Independence Realty Trust Inc (IRT) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q2 2014 Independence Realty Trust Incorporated earnings conference call. My name is Mina 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, Mina, and good morning to everyone. Thank you for joining us today to review Independence Realty Trust's second-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 will be 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 49252720.

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 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 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.

The growth story continues for Independence Realty Trust. We continue to see solid opportunities to purchase stable apartment properties in submarkets with strong rental demand and limited additions to supply. During the second quarter, we added 372 units by acquiring two properties for $42 million. We have a strong pipeline of opportunities with three properties under contract and an accepted offer on a fourth property. The first three properties that we acquire will close by the end of August and the fourth by mid-September. These acquisitions will be funded from the proceeds of our recent secondary offering where we raised gross proceeds of $76.5 million. We will initially acquire these assets for cash, subsequently finance them, then fund the additional acquisitions with proceeds from the financings.

At this point, I'd like to turn the call over to Jim Sebra to go through the numbers. Jim?

Thanks Scott. During the quarter, core FFO was $0.19 per share, or $3.4 million, up 150% from $1.3 million for the second quarter of last year. This quarter, we are reporting a GAAP net loss of $128,000, or $0.01 per share.

Revenue was up $6.9 million this quarter as compared to Q2 last year. This increase is primarily from $6.8 million of revenue from properties acquired subsequent to June 30 last year.

On a same-store basis, rental revenue is up 3.6% this quarter as compared to second quarter last year. Property operating expenses increased $3.3 million in 2014 as compared to 2013. This increase is primarily from $3.2 million of operating expenses from the properties acquired since June 30 of last year with the remaining increase primarily due to additional one-time real estate tax catch-ups for 2013. Occupancy at our same-store properties was 96% at quarter end with a weighted average rental rate of $798 per unit per month.

Interest expense increased by $1 million quarter-to-quarter due to $109 million of new financing obtained or assumed to finance a purchase of nine properties that we acquired since June 30 of last year.

Onto the balance sheet. Our leverage was 57% at quarter end based on debt to gross assets. During the second quarter of 2014, we acquired two properties for an aggregate value of $41.8 million. We paid for these transactions using $12.2 million of borrowings from our line of credit, cash, and the issuance of $2 million of OP units. We permanently financed these two properties in July with $27.4 million of first mortgages that have coupons of 3.95% and are interest-only for the full 10-year term.

Lastly, in July, IRT accessed the capital markets for the second time this year through an $8 million common share offering and raised net proceeds of $72.4 million.

Scott, this concludes the financial review. Back to you.

Thanks, Jim. At this time, I'd like Farrell to discuss the acquisition strategy and pipeline. Farrell?

Thanks. As Scott mentioned, during the second quarter, we continued with our growth strategy by purchasing two properties for a combined $42 million, which added 372 units to the portfolio. These assets are well-positioned properties in solid submarkets with limited to no new supply.

The first asset, Carrington Park, located in the Chenal Valley neighborhood of Little Rock. The area is known for white-collar jobs, upscale retail, and high-end housing. Chenal Valley is a 6000-acre master-planned community anchored by The Promenade at Chenal Valley, a lifestyle center with tenants such as Apple, Anthropologie an IMAX theater and several restaurants. The average income in a 1-mile radius of Carrington Park is $125,000 with an average home price of $315,000.

The property benefits from large units with an average unit size of over 1000 square feet. All apartments provide direct access entry and 90 of the units offer direct access garages. The property is well located less than one minute from the best shopping and dining in the market, five minutes from the medical center and 15 minutes from downtown Little Rock.

Carrington was unique as it was our first UPREIT deal. We purchased the asset from a tenant in common syndication and believe the property will benefit from our hands-on in-house management.

