Independence Realty Trust Inc (IRT) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth-quarter 2013 Independence Realty Trust Inc. earnings conference call. My name is Chantalay, and I will be your facilitator for today's call. At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Andres Viroslav. Please proceed, sir.

Thank you, operator, and good morning to everyone. Thank you for joining us today to review Independence Realty Trust's fourth-quarter and fiscal 2013 financial results. On the call with me today are Scott Schaeffer, IRT Chief Executive Officer; Jim Sebra, IRT Chief Financial Officer; and Farrell Ender, President of Independence Realty Advisors.

This morning's call is being webcast on our website at www.irtreit.com. There will be a replay of the call available via webcast on our website and telephonically beginning at approximately 1 PM Eastern time today. The dial in for the replay is 888-286-8010 with a confirmation code of 92995354.

Before I turn the call over to Scott, I would like to remind everyone that there may be forward-looking statements made in this call. These forward-looking statements reflect IRT's current views with respect to future events and financial performance. Actual results could differ substantially and materially from what IRT has projected. Such statements are made in good faith pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act 1995. Please refer to IRT's press release and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations.

Participants may discuss non-GAAP financial measures in this call. A copy of IRT's press release containing financial information, other statistical information, and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure is attached to IRT's most recent current report on Form 8-K available at IRT's website, www.irtreit.com under investor relations. IRT's other SEC filings are also available through this link. IRT does not undertake to update forward-looking statements in this call or with respect to matters described herein except as may be required by law.

Now, I would like to turn the call over to IRT Chief Executive Officer Scott Schaeffer. Scott?

Thanks Andres. And thank you all for joining our call today. I'd like to start with the financial highlights of 2013 as compared to 2012. Total revenues for the quarter grew 29% to $5.8 million. Operating income for the quarter increased 44% to $1.3 million. Core funds from operations per share increased 11% to $0.20 for the fourth quarter.

During the fourth quarter we acquired a property in Jackson, Mississippi and subsequently to quarter end we acquired a property in Illinois. In addition, we expect to close the Oklahoma City portfolio acquisition shortly. Subsequent to year-end, we raised $67 million through the sale of 8 million shares of common stock to close on properties we have under contract and also to fund our pipeline of opportunities.

We continue to see solid opportunities to purchase stable apartment properties in submarkets with strong rental demand and limited additions to supply which result in the potential for rent increases and improved operating efficiencies. The financing for these properties also remains very favorable.

As a result of these our progress and performance of the portfolio, IRT's Board announced monthly dividend increase to $0.06 or $0.18 per quarter for the first quarter of 2014, a 12.5% increase from the prior monthly dividend rate. At this point, I'd like to turn the call over to Jim Sebra to go through the financial numbers. Jim?

Thanks Scott. During Q4 2013 core FFO was $0.20 per share, up from $0.18 per share in Q4 2012. Note that our weighted average shares outstanding were 9.6 million shares this quarter as compared to a fully diluted 5.6 million shares in Q4 of 2012. This increase is due entirely to the 4 million shares we issued in our August public offering. Earnings-per-share was $0.03 this quarter up from the $0.01 loss per share during the Q4 2012.

For 2013, core FFO was $0.81, a 14% increase from $0.71 in 2012 on a higher weighted average shares. We reported GAAP earnings per share of $0.12, up from a loss of $0.02 per share in 2012.

A few items of note on the annual income statement. Revenue was up $3.3 million in 2013 as compared to 2012. This increase breaks down into $2.8 million of revenue from additional properties that were acquired in 2013 or present for a full year in 2013 as compared to 2012 and $500,000 of additional revenue from improved occupancies and increases in rental rates during 2013.

Property operating expenses increased $1.4 million in 2013 as compared to 2012. This increase breaks down into $1.2 million from new properties in 2013 as compared to 2012 and $100,000 from increased expenses for real estate taxes, utilities, and property insurance. As a result property NOI was $10.5 million for the year, up 23% or $2.0 million compared to 2012.

Occupancy of same-store properties was 93.9% at year-end compared to 91.7% at December 31, 2012. The average rental rate from same-store properties was $779 per unit per month in the fourth quarter as compared to $765 per unit per month during Q4 last year.

