Independence Realty Trust Inc (IRT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2014 Independence Realty Trust earnings conference call. My name is Matthew, and I will be your operator for today. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Mr. Andres Viroslav. Please proceed, sir.

Thank you, Matthew, and good morning to everyone. Thank you for joining us today to review Independence Realty Trust's first-quarter 2014 financial results. On the call with me today are Scott Schaeffer, IRT's Chief Executive Officer; Jim Sebra, IRT's 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 1:00 PM Eastern Time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 43302304.

Before I turn the call over to Scott, I'd 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 of 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 reports on Form 8-K available at IRT's website 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's Chief Executive Officer, Scott Schaeffer. Scott?

Thanks, Andres, and good morning, everyone. Thank you for joining us today. The first quarter for RAIT was very active. We raised $67 million through a secondary offering of 8 million shares of common stock. And we acquired seven properties, one each in Illinois and Missouri and five properties in Oklahoma City. In addition, we closed on a 202-unit property yesterday, which then fully deploys the January capital raise. We also have two more properties under contract, with closings expected within the next 45 days.

We continue to see solid opportunities to purchase stable apartment properties in submarkets with strong rental demand and limited additions to supply. The US Census Bureau recently reported that homeownership is at its lowest point since the mid-1990s, at 64.8% of American families as compared to a peak of 68.9% back in 2006.

These dynamics, when coupled with population growth and limited additions to supply, support continuing rent increases; and with improved operating efficiencies, results in increasing operating income. The current low interest rate environment also results in favorable long-term fixed-rate financing.

As a result of the performance of the portfolio, IRT's Board increased the monthly dividend amount for the first quarter and maintained the monthly dividend rate of $0.06 per month or $0.18 per quarter for the second quarter of 2014.

At this point I would like to turn the call over to Jim Sebra to go through the numbers.

Thanks, Scott. During Q1 2014, core FFO was $0.17 per share or $2.6 million, up 100% from $1.3 million in Q1 2013. We are reporting GAAP earnings of $2.9 million or $0.19 per share for the first quarter of 2014.

Revenue was up $3.4 million in Q1 this year as compared with Q1 last year. This increase breaks down into about $[3].3 million of revenue from additional properties in 2014 as compared to last year, with the remaining increase from improved occupancies and increases in rental rates during the first quarter of this year.

On a same-store basis, rental revenue was up 3.4% in Q1 this year as compared to Q1 of last year. Property operating expenses are up $1.8 million in 2014 as compared to 2013. This increase breaks down into about $1.5 million attributed to new properties that we acquired subsequent to the first quarter of last year, with the remaining increase primarily due to one-time real estate tax catch-ups for 2013, increased utilities, and snow removal costs resulting from the severe weather in the first quarter of 2014.

Occupancy at our same-store properties was 95% at quarter end, with a weighted average rental rate of $795 per unit per month. Interest expense increased $411,000 quarter to quarter due to $94.5 million of new financing obtained or assumed to finance the purchase of nine properties since first quarter of last year, totaling $163 million.

Onto the balance sheet: our leverage was 54% at quarter-end based on debt to gross assets. In January 2014 we completed 8 million common share offering and raised net proceeds of $63 million.

During the first quarter of 2014 we acquired seven properties in three separate transactions for an aggregate value of $126.7 million. We financed these transactions with $18.9 million of new financing and $67 million of the same financing on six properties.

With regards to the Oklahoma City portfolio of five properties, we acquired that portfolio at a discount to the market value of the properties, as the debt assumed is high-cost debt, at 5.6% fee for the remaining two-year term. In accordance with GAAP, we recorded the assets we acquired and the liabilities assumed at their fair values and recorded a net gain of $2.9 million.

That gain is recorded in GAAP net income but removed from our definition of core FFO as reported. Additional disclosure of this transaction is included in our Form 10-Q, to be filed shortly.

Scott, this concludes the financial review.

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

Thanks, Scott. It was a busy quarter for us. In January we closed on the Reserve at Eagle Ridge in Waukegan, Illinois, a suburb north of Chicago, for $29 million. The asset is a standard garden-style community containing 370 units and was managed by RAIT Residential for the previous owner.

We purchased the property at a 7% cap rate and financed it with a 65% loan-to-purchase price. The loan is fixed at 4.67% for 10 years, with interest-only payments for the duration of the loan. We expect the property to generate an 11% return on investment in its first year.

In February we closed on our Oklahoma portfolio. This is a market we targeted, and we were able to source and purchase five properties totaling 1,658 units, giving IRT scale in this market. We purchased the portfolio direct from the owner for $65 million and assumed approximately $45 million of existing debt, with an interest rate of 5.62% and a maturity of April 2016.