The second property, Arbors on the Reservoir, (sic), is located in Ridgeland Mississippi, a suburb of Jackson. Jackson can effectively be split into four quadrants with the most attractive area of the city considered to be the northeast quadrant where Ridgeland sits in Madison County. Like Chenal Valley, this is where you'll find your higher-end retail and housing. One of the reasons we like Ridgeland is that it is incredibly difficult to build new construction. Arbors was built in 2000 with the newest property in Ridgeland built in 2004. The limited supply of new product explains why the overall vacancy rate in Jackson for properties built after 2000 is 2.7%. The combination of limited supply and average unit size of 1150 square feet and its location within Jackson's best school district make Arbors a very attractive investment for IRT.

In regards to the pipeline, we currently have three properties under contract consisting of 950 units and another property with 500 units in which our offer has been accepted and we anticipate being under contract next week. The aggregate purchase price of the four properties is $101 million with cap rates ranging between 6% and 7%.

One of the properties under contract is located in the Broad Ripple section of Indianapolis, which is an established popular entertainment district 6 miles north of downtown Indy. The area is populated by young professionals and new families and currently has a 4.9% vacancy rate.

Indianapolis tends to fly under the radar. Government data provides the job growth, including the self-employed, for the MSA grew year-over-year at 4.5%, equating to 38,000 jobs added and that the city has reclaimed 140% of the jobs lost during the recession. This asset will be IRT's third in the market, bringing our total unit count in Indianapolis to 948 units.

Two of the properties totaling 860 units are located in Cordova, a suburb of Memphis. Walnut Hill, the one we have under contract, is a property we've talked about previously and will be our second UPREIT transaction. The second property will be under contract next week and will give us scale in the submarket. Generally speaking, the eastern suburbs of Memphis where these assets are located are the best submarkets and outperform the market. The Cordova submarket is running at a 5% vacancy rate versus 8.5% for the overall market. These assets were built in 1994 and 2000 and are averaging $0.75 a square foot in rent.

The last property under contract is located in Southwest Raleigh. Raleigh Durham is a market that RAIT Residential presently manages and a market that IRT is looking to expand into. The overall economy is incredibly strong. It added 28,000 jobs last year with extremely diverse demand drivers, the four schools, Duke, UNC, NC State, Wake Forest, the Research Triangle and state government being the largest. The property is located at the intersection of Highways 70 and 401, providing tenants easy access around the city. I-40, the Raleigh Beltway, is 3 miles north of the property and downtown Raleigh just 5 miles north. The property was built in 2001 and contains 266 units.

I'll turn it back over to Scott.

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

(Operator Instructions). Vincent Chao, Deutsche Bank.

Thanks for the color on the additional stuff that's underway on the acquisition side. Just curious. I think, at the time of the offering, you had talked about a $310 million pipeline on that order. I was just curious how the pipeline has changed and what your outlook is for some additional closures here beyond what's currently underway.

Sure Vince. It's Farrell. It will probably come off and on every day. Including the deals we have under contract or the one we talked about that will be under contract, there's $500 million roughly on the pipeline, about 5400 units. And there's two additional ones that we have offers out on that we are waiting to hear back from the sellers.

Okay. And just broadly speaking, from a qualitative perspective, does the market feel like it's continuing to stay robust here? Are you seeing more sellers come to market? And then also on the competitive side, are you seeing more folks poking around in the markets that you guys are looking at these days?

It's pretty similar to when we talked last. I mean there is the regional and local guys out there that we are competing with but we are able to identify and find these projects and execute pretty quickly. We are closing deals in 30 days or less, so we are a known commodity in the marketplace now.

In terms of I think there is more product out there. I think a lot of sellers are seeing the market is hot to sell right now, so we are seeing a lot of products. A lot of stuff is coming through our pipeline. It's just picking the ones that we think fit best in our strategy.

Okay. And then just a question on one of the assets here. Just at Windrush, it looks like the occupancy there went down quite a bit from last quarter. Just curious if you had some commentary or color on that. It looks like the rents stayed the same, but I think it was 94.4% last quarter, 85.6% this quarter?