Our Heritage Trace asset continues to improve after the floods last year reduced occupancy for the first half of 2013. In order to accelerate occupancy growth at this asset we reduced our asking rents until occupancy returns way more stabilized level.

Excluding Heritage Trace, rental rates increased 4% in our same-store assets since Q4 of 2012. Other expenses including G&A are down primarily due to the movement of our transfer agent from DST to American stock transfer in May of 2013. Interest expense increased by $354,000 year to year due to the $10 million of agency financing we used to purchase Runaway Bay in October of last year. The annual coupon of that debt is approximately 3.6%.

On the balance sheet, our leverage was 52% at December 31, 2013, based on debt to gross assets. In August 2013, we raised $34 million to our initial listing of IRT on the New York Stock Exchange MKT and promptly deployed the majority of those proceeds into two properties. Berkshire Square in September 2013 and The Crossings asset in November 2013. Berkshire Square is a 354-unit apartment property located in Indianapolis that was purchased for $13.25 million. The Crossings is a 432-unit apartment property located in Jackson, Mississippi that was purchased for $23 million.

During Q4 2013, we closed a $20 million acquisition line of credit with Huntington National Bank. At year-end we had $2.5 million outstanding under this line of credit. In addition we financed Berkshire Square with $8.6 million of permanent financing at year end. This new first mortgage has a term of seven years and bears interest at 4.4%.

In January 2014, IRT accessed the capital markets for a second time issuing 8 million common shares and raising gross proceeds of approximately $67 million. $29 million of these proceeds were used in late January to acquire a 370-unit apartment property in Waukegan, Illinois. Lastly, IRT is paying its common dividend monthly at a quarterly rate of $0.18 per quarter. Scott, this concludes the financial review.

Thank you, Jim. And at this time, I'd like Farrell to discuss IRT's acquisition strategy and pipeline. Farrell?

Thanks, Scott. We continue to make progress growing the portfolio by acquiring well-located assets in secondary markets. In the fourth quarter, we closed on one asset. Subsequently in January we closed on an additional asset and are under contract or in contract negotiations to acquire eight properties representing 2150 units, all of which we expect to close in the next 45 days. Once these acquisitions close, IRT is portfolio will be approximately $350 million consisting of 19 apartment communities and 5300 units.

In November 2013, we closed on The Crossings, a 432-unit property located in Jackson, Mississippi for $23 million and a going in cap of 7.5%. In late January, we closed on the Reserve at Eagle Ridge, a 370-unit apartment complex located 45 minutes north of Chicago. The purchase price for Eagle Ridge is $29 million and had a going in cap rate of 7.1%. We financed Eagle Ridge with a 10-year loan at [4.67%] interest rate. The asset was sourced by RAIT Residential as they managed the property for the previous owner.

As Scott mentioned, we expect to close the Oklahoma City portfolio this week. The portfolio contains five properties totaling 1600 units. The purchase price is $65 million and we will assume $45 million of existing debt requiring $20 million of equity.

This week we also expect to go under contract on a property in Creve Coeur, Missouri, a suburb of St. Louis. The property is in midrise apartment community with 152 apartment units and 10,000 square feet of retail space. We are buying the properties for $32.7 million and assuming $21 million of existing debt that is nine years remaining at a 3.96% interest rate. The asset will provide in excess of a 10% cash on cash return, and we expect to close in the middle of March.

St. Louis is a market we expect to grow. It has a population of 3 million people and apartment inventory of 135,000 units; contains four universities with 40,000 students, a diverse economy that includes healthcare manufacturing. The market has had very few units added and no meaningful amount of new supplies expected. The overall vacancy rate in this market is less than 5%.

We are also in the process of finalizing purchase and sale agreements on two properties totaling 338 units with a combined $38 million purchase price located in Ridgeland, Mississippi, a suburb north of Jackson. These two acquisitions, combined with The Crossings property we already own will create a small region for us and will benefit from the combined operating efficiencies. We expect these acquisitions to close within 45 days.