The cap rate on the portfolio of 8.65% was skewed due to the higher-than-market interest rate on the existing debt. Based on these parameters, the portfolio is generating more than a 10% return on equity.

In March we closed on King's Landing, a mid-rise property located in Creve Coeur, a suburb outside of St. Louis. The property contains 152 units and over 10,000 square feet of retail space. We acquired the property for $32.7 million and assumed a $21.2 million loan that bears interest at 3.96% and matures in June of 2022. The purchase price equates to a 6.2% cap rate, yielding a 10% return on equity.

Yesterday we closed on our first UPREIT transaction. The property, located in Little Rock, Arkansas, is a Class A garden-style community containing 202 units. The going-in cap rate is 6.6%.

It is worth noting that we bought the property from a TIC syndication. We paid $21.5 million for the property, of which $2.5 million were in OP units in IRT. The units assist to TIC investors to manage their tax situation by delaying the taxable event. IRT's ability to provide the investors a choice to receive cash or OP units in IRT will provide us with another competitive advantage when sourcing future acquisitions. This closing brings our total unit count to 5,172 units.

The debt markets remain attractive. For example, we are under application with Fannie Mae to finance The Crossings, a property in Jackson, Mississippi, we purchased in November of last year. The loan is priced at 138 basis points over the 10-year Treasury, or less than 4% based on today's Treasury rate. The loan is for a term of 10 years with interest-only payments for the duration. We expect to rate lock this loan tomorrow and close by the end of the month.

In regards to the pipeline, we have the two Jackson properties under contract, which were sourced off-market. We are through due diligence on the first, a 168-unit property located in Ridgeland, Mississippi, and will close by May 30.

We will be through due diligence on the second property in the next few weeks and closing in June. The balance of the pipeline totals $250 million worth of properties containing roughly 3,000 units. These are deals in various stages of discussion with owners and underwriting.

We continue to source properties through our various networks, as we have demonstrated based on the deals we've closed. We have closed transactions direct with principals, through existing RAIT relationships, through RAIT Residential's existing clients, with TIC syndicate, and properties that have been openly marketed.

Back to you, Scott.

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

(Operator Instructions) Bob Napoli, William Blair.

Nice trends. What are you seeing on the competitive front in these markets? Have you seen any change in the competitive environment? With the debt market so attractive and liquid, that tends to -- I mean, obviously has driven competition in many other areas. Have you seen any change? What are you seeing?

I think -- I will let Farrell speak to that in a moment, but I believe that the properties that are actively marketed, that there is significant competition out there and interest. What we're doing is we are building this portfolio off of existing relationships and contacts, and doing it primarily in off-market transactions. So there, while the competition is surrounding you, you're really not up against it when you are negotiating a transaction.

Farrell, how do you --?

I agree. And obviously, you have to consider the fact that these markets that we're going into -- you know, we are one of the few people that will close or do due diligence in two, three, four weeks and then close all cash. So the way we execute helps us a lot, as well.

Okay. What do you expect -- I mean, it's hard to tell with the acquisitions kind of what the same-store rental growth -- rental rate growth was? And maybe you mentioned that, but I missed it. What are you seeing on the ability to push rents, I guess? What has the trend been? What was it this quarter?

The trend has been that we are continuing to push rents. We are doing it at the same time as we are looking to maximize occupancy. So our goal is to push rents.

At the same time, it is keeping occupancy in the mid-90s level. And what you are seeing is total revenue, not just from a rent per unit perspective, but a rent per unit plus occupancy increase perspective is up near 4% quarter over quarter from last year's quarter -- same quarter last year.

So that is our goal, Bob, is to maximize the revenue. We have talked previously about the service that we subscribe to, LRO. It's not just pushing rents; it is pushing rents at the same time as maintaining occupancy at the highest levels.

And just thoughts, like, a longer-term thought for IRT -- you know, five years from now, is this a $2 billion asset, $2 billion, $3 billion asset company? Is that the market opportunity that you are looking at? What are your thoughts long term for IRT?

The long term is, yes, substantial growth. I think we have established that as long as the capital markets are open to us, that we can put the money to work. We're still a bit player in a very large market, so there is plenty of room for us to grow.

But when you say five years, I would laugh, because I don't know where five years is -- what it is going to mean. So if you go back five years ago and tell me where we were going to be. But yes, there's lots of opportunity for us. And for us, it is the ability to continue to raise capital accretively and to put it to work accretively. We have the relationships to do that and the ability.

Thank you very much.

Vincent Chao, Deutsche Bank.

I just want to make sure I got the numbers right. I think you said same-store revenues were up 4.4% year over year?

Just under 4%.

