cash and Cash Equivalents

Cash and cash equivalents include cash held in banks and highly liquid investments with 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 June 30, 2020 and December 31, 2019, we had $6,509 and $4,545, respectively, of restricted cash.

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 in-place lease assets is amortized over the assumed lease up period, typically six months. During the three and six months ended June 30, 2020, we acquired in-place leases with a value of $221, as part of related property acquisitions that are discussed further in Note 3. For the three and six months ended June 30, 2020, we recorded $186 and $557, respectively, of amortization expense for intangible assets. For the three and six months ended June 30, 2019, we recorded $294 and $850, respectively, of amortization expense for intangible assets. For the three and six months ended June 30, 2020, we wrote-off fully amortized intangible assets of $503 and $950, respectively. For the three and six months ended June 30, 2019, we wrote-off fully amortized intangible assets of $719 and $1,532, respectively. As of June 30, 2020, we expect to record additional amortization expense on current in-place intangible assets of $74 for the remainder of 2020.

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 our 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 six months ended June 30, 2020, we recorded $15,045 and $29,502 of depreciation expense, respectively. For the three and six months ended June 30, 2019, we recorded $12,427 and $24,318 of depreciation expense, respectively.

Occasionally, we incur losses at our communities from wind storms, floods, fires and similar hazards. Sometimes, a portion of these losses are not fully covered by our insurance policies due to deductibles. In these cases, we estimate the carrying value of the damaged property and record a casualty loss for the difference between the estimated carrying value and the insurance proceeds. During the three and six months ended June 30, 2020, we incurred $411 of casualty losses.

g. Revenue and Expenses

Rental and other property revenue

Management accounts for rental income in accordance with FASB ASC Topic 842, “Leases.” We primarily lease apartments 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 and (2) the lease component is the predominant element and (3) the combined single lease component would be classified as an operating lease.

In conjunction with the COVID-19 pandemic, many of our residents were economically impacted and unable to pay their rent in full. To assist residents who may have been impacted, we offered residents deferred rent payment plans whereby the resident could defer between 25% and 75% of their monthly rent for between one and three months. Residents were required to provide evidence of financial hardship and commit to a full 12-month lease term, which provided a longer period over which the deferred rent could be repaid. We accounted for the deferred payment plans as if no change had been made to the original lease agreement and continued to recognize rental income while increasing lease receivables from residents. During the three months ended June 30, 2020, we entered into 260 deferred payment plans with residents representing approximately 0.9% of our total rental and other property income during that period. As of June 30, 2020, deferred rents receivables from residents totaled $413.

We make ongoing estimates of the collectability of our base rents, tenant reimbursements, and other service fees included within rental and other property revenue. If collectability is not probable, we adjust rental and other property income for the amount of uncollectible revenue. Due to the COVID-19 pandemic some residents have experienced difficultly making rent payments and our rent receivables have increased compared to historical levels. This caused us to further evaluate collectability and we recorded a $723 provision for bad debts as of June 30, 2020 to appropriately reflect management’s estimate for uncollectible accounts. The provision for bad debts was recorded as a reduction to rental and other property income in our condensed consolidated statements of operations.

For the three and six months ended June 30, 2020, we recognized revenues of $148 and $151, respectively, related to recoveries of lost rental revenue due to natural disasters and other insurable events from our insurance providers. For the three and six months ended June 30, 2019, we recognized revenues of $17 and $23, respectively, related to recoveries of lost rental revenue due to natural disasters and other insurable events from our insurance providers.

Advertising Expenses

For the three and six months ended June 30, 2020, we incurred $551 and $1,160 of advertising expenses, respectively. For the three and six months ended June 30, 2019, we incurred $603 and $1,151 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 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.

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 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 six months ended June 30, 2020. The following table summarizes the carrying amount and the fair value of our financial instruments as of the periods indicated:

	As of June 30, 2020				As of December 31, 2019
Financial Instrument	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Cash and cash equivalents	$	11,652	$	11,652	$	9,888	$	9,888
Restricted cash		6,509		6,509		4,545		4,545
Derivative assets		—		—		953		953

Liabilities
Debt:
Unsecured credit facility		210,765		212,802		183,966		186,302
Term loans		298,588		300,000		298,418		300,000
Mortgages		499,558		520,898		503,188		505,510
Derivative liabilities		34,614		34,614		7,769		7,769

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

In accordance with FASB ASC Topic 842, “Leases”, lessees are required 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 June 30, 2020, we have $2,664 of operating lease right-of-use assets and $3,024 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 $158 and $297 of total operating lease expense during the three and six months ended June 30, 2020, which is recorded within property management expense and general and administrative expenses in our condensed 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 six months ended June 30, 2020 and 2019.

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.

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 2016, the FASB issued an accounting standard classified under FASB ASC Topic 326, “Financial Instruments – Credit Losses.” The amendments in this update revise the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities and other financial instruments. The amendments require entities to estimate a lifetime expected credit loss for certain financial instruments, including trade receivable. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early application of the amendments in this standard is permitted. We adopted the new standard on January 1, 2020. The adoption of this standard has not had an effect on our consolidated financial statements.

In June 2018, the FASB issued an accounting standard classified under FASB ASC Topic 718, “Compensation – Stock Compensation.” The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. As a result, the accounting for share-based payment award transactions could be impacted. This standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this standard is permitted. 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.