Lastly in regards to the pipeline we are constantly looking at our target markets and underwriting potential acquisition opportunities. The pipeline currently stands at nine properties, the total acquisition cost of $175 million containing 2000 units. The properties are in various stages of underwriting and due diligence.

Many of these opportunities are sourced through our external manager RAIT Financial Trust existing relationship platform, which is proving to give IRT unique access to transactions. Additionally, our property manager RAIT Residential is proving to be a good source of deal flow as they have an extensive relationship network in 17 states which they manage properties. Scott, back to you.

Thank you, Farrell. At this point, operator I'd like to open the call up for questions.

(Operator Instructions). Brian Hogan, William Blair.

I'm going to start with a question on competition in your target markets. You know the St. Louis deal, the Mississippi deal, Oklahoma -- just in your target markets, give us a feel of what the competition is.

I mean it's generally [each of the four] your local operators to have a couple of thousand units. We feel we are -- given our size and the external management and resources we have with RAIT Residential and RAIT that we are able to compete on a higher level and underwrite the deals significant cost savings that we generate from that platform.

We have not (multiple speakers) a lot of competition at this point, Brian.

You have not you said?

We have not seen a lot of competition in these markets. Again any organized competition. And the Oklahoma City deal and the Illinois deal, again, were sourced off market. They weren't -- the seller didn't hire a broker and put out the properties to bid. We were able to do that off market just from relationships that we've had here at a RAIT and we expect to do a lot more of that. St. Louis was a deal that was marketed. We felt that we identified some operating efficiencies and were able to come to terms because of that to come to terms with the seller at a number that works for both of us.

What have you seen in terms of like cap rates/pricing, if you will?

It's relatively unchanged since the last call. Rates have been -- interest rates have been steady so, we are really -- we are able to see the same cap rates we identified, 7-plus. In some cases like St. Louis we might go a little bit lower because of quality asset, but the debt that's in place in St. Louis made it attractive.

We are still seeing the 6.75 to 7 to 7.25.

And I know this is going to vary by market, but can you give me a sense and a feel of where we are at in the cycle in terms of rental rates and occupancy rates? Is there a point where you can still push rental rates and still maintain occupancy? Or is it getting the point where rental rates have to level off and we should -- with that should we still assume 3% increases in rental rates on an annual basis, or is it 1%?

I would assume 4% on an annual basis. I think the markets that we are targeting, again, are areas where there is no new or very limited additions to new supply being added. That's one of the things that we like and we look for, and as far as occupancies go, occupancies are -- they are pretty strong and I would say mid 90s is full occupancy. You don't want to be higher than that. And again, one of the things that we do is that we subscribed to the LRO service which allows us to manage our rental rates relative to the occupancies and to make sure that we are getting the highest possible rate relative to the demand for that unit in the market at that time.

So, we are happy with occupancies where they are. We do believe, however, that in these markets that we still have another year maybe two of 4% or so year-over-year rental increases, and it will -- it may drop a little bit down from there, but these are markets again with no new additions to supply. They are properties and markets that have strong occupancies. So there's no really -- there is no place for these tenants to go to other than to buy a house, and that's not as easy as it was years ago. And at the same time, you have growing population and growing employment. So the dynamics are there for continued rental increases over at least the next year or two.

All right. Thank you.

Wilkes Graham, Compass Point.

I have a number of questions. Some of these are pretty easy I think. I just want to clarify for myself some of the things that you said. I've got the eight properties under contract. That obviously includes the five in Oklahoma City. And then you mentioned the other three. Did you mentioned a cap rate on those three new assets?

No, I did not. The St. Louis property is in the low 6's, but that's a product of the existing debt that's in place. It's up 4%. The two in Jackson are going to be around 7.25%.

And those are nominal cap rates, right? Before CapEx?

Yes.

Okay. Do you have -- how much CapEx you spent during the quarter? Fourth quarter?

Jim has that number.

Sure. The CapEx for the quarter was about $315,000 broken down into about $200,000 for what we call recurring and about $100,000 of nonrecurring.

Okay. And do you have the incentive fee?