Yes. Windrush has some exposure to students because it's near Central Oklahoma University, but in general, there are a couple of properties that we took over that we have to change the renters' mentality. A lot of these owners who are smaller mom and pops will take rent throughout the month is as it comes in. And when we going we really have to -- we have to weed out some tenants. And in the Oklahoma City portfolio, that's what we had to do. It's happened in Brookshire. It's happened in The Crossings. So we've leased it back up now, so it's just a matter of getting in there, turning the tenant profile, making sure people know that they have to pay on the 1st, and if they don't then they get evicted.

Okay, so that generally takes you one or two quarters to kind of flush out?

Yes, generally I would say.

Okay. All right, thanks guys.

Wilkes Graham, Compass Point.

A couple of questions. Farrell, I want to make sure I heard you right. Did you say that the four assets that you would close by the end of August and by mid-September adds up to $101 million?

Yes.

Okay. And the additional asset, the 500 units, looks like it's for maybe about $30 million. That's in addition to what was in the prospectus back in mid-July, right?

Correct.

Okay. A couple of technical questions. Can you say how big the incentive fee was that was in G&A and what the amount of the debt premium was that was in interest expense?

Yes, the debt premium I don't have. I'll get back to you on that one, Wilkes, but the incentive fee was right around $150,000.

Okay. And then lastly, you talked about how the pipeline is $500 million. As you look at where cap rates are versus where mortgage rates are and your ability to invest at these pretty attractive levered returns, how does the environment look today from a levered return perspective relative to when you IPO-ed or even relative to this past spring?

I believe the environment today is a little bit better because interest rates have declined generally over the last few months more quickly than cap rates. We had a quote yesterday, as recently as yesterday, if you can imagine that 130 basis points over the seven year, which is about a 3.4% rate fixed for seven years. That's probably 100 basis points to 120 basis points inside where we had modeled our financing costs a few months ago. And I can say for certain that cap rates have not declined by that same level. So, even though interest rates have been bumping around, we all know yesterday wasn't a good day. We still find that the returns that we are able to achieve are higher than what was modeled when we were doing this six months ago.

Thank you.

Daniel Donlan, Ladenburg.

This is actually John Massocca on for Dan. Just a quick question on the just acquisition front. When you guys look at purchasing buildings, how big of a deal is asset age? A lot of the stuff I think you've purchased previously has been kind of older, maybe more legacy assets. Would you ever focus on more new build stuff or building into doing deals with developers, kind of purchase things just as they kind of get completed or is that just not an area that you're as interested in, given the prices?

Age is always important. Clearly, we're not interested in buying a dilapidated old building. However, what we are looking at is the market, what the market demands and who the tenant base is and the quality of that tenant base. And clearly we want newer product within the submarket that we are investing in. But at the same time, an older building, if it's been maintained in a strong market, doesn't scare us.

We have not at this point had to look at transactions with developers that are under construction or pre-market. From my experience, I know a lot of people are doing that on the acquisition side. It almost seems to me like you are grasping for yield and taking a certain level of risk in order to get that yield. We haven't been -- it hasn't been necessary for us to do that. With the relationships we have and the market knowledge that we have within the team here, we've been able to source assets without going to that I won't say drastic measure, but going to that measure where we are taking the risk of lease-up or we are taking the development risk and guaranteeing a price in one market knowing that we're -- or one environment, market environment, and knowing that we are not going to close until a different market environment. So, we know people are doing it. We haven't had to, and we feel that our pipeline is strong enough that we can continue to grow the Company just based on, again, our market reach.

Okay, that absolutely makes sense. And then more of a financial question, G&A kind of jumped a little bit during the quarter. Is that just a result of the bigger portfolio, or was there some kind of maybe one-time-ish items in there? Is that $378,000 maybe a good run rate to kind of base off of or is there something maybe that will cause it to be a little lower in 3Q?

Yes, it's primarily what we would call the first kind of year public company costs is. It's a lot of the 10-K annual report filing proxy creation stuff. So, the $300,000 is probably a little bit higher than what you will see in the next couple of quarters. But if you want to use that as a run rate, it's not terribly off the reservation.