In March 2020, the FASB issued an accounting standard classified under FASB ASC Topic 848, “Reference Rate Reform.” The amendments in this update contain practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASC 848 is optional and may be elected over time as reference rate reform activities occur. Beginning in the first quarter of 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We will continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

NOTE 3: Investments in Real Estate

As of June 30, 2020, our investments in real estate consisted of 58 apartment properties that contain 15,805 units. The following table summarizes our investments in real estate:

	As of June 30, 2020			As of December 31, 2019			Depreciable Lives (In years)
Land	$	238,723		$	234,050			—
Building		1,499,444			1,453,052			40
Furniture, fixtures and equipment		126,015			109,263		5-10
Total investment in real estate	$	1,864,182		$	1,796,365
Accumulated depreciation		(187,758	)		(158,435	)
Investments in real estate, net	$	1,676,424		$	1,637,930

Acquisitions

In February 2020, we acquired a 251-unit property located in McKinney, TX for $51,204.

The following table summarizes the aggregate relative fair value of the assets and liabilities associated with the properties acquired during the six-month period ended June 30, 2020, on the date of acquisition, accounted for under FASB ASC Topic 805-50-15-3.

Description	Fair Value of Assets Acquired During The Six Months Ended June 30, 2020
Assets acquired:
Investments in real estate (a)	$	51,052
Other assets		35
Intangible assets		221
Total assets acquired	$	51,308
Liabilities assumed:
Accounts payable and accrued expenses	$	126
Other liabilities		83
Total liabilities assumed		209
Estimated fair value of net assets acquired	$	51,099

(a)

Included $69 of property related acquisition costs capitalized during the six months ended June 30, 2020.

NOTE 4: Indebtedness

The following tables contain summary information concerning our indebtedness as of June 30, 2020:

Debt:	Outstanding Principal		Unamortized Debt Issuance Costs			Carrying Amount		Type	Weighted Average Rate	Weighted Average Maturity (in years)
Unsecured credit facility (1)	$	212,802	$	(2,037	)	$	210,765	Floating	1.6%		2.9
Unsecured term loans		300,000		(1,412	)		298,588	Floating	1.5%		3.8
Mortgages		501,041		(1,483	)		499,558	Fixed	3.9%		3.5
Total Debt	$	1,013,843	$	(4,932	)	$	1,008,911		2.7%		3.5

(1)

The unsecured credit facility total capacity is $350,000, of which $212,802 was outstanding as of June 30, 2020.

On July 9, 2020, we drew down on our unsecured credit facility to extinguish a property mortgage and make partial paydowns totaling $32,117. The property mortgages had a weighted-average rate of 3.9% compared to the 1.6% interest rate on our unsecured credit facility as of June 30, 2020.

As of June 30, 2020, we were in compliance with all financial covenants contained in the documents governing our indebtedness.

	Scheduled maturities on or before December 31,
Debt:	2020		2021		2022		2023		2024		Thereafter
Unsecured credit facility	$	—	$	—	$	—	$	212,802	$	—	$	—
Unsecured term loans		—		—		—		—		300,000		—
Mortgages		3,926		76,176		70,840		107,523		58,062		184,514
Total	$	3,926	$	76,176	$	70,840	$	320,325	$	358,062	$	184,514

The following table contains summary information concerning our indebtedness as of December 31, 2019:

Debt:	Outstanding Principal		Unamortized Debt Issuance Costs			Carrying Amount		Type	Weighted Average Rate	Weighted Average Maturity (in years)
Unsecured credit facility (1)	$	186,302	$	(2,336	)	$	183,966	Floating	3.2%		3.4
Unsecured term loans		300,000		(1,582	)		298,418	Floating	3.1%		4.3
Mortgages		504,876		(1,688	)		503,188	Fixed	3.9%		4.0
Total Debt	$	991,178	$	(5,606	)	$	985,572		3.5%		4.0

(1)

The unsecured credit facility total capacity was $350,000, of which $186,302 was outstanding as of December 31, 2019.

NOTE 5: Derivative Financial Instruments

The following table summarizes the aggregate notional amounts and estimated net fair values of our derivative instruments as of June 30, 2020 and December 31, 2019:

	As of June 30, 2020						As of December 31, 2019
	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	$	—	$	1,421	$	150,000	$	953	$	—
Interest rate collars		250,000		—		15,776		250,000		—		4,330
Forward interest rate swaps		—		—		17,417		—		—		3,439
Total	$	400,000	$	—	$	34,614	$	400,000	$	953	$	7,769

On March 2, 2020 we entered into a forward-starting interest rate swap with a notional value of $150,000 and a strike rate of 0.985%. This forward interest rate swap has an effective date of May 17, 2022 and a maturity date of May 17, 2027. We designated this forward interest rate swap as a cash flow hedge at inception and determined that the hedge is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness.

Effective interest rate swaps and 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 losses of $1,107 and $1,244 to earnings within interest expense for the three and six months ended June 30, 2020, respectively, and we expect $7,046 to be reclassified out of accumulated other comprehensive income to earnings over the next 12 months.

NOTE 6: Stockholders’ Equity and Noncontrolling Interests

Stockholders’ Equity

On March 16, 2020, our board of directors declared a dividend of $0.18 per share on our common stock, which was paid on April 24, 2020 to common stockholders of record as of April 2, 2020.

On June 15, 2020, our board of directors declared a dividend of $0.12 per share on our common stock, which was paid on July 24, 2020 to common stockholders of record as of July 2, 2020.

During the three and six months ended June 30, 2020, we also paid $0 and $161, respectively, of dividends on restricted common share awards that vested during the period.