I don't have that handy in front of me, but it was relatively nominal. It wasn't huge. I can call you with it later.

Okay. The -- just to clarify you said same-store rents were up 4% year over year?

Yes.

Do you have the NOI number?

Jim?

Give me one second. NOI growth year over year was just over 6% for the same-store portfolio. 6.3% actually.

6.3%. Okay, great. Okay. And the -- you mentioned the St. Louis asset. The $38 million, the two extra assets. Did you say where those were?

They are in Ridgeland, which is a suburb north of Jackson. So, you're going to (technical difficulty) with The Crossings, you've got a nice 700-unit portfolio there.

Okay. And do you then just have any general comments about particular markets where you're seeing more acquisition opportunities?

They are coming from the markets that we are in. I mean that's where Jackson came from because we're there. So we are seeing -- the deals that we are closing deals -- the locations where we are closing deals, we're obviously seeing opportunity. But now that we are out -- we are in the CB network. We are in the HSS network, all of our mortgage vectors that we've dealt with. I mean we are seeing deals from all over the place to be quite honest with you. And we're just trying to just pick off the best opportunities we see.

Okay. Last question. Can you give us a sense for where maybe Fannie and Freddie pricing on a single multifamily asset has gone from maybe -- it seems to me last summer it was somewhere around 200 bps over the seven year which came out to maybe as high as 4.5%, but I'm just curious if that's come down and where that is now.

Yes, well, debt right now is extremely attractive. It's a product of it just being the beginning of the year as well. Freddie on that product that you just talked about, a seven-year loan is probably 185 over now. With a seven-year treasury at 215, yes, you're right around 4%. We are also seeing a lot of like companies being aggressive as well. So they will be pricing -- if they like your asset, they are a lot more selective than Freddie or Fannie, they are pricing anywhere from 130 on a high quality asset to 160 over a seven-year, so you're seeing sub-4% interest rates now.

Great. Okay. Thank you very much.

Dan Donlan, Ladenburg Thalmann.

Jim, just going back to the comment on the incentive fee, is that roped into the G&A expense for the quarter?

It is. That's why -- I don't have it handy, and I will get it for you. I'll send it around.

Okay. All right. And then, as far as the dividend is concerned, was kind of curious as to why you guys raised the dividend for the first quarter. I think the stock is -- the current yield is 8.5%. The average apartment REIT is 3.5%. I'm not necessarily sure you're being compensated for paying a larger dividend. Why not just retain the cash and use it towards acquisitions?

Well, this is Scott, Dan. First of all, the amount of cash in dollar terms that you're speaking about is relatively minor. So to retain that for acquisitions really wouldn't amount to much. So as we grow the Company, we were going to need additional capital anyway regardless of whether we raised the dividend or not. And the reason that the Board agreed to raise it was because they looked at the pipeline, they looked at the cap rates and versus the financing cost and felt that the Company's cash flow was increasing quarter over quarter at a level which warranted an increase in dividend.

Again, we are a REIT. We're going to pay out a majority of our cash. As the company grows, I think you may see us dial back the percentage of the amount of cash that we are paying out to a more standard level, but at this point in the early stages, the Board felt it was more important to distribute out the cash flow that we are generating. And it has been increasing and is projected to continue to increase, the cash flow, that is.

Right, right. I guess I'm kind of curious as to -- and I hear you on how small of a number it is. I'm just kind of curious as to how you're going to look at it on a going forward basis. And I won't speak to the validity of my model, but it looks like -- when you look at the dividend on a going forward basis, do you look at it more on your operating cash flow or CAD, so including principal amortization as well as all CapEx? Or do you look at it more on kind of an FFO percentage number, because obviously as a REIT the last thing you want to do is reduce the dividend? So, just kind of curious how you are thinking about that as we look out a year or two or three years from now.

We are looking at it on a percentage of core FFO. And I agree with you. We never want to be in a position where we are going to be reducing the dividend, but you have to remember that, again, we are in this growth mode where we are acquiring properties that are very accretive, notwithstanding the cost of the capital. They are accretive to that capital. So we have a growing cash flow at this point.