Just under 4%. Okay. And then same-store expenses -- I know you mentioned some snow removal costs and the like, but what was the same-store expense growth there and the NOI growth, same-store NOI growth?

Same-store NOI growth without the one-time expenses was around 4% increase, as well.

Okay. And what was it all in?

You mean the expenses?

Yes.

The expenses were -- the increase in the same-store expense was around $300,000. All of that was -- or the majority of it, $290,000 of it, was from these one-time expenses for increased taxes for 2013, et cetera.

Okay. So 4% --.

Just to be clear, we received -- on a number of properties we received tax bills this past January, which was 2014, that some of the tax increase was related to -- January 2014, excuse me -- related to 2013. So it had to be all expensed in the first quarter.

We are in the process of appealing those taxes. We don't know how that appeal will be resolved, but we had to record the expense in the first quarter really for taxes that were from the prior year. So that is why we say it is one time, because we're not going to have that again in the second, or third, or fourth quarters of 2014.

Right. Okay, I got you. And then maybe if you could just talk a little bit about the Little Rock deal: how does that market compare to the other markets in terms of growth potential? What is the current occupancy on that asset, if you have it? I'm just trying to understand the outlook for that particular market.

As Scott always says, we try to buy in the best submarkets in the markets we're looking at, and the asset in Little Rock is in an area called Chenal Valley, which is the highest-end suburb you can be in in Little Rock. What is intriguing about it is the UPREIT structure and the fact that it was a TIC syndicate.

So the property -- I don't know how familiar you are with TIC transactions, but the property was operated by a third-party manager. Not a lot of money went into the property over the past seven years. It is 93% occupied today. They are not on any type of leasing software, so we had the ability to put LRO in, as well.

And we actually were awarded the contract for less. We weren't the top bidder, but what we gave the TIC investors was the ability to either exchange into IRT or take cash. And what I learned through all the calls is that most of these TIC investors were thrilled with the fact that they got to control their own liquidity event, whereas the structure they were in, they owned one single asset in Little Rock. You had to get 30 people to agree to sell it, to refinance it, to invest money. In this situation they deferred their taxable event, invested in a geographically diverse company, and got the benefit of our dividend. So it was really, I think, a win-win for both of us.

Okay. And do you think that with the pipeline that you have, the two deals under contract plus the $250 million of additional pipeline deals -- is that something you're going to look to try to utilize a little bit more in the future? Or given the fact that the capital raise proceeds are now expended -- which you did that quite quickly, so that was great -- or do you think you will need to hit the equity markets again here to close on some of these other deals that are coming down?

I think we will need to do both. We have enough capital to close the Jackson deals and maybe one more, and then we will have to decide how to deal with the rest of the pipeline.

Yes. Remember, when I say that we have fully deployed the January proceeds, we bought a couple of these properties for all cash. So we're now in the process of financing those. So when we receive the refinancing proceeds back in cash, we will then have that cash to continue to close on the pipeline.

So the next two properties that we spoke about closing in the next 45 days, we have -- through the financing of existing properties, we have the capacity to close those or will have the capacity to close those. And as Farrell mentioned, we are looking at further UPREIT deals. There are some of those in the pipeline. But probably at some point in the third quarter, we will be looking at capital again.

Okay, thanks, guys. That's all I had.

Wilkes Graham, Compass Point.

It is Ryan Gilbert on with Wilkes. First question: can you talk about the cap rate expectations for the two deals that you have under contract?

We are aiming on all the deals we are looking at to be at 6.5% or above, and they fall in that range. You buy these at 6.5%; the financing now, sub-4% on 10-year money and 3.6% on seven-year money, creates very attractive returns.

And the financing is also interest only, at least for the initial period, and sometimes for the full term.

Okay, great. And then on the transaction that you just announced, it looked like the LTV was a little bit higher than you guys run.

What was slightly unusual about the UPREIT transaction is that to preserve the tax basis for the investors that were exchanging into IRT, we had to basically fund our cash as a loan so that they could pay off their existing loan with loan proceeds as opposed to cash. It is more semantics than anything else. We really bought the property all cash and are looking to finance it or put it on our line.

Okay, so this is specific to the transaction and not, like, a --.

Right. It was tax driven more than anything else.

But just to be clear, it was not a third-party financing. It was -- part of IRT's funds were put in the property, part as a loan and part as equity, and then some as OP units. So for IRT it is really all equity. But for the selling parties that took OP units, they get to show that there is debt on the property. But it is all IRT money.

Okay, thanks. And then I think you guys mentioned this at the beginning of the call, but what percent of the increase in property operating expenses was due to weather? And how did that affect your NOI margin?