On February 20, 2020, we entered into an underwriting agreement with KeyBanc Capital Markets Inc. and BMO Capital Markets Corp., as representatives of the several underwriters named therein (collectively, the “Underwriters”), BMO Capital Markets Corp. (the “Forward Seller”), and Bank of Montreal (the “Forward Counterparty”) relating to the offering of an aggregate of 10,350,000 shares of common stock at a price to the Underwriters of $14.688 per share, consisting of 10,350,000 shares of common stock offered by the Forward Seller in connection with the forward sale agreements described below (including 1,350,000 shares offered pursuant to the Underwriter’s option to purchase additional shares, which was exercised in full). We completed the offering on February 24, 2020. We did not initially receive any proceeds from the sale of common stock by the Forward Seller..

In connection with the offering, we also entered into two forward sale agreements. The first forward sale agreement (the “Initial Forward Sale Agreement”), dated February 20, 2020, with the Forward Seller and Forward Counterparty, and the second forward sale agreement (the “Additional Forward Sale Agreement”, together with the Initial Forward Sale Agreement, the “Forward Sale

Agreements”), dated February 20, 2020, with the Forward Seller and the Forward Counterparty. In connection with the Forward Sale Agreements, the Forward Seller or its affiliate borrowed from third parties and sold to the Underwriters an aggregate of 10,350,000 shares of common stock that was sold in the offering. On March 31, 2020, we physically settled $50,000 under the Forward Sale Agreements by issuing 3,406,000 shares. As of June 30, 2020, 6,944,000 shares remain to be settled under the Forward Sale Agreements, which if physically settled would provide additional proceeds to us of $99,790 based on the forward price as of July 26, 2020. We expect to physically settle the balance of the Forward Sale Agreements and receive proceeds from the sale of those shares upon one or more such physical settlements within approximately twelve months from the date of the prospectus, earlier than February 24, 2021, the scheduled maturity date of the Forward Sale Agreements. Although we expect to settle the Forward Sale Agreements entirely by the physical delivery of shares of common stock for cash proceeds, we may also elect to cash or net share settle all or a portion of our obligations under the Forward Sale Agreements, in which case, we may receive or owe cash or shares of common stock from or to the Forward Seller. The Forward Sale Agreements provide for an initial forward sale price of $14.688 per share, subject to certain adjustments pursuant to the terms of each of the Forward Sale Agreements. The Forward Sale Agreements are subject to early termination or settlement under certain circumstances.

We evaluated the accounting for the Forward Sale Agreements under FASB ASC Topic 480 “Distinguishing Liabilities from Equity” and FASB ASC Topic 815 “Derivatives and Hedging”. As the Forward Sale Agreements are considered indexed to our own equity and since they meet the equity classification conditions in ASC 815-40-25, the Forward Sale Agreements have been classified as equity.

Noncontrolling Interest

During the three and six months ended June 30, 2020, holders of IROP units exchanged 82,357 units for 82,357 shares of our common stock. As of June 30, 2020, 789,134 IROP units held by unaffiliated third parties remain outstanding.

On March 16, 2020, our board of directors declared a dividend of $0.18 per unit, which was paid on April 24, 2020 to IROP LP unitholders of record as of April 2, 2020.

On June 15, 2020, our board of directors declared a dividend of $0.12 per unit, which was paid on July 24, 2020 to IROP LP unitholders of record as of July 2, 2020.

NOTE 7: Equity Compensation Plans

Long Term Incentive Plan

In May 2016, our shareholders approved and our board of directors adopted an amended and restated Long Term Incentive Plan (the “Incentive Plan”), which provides for the grants of awards to our 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 (“RSUs”), stock appreciation rights (“SARs”), dividend equivalents and other stock- or cash-based awards. In conjunction with the amendment, the number of shares of common stock issuable under the Incentive Plan was increased to 4,300,000 shares and the term of the incentive plan was extended to May 12, 2026.

Under the Incentive Plan, we have granted restricted shares, RSUs, and PSUs to our employees. These awards generally vest or vested over a two- to four-year period. In addition, we have granted unrestricted shares to our non-employee directors. These awards generally vest or vested immediately.

On January 2, 2020, our compensation committee awarded, to our community-level employees, 71,604 restricted stock awards, valued at $13.86 per share, or $993 in the aggregate. These restricted stock awards vest over a two-year period. On February 4, 2020, our compensation committee awarded, to our non-executive corporate employees, 62,483 restricted stock awards, valued at $14.88 per share, or $930 in the aggregate. These restricted stock awards vest over a three-year period. On March 2, 2020, our compensation committee awarded, to our named executive officers, 67,381 RSUs and 202,145 PSUs. The RSUs vest over a four-year period and were valued at $13.87 per share, or $935 in the aggregate. The number of PSUs earned will be based on attainment of certain performance criteria over a three-year period, with the actual number of shares issuable ranging between 0 and 150% of the number of PSUs granted. Half of any PSUs earned will vest, and shares will be issued in respect thereof, immediately following the end of the three-year performance period; the remaining half of any PSUs earned will vest, and shares will be issued in respect thereof, after an additional one-year period of service. The aggregate grant date fair value of the PSUs was $2,379.

During the three months ended March 31, 2020, a portion of the RSUs and PSUs granted were issued to employees who are retirement eligible. While the terms of the awards still provide for three-to-four years of time vesting, the fact that the grantees are retirement eligible results in immediate recognition of the associated stock-based compensation expense totaling $1,667.

On April 1, 2020, our compensation committee awarded, to our community-level employees an aggregate of 17,804 restricted stock awards, valued at $8.05 per share, or $144 in the aggregate. These restricted stock awards vest over a two-year period. On May 13, 2020, our compensation committee awarded to our non-employee directors an aggregate of 39,685 shares of our common stock, valued at $9.00 per share, or $357 in the aggregate. These awards vested immediately.