Okay. And then, as far as -- as you are looking at acquisitions, I know you mentioned that you acquired an asset at a low 6 cap and the reason it was low is because the debt on that property was lower. Do you expect though that that asset is going to have a higher growth rate though than some of the ones that you are acquiring in the low 7 cap range?

We expect it to have similar growth. At the same time when we said a low 6's cap rate, that's based upon the cash flow, the trailing cash flow, and we think that we've identified some operating efficiencies that over the course of the first year that that cap rate based on our operations would be higher. You put that -- you combine that with, again, a debt cost that is lower than what the market was at that time. The market may have come back to that now a little bit. But it's still generating north of 10% cash-on-cash return going in. So, we do expect that to -- and we expect that to grow, so it does fit within the model that we've laid out.

Okay. And then, the other thing going back to your property manager asset managing so many different properties, can you maybe talk about how that's impacting your ability to purchase assets you believe -- I mean what does that give you versus somebody that only manages 20 properties? What's the scale that you have there from an operating expense savings?

I'm not sure I got that question completely, but we have a wide reach through our property manager. We are in many different markets and dealing not only with properties that we own or control but also managing third-party properties. So there is an enormous amount of opportunity that comes from those relationships. You know, the Illinois property, for example, is one that we had managed for a third-party for years. They decided they wanted to sell it. We were able to just talk with them amongst ourselves and come to an agreement and buy it. Those are opportunities that a typical company without those relationships wouldn't see.

But as far as the operating efficiencies, we think that, again, managing -- I think we're up to 13,000 units give or take now at RAIT Residential. There are benefits from size. Utility contracts, cable contracts are basically on a national basis. As you know now, Comcast basically controls the whole country. So as we go in to negotiate cable and Internet contracts with the provider, we have a relationship with them. We are big provider of business to them. It gives us an advantage. The same thing with trash removal, waste management. You're dealing with the same company in many different markets. You're not just going in and negotiating a one-off transaction.

So we've talked about this where we actually have a person on staff here whose sole job it is when we acquire properties is to go in and renegotiate all of these contracts. And what we found is, there is enormous savings associated with that effort. One example is in the Oklahoma City portfolio, we have a blanket policy here, insurance policy that covers north of $1 billion worth of real estate assets. That Oklahoma City five-property portfolio was insured by itself. When we roll it into our policy, it's already been priced. It's going to stay at $0.5 million a year. So, that happens over and over again and before you know it, it adds up to real money.

Right. No, I butchered the question, but you answered very well. That's it for me. Thank you.

[Doug Rice], TSW Investment.

I was wondering if you could speak a little more generally about how you look at your all-in cost of capital? I recognize that your financing rates are low, but the cost of equity capital looks pretty high here and whether there is a sort of minimum cap rate threshold at which point you say as much as we want to grow we are going to wait until the equity is more fairly valued?

Well, the cost of our capital right now is our dividend rate because all we have other than the property level debt is common shares outstanding. So having said that, we are looking at net cost of capital over time. We would like it to be lower, but it's a factor of the size of the company. And we do expect that as the company grows and the portfolio becomes larger and more diverse that there would -- the market would view it as being somewhat safer and reduce the cost associated with that equity capital. Having said that, when we put the acquisitions at the cap rates that are available to us in the model with the debt, we are actually still doing accretive acquisitions even with the higher cost of capital so that's part of the opportunity as we see it. We grow the portfolio in a way that's accretive to even to the high cost of capital today, and as that cost comes down, there's real growth potential within the shares.

I guess my follow-up would be, is there kind of a sweet spot in terms of portfolio size where you think -- where you envision getting more of a market multiple?

I'm sure there is, but at this point we haven't really thought about it that way. We are so small relative to the other multifamily REITs out there that we just know that we need to grow the Company from where it is at and do that for some time, and that's our plan. There are lots of opportunities out there, and we just want to take advantage of them in every instance.

Okay. Thanks.

At this time there are no additional questions in the audio queue. And I would like to turn the conference back over to Mr. Scott Schaeffer for closing remarks. Please proceed, sir.

Well, thank you for joining us today, and we look forward to speaking with you next quarter. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.