Okay. Thank you very much gentlemen. That's all for me.

John Benda, National Securities Corporation.

Just to go back to the Oklahoma portfolio, it seems like occupancy rates are down Q2 in a couple of them, but you are pushing pricing on some assets. But this occupancy rate thing, just back to your comments before, is that all just from these used to be mom and pop and we are bringing in this institutional platform and, you know, things are kind of changing, people moving out, or is there a little more going on there? Because it seems like the single asset purchases that you guys have made have done really well but this one particular portfolio may be not as much? Pricing has been going up but it kind of seems like there has been some vacancy decline.

Sorry to interrupt. It's a combination of things. One is the seller had a lease expiration schedule that was really consolidated over summer months. And we knew that going into the acquisition, and it's also a little bit changing the renters' mentality. So the combination of the two has impacted occupancy. On the positive side is that we are actually performing at budget on the portfolio based on expense savings that we've experienced.

Okay.

So, Windrush is up to 89%. The other one, Augusta, is up to 86%. So, we are getting there. It's just going to take a while. speakers)

Well, my question was basically it seems like, when you guys take down single assets, how they perform, they do really well and it's one of the kinds of things that if there's bulk purchase, maybe not so much. I'm just trying to get more insight on the deployment of the raise that you just did. It seems like you're going to do more one-off basis than a portfolio?

Again, it's a market that we went into and these assets that we went into thinking that we could -- knowing that we could push rents based on prior ownership.

Yes.

So, it's a combination of getting effective market rents, changing the renters' mentality and just lease expiration exposure concentrated in a couple of months.

I think it's also -- when you think about the fact that we believe that the rents there were well below market and we are pushing the rents and then you --

Yes, yes.

-- combine that with the concentrated lease expirations that someone has been living there and had one rent for many years and all a sudden it goes up dramatically, they leave.

Yes.

But we are okay with that because we are --

Oh yeah, oh yeah.

-- we are improving the tenant base long-term.

Yes, and that's definitely evident. You've got Heritage Park up $45 per month from December and Windrush and Raindance, some of that stuff is definitely evident there. All right, thank you very much.

Brian Hogan, William Blair.

A question actually on the ability to push rent. I look at your same-store sales up $798 per month effective rent and you are at 96% occupancy. That continues to climb. I mean I have no doubt you can actually push rent, but can you do it faster? What's the acceptance of higher rents?

Well, what we try to do is we try to maximize revenues. So it's not just about pushing rents but it's pushing rents without really, really crushing your occupancy, and it's about keeping occupancy high while still able to push rents. So it's a balance. So, we like properties to be operating -- we think full occupancy is in the mid-90s%. And as I've said many times before, if you get above that, it just means you rents are too low. So that 94% to 96% occupancy range is where we want to be but at the same time we went to maintain there knowing we're getting the highest possible rent that we can. So, we believe that we are managing it appropriately. We have it on the LRO system which does just that, manages occupancy versus rental increases relative to demand in the market. And our goal is to continue to keep the properties, the stable properties obviously. I'm not talking about ones that we -- a month after we acquire them -- but the stable properties in that mid-90s% occupancy while pushing rents as much as we can, and we think that that should still be in the 4% range year-over-year.

4%? Okay. I guess one quick clarification to make sure I heard this right. The three that are under contract that are supposed to close here in August and then the other one that's offer accepted that is September and that totals $101 million, is that correct?

That's correct.

Okay. And then the additional pipeline on top of that is the $500 million?

That $500 million includes that $100 million.

That includes the $100 million? All right, thanks for the clarification.

Thank you sir. You have no questions at this time. I would now like to turn the call over to Mr. Scott Schaeffer for closing remarks.

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

Thank you sir. Ladies and gentlemen, that concludes your conference call for today. Thank you for participating. You may now disconnect. Thank you. Have a good day.