NOTE 8: Earnings Per Share

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2020 and 2019:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
Net income	$	799		$	14,856		$	425		$	17,422
Income allocated to noncontrolling interest		(10	)		(147	)		(8	)		(173	)
Net income allocable to common shares		789			14,709			417			17,249
Weighted-average shares outstanding—Basic		94,435,722			89,513,105			92,646,891			89,252,724
Weighted-average shares outstanding—Diluted		95,092,860			90,019,909			93,550,425			89,902,637
Earnings per share—Basic	$	0.01		$	0.16		$ 0.00			$	0.19
Earnings per share—Diluted	$	0.01		$	0.16		$ 0.00			$	0.19

Certain IROP units, unvested shares, and shares deliverable under the Forward Sale Agreements were excluded from the earnings (loss) per share computation because their effect would have been anti-dilutive, totaling 7,785,677 and 7,733,134 for the three and six months ended June 30, 2020, respectively, and 881,107 and 881,107 for the three and six months ended June 30, 2019, respectively.

NOTE 9: Other Disclosures

Risks and Uncertainties

Currently, one of the most significant risks and uncertainties is the duration and scope of the current global COVID-19 pandemic, which has disrupted businesses and slowed economic activity. We have been impacted by the COVID-19 pandemic and, in response, we have made operational and policy changes to: (1) comply with governmental mandates on a jurisdiction by jurisdiction basis; (2) protect our employees, residents, and prospective residents; and (3) minimize the adverse financial impact to us. The extent to which COVID-19 impacts our business, operations and financial results will depend on numerous evolving factors, many of which are not within management’s control, and that we are unable to predict at this time, including but not limited to: (1) the duration and scope of the pandemic; (2) the pandemic’s impact on current and future economic activity; and (3) the actions of governments, businesses and individuals in response to the COVID-19 pandemic.

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.

Factors that might cause actual results to differ materially from our expectations, many of which may be more likely to impact us as a result of the ongoing COVID-19 pandemic, are set forth in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and in other of our public filings with the SEC, among others, and 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 June 30, 2020, we owned and operated 58 multifamily apartment properties that contain 15,805 units. Our properties are located in Georgia, North Carolina, Tennessee, Kentucky, Ohio, Oklahoma, Indiana, Texas, Florida, South Carolina, Missouri, Louisiana, and Alabama. We do not have any foreign operations and our business is not seasonal. Our executive offices are located at 1835 Market Street, Suite 2601, Philadelphia, PA 19103 and our telephone number is (267) 270-4800. We have offices in Philadelphia, Pennsylvania and Chicago, Illinois.

Our Business Objective and Investment Strategies

Our primary business objective is to maximize stockholder value through diligent portfolio management, strong operational performance, and a consistent return of capital through distributions and capital appreciation. Our investment strategy is focused on the following:

•

gaining scale within key amenity rich submarkets of non-gateway cities that offer good school districts, high-quality retail and major employment centers and are unlikely to experience substantial new apartment construction in the foreseeable future;

•

increasing cash flows at our existing apartment properties through prudent property management and strategic renovation projects; and

•

acquiring additional properties that have strong and stable occupancies and support a rise in rental rates or that have the potential for repositioning through capital expenditures or tailored management strategies.

Property Portfolio

As of June 30, 2020, we owned 58 multifamily apartment properties, totaling 15,805 units. Below is a summary of our property portfolio by market.


(Dollars in thousands, except per unit data)	As of June 30, 2020									For the Three Months Ended June 30,
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	$	258,038		95.2	%	$	1,205	$	4,520		14.5	%
Raleigh - Durham, NC		6		1,690		244,526		94.6	%		1,190		4,029		13.0	%
Louisville, KY		6		1,710		199,944		89.1	%		1,022		2,949		9.5	%
Memphis, TN		4		1,383		147,716		92.6	%		1,163		2,953		9.5	%
Columbus, OH		6		1,547		154,876		92.9	%		1,043		2,382		7.7	%
Tampa-St. Petersburg, FL		4		1,104		177,769		91.8	%		1,269		2,152		6.9	%
Oklahoma City, OK		5		1,658		79,096		95.1	%		689		2,104		6.8	%
Dallas, TX		4		985		91,589		95.6	%		1,291		2,077		6.7	%
Indianapolis, IN		4		916		139,650		95.2	%		1,040		1,771		5.7	%
Myrtle Beach, SC - Wilmington, NC		3		628		64,272		93.5	%		1,034		1,228		3.9	%
Charleston, SC		2		518		80,093		92.9	%		1,325		1,160		3.7	%
Orlando, FL		1		297		48,926		96.0	%		1,485		781		2.5	%
Charlotte, NC		1		208		42,229		92.8	%		1,537		660		2.1	%
Asheville, NC		1		252		28,803		97.2	%		1,144		589		1.9	%
Chattanooga, TN		2		295		27,533		97.0	%		998		487		1.6	%
St. Louis, MO		1		152		33,633		90.8	%		1,457		475		1.5	%
Huntsville, AL		1		178		16,515		96.1	%		1,051		398		1.3	%
Baton Rouge, LA		1		264		28,974		87.5	%		922		386		1.2	%
Total/Weighted Average		58		15,805	$	1,864,182		93.5	%	$	1,108	$	31,101		100.0	%

As of June 30, 2020, our same-store portfolio consisted of 54 multifamily apartment properties, totaling 14,748 units. See “Non-GAAP Financial Measures – Same Store Portfolio Net Operating Income” below for our definition of same store and definitions and reconciliations related to our net operating income and net operating income margin.