The majority of this -- on the same-store portfolio, the increase was about $300,000 Q1 last year to Q1 this year. All of it was associated with these one-time realty tax increases that Scott mentioned earlier, snow removal costs, higher utility costs. The utility increase and the snow removal cost was around $75,000 to $100,000 of that $300,000.

And we believe, although the utilities don't tell you it was because it was a significantly colder weather, but without the utility rates going up, it makes sense that the reason that the utility costs went up is because of the weather that we endured this past quarter.

Okay. And what are you guys targeting for an NOI margin in 2014? What do you think the portfolio can run at?

Yes, we're here. Jim is looking through his information.

Let us come back to you on that. You have to recognize that IRT is in such growth mode now; and we are looking at deals as one-offs and managing the portfolio as a whole, as it is. And what we're attempting to do is to add deals that will be accretive, so that we can grow the dividend and ultimately the share price.

So to say what is our target -- our target is to do the best that we possibly can buying in the markets we are buying in. We expect it to be about -- the NOI margin you were asking -- right now it is in the 50% range, and we're hoping to improve on that.

Okay. Thanks very much. Appreciate it.

Craig Kucera, Wunderlich Securities.

I may have missed this, but I know you said that you just closed the transaction yesterday. I think it was about $21.5 million. You've got a couple more closing in the next 45 days. What is the dollar amount on those and the expected cap rates?

Like I said previously, we are aiming for 6.5% or better on our purchases. That is where we are in those Jackson deals. They are both right around $20 million.

Okay. And as far as -- I appreciated the color on being able to refi The Crossing asset. With the Oklahoma City debt, are there prepayment penalties on that debt that just make it too onerous to try to refi that? Can you give us some color on that debt and when it might burn off?

Sure. It was a CMBS loan that we assumed. And there is defeasance, roughly, if we paid it off today, roughly $5 million.

There's two years to go.

Right. So what we see is -- in another year, we'll start figuring out how much sense it makes to pay it off early and where rates are at that time.

Okay, great. Appreciate it.

John Massocca, Ladenburg Thalmann & Company Inc.

My first question really on the portfolio, the same-store portfolio -- given that a lot of it is -- the occupancy, pretty much everything is above 93%, with the exception of Heritage Trace, which obviously is tied to the releasing around the flooding that happened there. But do you think you guys can really drive rents in 2Q as we approach leasing season, given that these properties are so well occupied?

Yes, we do think that we can still drive rents. We can definitely drive rents on properties that we've acquired, because we think that there's lots of room in those.

In the existing same-store portfolio from last year, yes, we do think there is some room. I don't think it is probably 5% or 6%; it is probably 2%. But we are very confident that we will be able to control expenses, as long as we don't have one-time issues that are out of our control. So if we can compound 2% to 3% rent increases with stable or static expenses and static interest expense, it makes for a very nice trajectory.

That would make sense. And then with regard to the Oklahoma City assets, some of those are below, obviously, where you would like them to be occupied. Is that something specific to the market, the assets themselves? Or do you think by coming in and bringing in best practices, you can really ramp up occupancy there without seeing any kind of loss in effective rent per unit?

In Oklahoma City and a lot of the deals we are looking at, we feel that we have the operational upside just on the management side. So that is definitely -- I mean, that was a owner based in South Jersey that was managing it from here. So we think without question that we will be able to do that.

Okay, that makes sense. And then --

I'm sorry. Just to use your term, the best practices -- we do believe that that will have a positive effect. And you also have to remember that in many instances, when you buy a property, that there's tenants in there that you don't want that the prior owner put in in order to position it for sale. So that happens a lot, where we buy a property and then as leases are renewing, we look very closely at the quality of the tenant and determine if that is a tenant that we want to keep in the property, on their payment history and on other factors. And also, as you start raising rents as we do, sometimes you lose some tenants that have been there previously.

So all of those factors together, it's not unusual for there to be an occupancy blip shortly after we buy it. But then our goal and work is to fix that occupancy, bring it back up to the normalized level, and push the rents.

That makes sense. And then on the acquisition front, with something similar -- would you be looking at something in the portfolio deal, something similar to Oklahoma City? Is that stuff still out there and available? And how competitive are those transactions as opposed to the one-offs transactions that you have done since Oklahoma City?

We have portfolios on our pipeline. Some of them are marketed, some of them aren't. And just because of their size, they are a little bit more competitive. But we will be able to find Oklahoma City portfolios out there. I am not concerned about it.

All right. Well, thank you very much, gentlemen.

Thank you for your questions. I would now like to turn the call over to Scott Schaeffer for the closing remarks.

Well, thank you again for joining us. And we look forward to speaking with you after the end of the second quarter. Thanks.

Thank you for joining today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day.