COVID-19 Pandemic

During the six months ended June 30, 2020, the outbreak of COVID-19 has disrupted businesses and has slowed economic activity. We have been impacted by the COVID-19 pandemic and, in response, have made operational and policy changes to: (1) comply with governmental mandates on a jurisdiction by jurisdiction basis; (2) protect our employees, residents, and prospective residents; and (3) minimize the financial impact to us. The extent to which COVID-19 impacts our business, operations and financial results will depend on numerous evolving factors, many of which are not within management’s control, and that we are unable to predict at this time, including but not limited to: (1) the duration and scope of the pandemic; (2) the pandemic’s impact on current and future economic activity; and (3) the actions of governments, businesses and individuals in response to the COVID-19 pandemic.

Some of the specific operational and policy changes we have made in response to the COVID-19 pandemic include: (1) delaying or canceling capital recycling activity in order to focus on current operations; (2) delaying or canceling capital spending, including pausing or otherwise delaying spending under our value-add program; and (3) working to support residents impacted by COVID-19 while maximizing occupancy and rent collections.

Despite the impact the COVID-19 pandemic has had on our business, we have been able to maintain occupancy and have experienced steady rent collections during the three months ended June 30, 2020. In addition, we have supported residents impacted by COVID-19 by entering into 260 deferred payment plans under which residents deferred $0.4 million of rent payments during the three months ended June 30, 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 growth is slowing.

In February 2020, we purchased a 251-unit located in McKinney, TX for $51.2 million. This acquisition was a part of our previously announced 2019 capital recycling program.

In April 2020, we allowed a previously announced non-binding letter of intent related to the acquisition of three Class A communities in Atlanta, GA to expire, without realizing any financial penalty. This decision provides us with greater financial flexibility given the uncertainties surrounding the COVID-19 pandemic.

Forward Sale Agreements

In connection with the offering, we also entered into two forward sale agreements (collectively, the “Forward Sale Agreements”) with the Forward Seller and the Forward Counterparty. In connection with the Forward Sale Agreements, the Forward Seller or its affiliate borrowed from third parties and sold to the Underwriters an aggregate of 10.4 million shares of common stock that was sold in the offering. On March 31, 2020, we settled $50 million under the Forward Sale Agreements by issuing 3.4 million shares. As of June 30, 2020, 6.9 million shares remain to be settled under the Forward Sale Agreements, which if physically settled would provide additional proceeds to us of $99.8 million based on the forward price as of July 26, 2020. The offering and Forward Sale Agreements provide us with further financial resources and flexibility considering the ongoing COVID-19 pandemic. We expect to physically settle the Forward Sale Agreements and receive proceeds from the sale of those shares upon one or more such physical settlements within approximately twelve months from the date of the prospectus, earlier than February 24, 2021, the scheduled maturity date of the Forward Sale Agreements. Although we expect to settle the Forward Sale Agreements entirely by the physical delivery of shares of common stock for cash proceeds, we may also elect to cash or net share settle all or a portion of our obligations under the Forward Sale Agreements, in which case, we may receive or owe cash or shares of common stock from or to the Forward Seller. The Forward Sale Agreements provide for an initial forward sale price of $14.688 per share, subject to certain adjustments pursuant to the terms of each of the Forward Sale Agreements. The Forward Sale Agreements are subject to early termination or settlement under certain circumstances.

Value Add

Value add initiatives, comprised of renovations and upgrades at selected communities to drive increased rental rates, remain a core component of our longer-term growth strategy. We have identified 7,136 units across 23 properties for renovations and upgrades as part of this initiative. As of June 30, 2020, we had completed renovations and upgrades at 3,252 of the 7,136 units. Given the COVID-19 pandemic, we are actively monitoring the markets where these value add renovations are occurring and have paused or otherwise delayed the volume of renovations where warranted.

Results of Operations

Three Months Ended June 30, 2020 compared to the Three Months Ended June 30, 2019

	SAME STORE PROPERTIES												NON SAME STORE PROPERTIES												CONSOLIDATED
(Dollars in thousands)	Three Months Ended June 30,												Three Months Ended June 30,												Three Months Ended June 30,
	2020			2019			Increase (Decrease)			% Change			2020			2019			Increase (Decrease)			% Change			2020			2019			Increase (Decrease)			% Change
Property Data:
Number of properties	54			54									4			4				-			0.0	%	58			58				-			0.0	%
Number of units		14,748			14,748									1,057			986			71			7.2	%		15,805			15,734			71			0.5	%
Average occupancy		93.0	%		94.2	%		-1.2	%	n/a				92.3	%		96.3	%		-4.0	%	n/a				92.9	%		94.4	%		-1.4	%	n/a
Average effective monthly rent, per unit		1,098			1,056			42			4.0	%		1,252			1,083			169			15.6	%		1,108			1,058			50			4.8	%
Revenue:
Rental and other property revenue	$	48,176		$	47,389		$	787			1.7	%	$	3,911		$	3,459		$	452			13.1	%	$	52,087		$	50,848		$	1,239			2.4	%
Expenses:
Property operating expenses		19,213			18,774			439			2.3	%		1,761			1,298			463			35.7	%		20,974			20,072			902			4.5	%
Net Operating Income	$	28,963		$	28,615		$	348			1.2	%	$	2,150		$	2,161		$	(11	)		-0.5	%	$	31,113		$	30,776		$	337			1.1	%

Other Revenue:
Other revenue																									$	181		$	108		$	73			67.6	%
Corporate and other expenses:
Property management expenses																										2,077			2,062			15			0.7	%
General and administrative expenses																										3,574			3,538			36			1.0	%
Depreciation and amortization expense																										15,231			12,721			2,510			19.7	%
Casualty losses																										411			-			411		nm
Total corporate and other expenses																										21,293			18,321			2,972			16.2	%
Interest expense																										(9,202	)		(9,849	)		647			6.6	%
Gains on sale of assets																										-			12,142			(12,142	)		-100.0	%
Net income																										799			14,856			(14,057	)		-94.6	%
Income allocated to noncontrolling interests																										(10	)		(147	)		137			93.2	%
Net income available to common shares																									$	789		$	14,709		$	(13,920	)		-94.6	%

Revenue

Rental and other property revenue. Revenue from rental and other property revenue of the consolidated portfolio increased $1.3 million to $52.1 million for the three months ended June 30, 2020 from $50.8 million for the three months ended June 30, 2019. The increase was primarily attributable to a $0.8 million increase in same store rental and other property revenue driven by a 4.0% increase in average effective monthly rents compared to the prior year period, which was partially offset by a $0.5 million increase in bad debt compared to the prior year. The increase in bad debt during the three months ended June 30, 2020 was driven by a $0.7 million provision for bad debt that was recorded to reflect management’s estimate of lease receivables that were not probable of collection due to the COVID-19 pandemic’s economic impact on our residents. In addition, there was a $0.5 million increase in non-same store rental and other property revenue primarily driven by our recent property acquisitions having a higher average effective rent per unit and therefore, generating more revenue than recent property dispositions.

Expenses

Property operating expenses. Property operating expenses increased $0.9 million to $21.0 million for the three months ended June 30, 2020 from $20.1 million for the three months ended June 30, 2019. The increase was primarily due to a $0.4 million increase in same store property operating expenses and a $0.5 million increase in the non same store property operating expenses, primarily related to an increase in real estate taxes during the three months ended June 30, 2020.

Property management expenses. Property management expenses remained consistent at $2.1 million for the three months ended June 30, 2020 and 2019.

General and administrative expenses. General and administrative expenses increased $0.1 million to $3.6 million for the three months ended June 30, 2020 from $3.5 million for the three months ended June 30, 2019.

Depreciation and amortization expense. Depreciation and amortization expense increased $2.5 million to $15.2 million for the three months ended June 30, 2020 from $12.7 million for the three months ended June 30, 2019. The increase was primarily attributable to a $1.5 million increase in depreciation expense at our value add properties for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 and $0.8 million in depreciation expense for properties acquired since June 30, 2019.

Interest expense. Interest expense decreased $0.6 million to $9.2 million for the three months ended June 30, 2020 from $9.8 million for the three months ended June 30, 2019. The decrease was primarily due to lower interest rates during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Six Months Ended June 30, 2020 compared to the Six Months Ended June 30, 2019

	SAME STORE PROPERTIES												NON SAME STORE PROPERTIES												CONSOLIDATED
(Dollars in thousands)	For the Six Months Ended June 30,												For the Six Months Ended June 30,												For the Six Months Ended June 30,
	2020			2019			Increase (Decrease)			% Change			2020			2019			Increase (Decrease)			% Change			2020			2019			Increase (Decrease)			% Change
Property Data:
Number of properties	49			49									9				9			-			0.0	%	58				58			-			0.0	%
Number of units		14,748			14,748									1,057			986			71			7.2	%		15,805			15,734			71			0.5	%
Average occupancy		92.8	%		93.5	%		-0.7	%	n/a				91.5	%		95.4	%		-3.9	%	n/a				92.7	%		93.7	%		-0.9	%	n/a
Average effective monthly rent, per unit		1,093			1,047			46			4.4	%		1,255			1,083			172			15.9	%		1,104			1,050			54			5.2	%
Revenue:
Rental and other property revenue	$	96,069		$	93,136		$	2,933			3.1	%	$	7,174		$	7,177		$	(3	)		0.0	%	$	103,243		$	100,313		$	2,930			2.9	%
Expenses:
Property operating expenses		37,651			36,982			669			1.8	%		3,060			2,976			84			2.8	%		40,711			39,958			753			1.9	%
Net Operating Income	$	58,418		$	56,154		$	2,264			4.0	%	$	4,114		$	4,201		$	(87	)		-2.1	%	$	62,532		$	60,355		$	2,177			3.6	%

Other Revenue:
Other revenue																									$	375		$	183		$	192			104.9	%
Corporate and other expenses:
Property management expenses																										4,233			3,875			358			9.2	%
General and administrative expenses																										8,950			6,645			2,305			34.7	%
Depreciation and amortization expense																										30,059			25,168			4,891			19.4	%
Abandoned deal costs																										130			-			130		nm
Casualty losses																										411			-			411		nm
Total corporate and other expenses																										43,783			35,688			8,095			22.7	%
Interest expense																										(18,699	)		(19,570	)		871			4.5	%
Gains on sale of assets																										-			12,142			(12,142	)		-100.0	%
Net income																										425			17,422			(16,997	)		-97.6	%
Income allocated to noncontrolling interests																										(8	)		(173	)		165			95.4	%
Net income available to common shares																									$	417		$	17,249		$	(16,832	)		-97.6	%

Revenue

Rental and other property revenue. Revenue from rental and other property revenue of the consolidated portfolio increased $2.9 million to $103.2 million for the six months ended June 30, 2020 from $100.3 million for the six months ended June 30, 2019. The increase was primarily attributable to a $2.9 million increase in same store rental and other property revenue driven by a 4.5% increase in average effective monthly rents compared to the prior year period. This was partially offset by $0.5 million increase in bad debt compared to the prior year primarily due to a provision for bad debt recorded in the six months ended June 30, 2020.

Expenses

Property operating expenses. Property operating expenses increased $0.7 million to $40.7 million for the six months ended June 30, 2020 from $40.0 million for the six months ended June 30, 2019. The increase was primarily due to a $0.6 million increase in the same store property operating expenses, primarily related to an increase in real estate taxes, utilities, contract services, and personnel costs during the six months ended June 30, 2020. This was partially offset by lower repairs and maintenance costs during the six months ended June 30, 2020.

Property management expenses. Property management expenses increased $0.3 million to $4.2 million for the six months ended June 30, 2020 from $3.9 million for the six months ended June 30, 2019. This increase was primarily due to an increase in

personnel costs as the size of our property management team has grown to support our management platform.

General and administrative expenses. General and administrative expenses increased $2.4 million to $9.0 million for the six months ended June 30, 2020 from $6.6 million for the six months ended June 30, 2019. This increase was primarily due to $1.7 million in stock based compensation recognized during the six months ended June 30, 2020 related to performance share units and restricted stock units granted to employees who are retirement eligible.

Depreciation and amortization expense. Depreciation and amortization expense increased $4.9 million to $30.1 million for the six months ended June 30, 2020 from $25.2 million for the six months ended June 30, 2019. The increase was primarily attributable to a $3.1 million increase in depreciation expense at our value add properties for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 and $1.4 million in depreciation expense for properties acquired since June 30, 2019.

Interest expense. Interest expense decreased $0.9 million to $18.7 million for the six months ended June 30, 2020 from $19.6 million for the six months ended June 30, 2019. The decrease was primarily due to lower interest rates during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

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 additional appropriate measures of the operating performance of a REIT and IRT in particular.

We compute 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. CFFO is a computation made by analysts and investors to measure a real estate company’s operating performance by removing the effect of items that do not reflect ongoing property operations, including stock compensation expense, depreciation and amortization of other items not included in FFO, amortization of deferred financing costs, and other non-cash or non-operating gains or losses related to items such as casualty losses and abandoned deal costs.

Our calculation of CFFO differs from the methodology used for calculating CFFO by certain other REITs and, accordingly, our CFFO may not be comparable to CFFO reported by other REITs. Our management utilizes FFO and CFFO as measures of our operating performance, and believes 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 but may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, CFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we believe that FFO and CFFO provide investors with additional useful measures to compare our financial performance to certain other REITs. Neither FFO nor CFFO is equivalent to net income or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO and CFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. 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 six months ended June 30, 2020 and 2019 (in thousands, except share and per share information):

	For the Three Months Ended June 30, 2020				For the Three Months Ended June 30, 2019
	Amount		Per Share (1)		Amount			Per Share (2)
Funds From Operations (FFO):
Net income (loss)	$	799	$	0.01	$	14,856		$	0.16
Adjustments:
Real estate depreciation and amortization		15,156		0.16		12,675			0.14
Net (gains) losses on sale of assets excluding debt extinguishment costs		—		—		(14,171	)		(0.15	)
FFO	$	15,955	$	0.17	$	13,360		$	0.15
Core Funds From Operations (CFFO):
FFO	$	15,955	$	0.17	$	13,360		$	0.15
Adjustments:
Stock compensation expense		1,233		0.02		1,086			0.02
Amortization of deferred financing costs		362		—		362			—
Other depreciation and amortization		75		—		46			—
Casualty losses		411		—		—			—
Defeasance costs included in net gains (losses) on sale of assets		—		—		2,029			0.02
CFFO	$	18,036	$	0.19	$	16,883		$	0.19

	For the Six Months Ended June 30, 2020				For the Six Months Ended June 30, 2019
	Amount		Per Share (1)		Amount			Per Share (2)
Funds From Operations (FFO):
Net income (loss)	$	425	$ 0.00		$	17,422		$	0.19
Adjustments:
Real estate depreciation and amortization		29,881		0.32		24,993			0.28
Net (gains) losses on sale of assets excluding debt extinguishment costs		—		—		(14,171	)		(0.16	)
FFO	$	30,306	$	0.32	$	28,244		$	0.31
Core Funds From Operations (CFFO):
FFO	$	30,306	$	0.32	$	28,244		$	0.31
Adjustments:
Stock compensation expense		3,860		0.05		1,708			0.02
Amortization of deferred financing costs		723		0.01		701			0.01
Other depreciation and amortization		178		—		175			—
Abandoned deal costs		130		—		—			—
Casualty losses		411		—		—			—
Defeasance costs included in net gains (losses) on sale of assets		—		—		2,029			0.02
CFFO	$	35,608	$	0.38	$	32,857		$	0.36

(1)

Based on 95,224,855 and 93,462,270 weighted-average shares and units outstanding for the three and six months ended June 30, 2020, respectively.

(2)

Based on 90,394,212 and 90,133,830 weighted-average shares and units outstanding for the three and six months ended June 30, 2019, respectively.

Same Store Portfolio Net Operating Income

We believe that Net Operating Income (“NOI”), a non-GAAP financial measure, is a useful supplemental measure of its operating performance. We define NOI as total property revenues less total property operating expenses, excluding interest expenses, depreciation and amortization, 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 GAAP operating income or net income insofar as the measure reflects only operating income and expense at the property level. We use NOI to evaluate 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 measure of our financial performance.

We review our same store 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 are held-for-sale or have been sold 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 six months ended June 30, 2020 and 2019 (in thousands, except per unit data):

	Three Months Ended June 30, (a)									Six Months Ended June 30, (a)
	2020			2019			% change			2020			2019			% change
Revenue:
Rental and other property revenue	$	48,176		$	47,389			1.7	%	$	96,069		$	93,136			3.1	%
Property Operating Expenses
Real estate taxes		6,261			5,937			5.5	%		12,182			12,028			1.3	%
Property insurance		1,097			963			13.9	%		2,014			1,916			5.1	%
Personnel expenses		4,658			4,512			3.2	%		9,043			8,820			2.5	%
Utilities		2,555			2,451			4.2	%		5,321			5,028			5.8	%
Repairs and maintenance		1,697			1,955			-13.2	%		3,197			3,454			-7.4	%
Contract services		1,969			1,782			10.5	%		3,720			3,434			8.3	%
Advertising expenses		485			522			-7.1	%		1,020			986			3.4	%
Other expenses		491			652			-24.7	%		1,154			1,316			-12.3	%
Total property operating expenses		19,213			18,774			2.3	%		37,651			36,982			1.8	%
Net operating income	$	28,963		$	28,615			1.2	%	$	58,418		$	56,154			4.0	%
NOI Margin		60.1	%		60.4	%		-0.3	%		60.8	%		60.3	%		0.5	%
Average Occupancy		93.0	%		94.2	%		-1.2	%		92.8	%		93.5	%		-0.7	%
Average effective monthly rent, per unit	$	1,098		$	1,056			4.0	%	$	1,093		$	1,047			4.4	%
Reconciliation of Same-Store Net Operating Income to Net Income (Loss)
Same-store portfolio net operating income (a)	$	28,963		$	28,615					$	58,418		$	56,154
Non same-store net operating income		2,150			2,161						4,114			4,201
Other revenue		181			108						375			183
Property management expenses		(2,077	)		(2,062	)					(4,233	)		(3,875	)
General and administrative expenses		(3,574	)		(3,538	)					(8,950	)		(6,645	)
Depreciation and amortization		(15,231	)		(12,721	)					(30,059	)		(25,168	)
Abandoned deal costs		—			—						(130	)		—
Casualty losses		(411	)		—						(411	)		—
Interest expense		(9,202	)		(9,849	)					(18,699	)		(19,570	)
Net gains (losses) on sale of assets		—			12,142						—			12,142
Net income (loss)	$	799		$	14,856					$	425		$	17,422

(a)

Same store portfolio for the three and six months ended June 30, 2020 and 2019 included 54 properties containing 14,748 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 to continue our value add initiatives to improve the quality and performance of our properties;

•

repay our indebtedness;

•

fund costs 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 equivalents of $11.7 million as of June 30, 2020;

•

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 we expect to issue in settlement of our forward sale agreement.

Cash Flows

As of June 30, 2020 and 2019, we maintained cash and cash equivalents, and restricted cash of approximately $18.2 million and $18.8 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Six Months Ended June 30,
	2020			2019
Cash flow from operating activities	$	34,339		$	36,100
Cash flow from investing activities		(67,688	)		(28,152	)
Cash flow from financing activities		37,077			(5,153	)
Net change in cash and cash equivalents, and restricted cash		3,728			2,795
Cash and cash equivalents, and restricted cash, beginning of period		14,433			16,045
Cash and cash equivalents, and restricted cash, end of the period	$	18,161		$	18,840

Our cash inflows from operating activities during the six months ended June 30, 2020 and 2019 were primarily driven by ongoing operations of our properties.

Our cash outflows from investing activities during the six months ended June 30, 2020 were primarily due to one property acquisition and capital expenditures. Our cash outflows from investing activities during the six months ended June 30, 2019 were primarily due to one property acquisition and capital expenditures partially offset by one property disposition.

Our cash inflows from financing activities during the six months ended June 30, 2020 were primarily due to $65.5 million of draws on our unsecured credit facility and a $50.0 million settlement on our forward sale agreements, partially offset by the payment of dividends on our common stock and distributions on noncontrolling interests and $39.0 million of repayments on our unsecured credit facility. Our cash outflows from financing activities during the six months ended June 30, 2019 were primarily due to repayments of our unsecured credit facility, payment of dividends on our common stock, and distributions on noncontrolling interests, partially offset by draws on our unsecured credit facility.

Contractual Commitments

Our Annual Report on Form 10-K for the year ended December 31, 2019 filed on February 18, 2020, includes a table of contractual commitments. There were no material changes to these commitments since the filing of our Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements during the six months ended June 30, 2020 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 2019 Annual Report on Form 10-K contains a discussion of our critical accounting policies. Management discusses our critical accounting policies and management’s judgments and estimates with the audit committee of our board of directors. There were no material changes to our critical accounting policies sine the filing of our Annual Report on form 10-K.

Item 3.

Qualitative and Quantitative Disclosure About Market Risk.

Our 2019 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 six months ended June 30, 2020 from the disclosures included in our 2019 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 June 30, 2020, 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 June 30, 2020 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 disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by the risk factor in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

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.

None.

Item 6.

Exhibits.

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


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		iXBRL (Inline eXtensible Business Reporting Language). The following materials, formatted in iXBRL: (i) Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019, (iii) Consolidated Statement of Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019, (iv) Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2020 and 2019, (v) Consolidated Statements of Cash Flows for the six months June 30, 2020 and 2019 and (vi) notes to the consolidated financial statements as of June 30, 2020.

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

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: July 30, 2020	By:	/s/ Scott f. Schaeffer
		Scott F. Schaeffer
		Chairman of the Board and Chief Executive Officer
		(Principal Executive Officer)

Date: July 30, 2020	By:	/s/ James J. Sebra
		James J. Sebra
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

Date: July 30, 2020	By:	/s/ Jason R. Delozier
		Jason R. Delozier
		Chief Accounting Officer
		(Principal Accounting Officer)