Independence Realty Trust Inc (IRT) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q3 2014 Independence Realty Trust, Inc., earnings conference call. Today's call is hosted by Andres Viroslav.

My name is Bhupendra; I'll be your event manager today. (Operator Instructions)

And now, I would like to hand the call over to Andres. Please go ahead.

Thank you, Operator, and good morning to everyone. Thank you for joining us today to review Independence Realty Trust's third 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 Trust.

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 56293476.

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 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's Chief Executive Officer, Scott Schaeffer. Scott?

Thanks, Andres, and thank you all for joining our call today. Independence Realty Trust continues to grow. Our real estate investments have increased 24%, to $444 million, since December 31, 2013, (sic - see press release, "June 30, 2014") and the portfolio's net operating income has increased 191% since September of 2013.

We continue to see solid opportunities to purchase stable apartment properties in submarkets with strong rental demand and limited additions to supply. During the third quarter, we added 1,128 units by acquiring three properties for $82 million. Though we are seeing modest cap rate compression in our markets, this compression has been more than offset by lower financing costs.

We are still targeting acquisitions requiring limited capital expenditures, with going-in cash-on-cash returns of between 10% to 12%, with room to grow rents and lower costs through operating efficiencies. Our current pipeline is anchored by the recently announced $163 million, five-property portfolio we expect to acquire in Louisville, Kentucky, which Farrell will discuss shortly.

Assuming we close on the Louisville portfolio in December, we will be fully deployed and levered on the proceeds from our July equity offering.

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

Thanks, Scott.

During the quarter, core FFO was $0.17 per share, or $4 million, up just over 200% from $1.3 million for the third quarter of last year.

This quarter, we are reporting a GAAP net loss of $56,000.

Revenue was up $8.3 million this quarter, as compared to the third quarter of last year. This increase is primarily from $8.1 million of revenue from the properties we acquired subsequent to the end of the quarter last year. On a same-store basis, rental revenue was up 5% this quarter, as compared to third quarter of last year.

Property operating expenses increased $3.7 million this quarter, almost entirely from the properties acquired since September 30 of last year. Operating expenses at the same-store properties was largely unchanged from last year.

Our underlying margin was 53% this quarter, as compared to 50% during the third quarter of last year.

Regarding the portfolio, occupancy was 92.6%, with a weighted average monthly rental rate of $791 per month. As discussed on previous calls, when we acquire a property some transition occurs, resulting in tenant turnover which is anticipated in our underwriting. Most of the properties acquired since Q3 of last year have successfully transitioned, whereas in some that transition is still in progress.

The same-store portfolio reported occupancy at 94.3%, with a weighted average monthly rental rate of $814 per month, an increase of 4% over the third quarter of last year.

General and administrative expenses increased by $145,000, to $248,000, due to increased cost of being a public Company. G&A expenses include $31,000 of stock-based compensation during the quarter.

Asset management fees of $445,000 represents the fees paid to our external adviser and only included the basic management fee this quarter. There was no incentive fees expense this quarter.

Interest expense increased by $1.4 million quarter to quarter due to new financing obtained or assumed to finance the purchase of 14 properties that we acquired since the end of the third quarter of last year.

On to the balance sheet. In July, we accessed the capital markets for the second time this year and issued 8 million common shares and raised $72 million of proceeds. We deployed these proceeds into three properties during the quarter, for an aggregate value of $82 million. We are permanently financing these properties in the fourth quarter, using agency mortgages at 65% LTV with coupons of 3.5% for seven years.

We ended the quarter with $444 million of gross investments in real estate, representing 6,470 units, and $254 million of debt. At September 30, 2014, we had $35 million of cash on hand, resulting from the financing of properties we acquired in Q2 of this year. At quarter-end, our leverage was 53% on a debt-to-[gross assets] basis.

Scott, this concludes the financial review.

Thanks, Jim. At this time, I'd like to turn the call over to Farrell Ender to discuss IRT's acquisition strategy and pipeline. Farrell?

Thanks, Scott.

As Jim and Scott mentioned, during the quarter we purchased three communities, increasing the portfolio to 22 properties and 6,470 units.

We acquired two properties in Cordova, Tennessee, totaling 860 units. These acquisitions provided us with immediate scale and a strong submarket within southwest Tennessee.

Cordova is a suburb directly north of Germantown, the area's most exclusive neighborhood and home to FedEx's worldwide headquarters employing 30,000 people. It offers residents affordable rent in a strong location with close proximity to Germantown's amenities to the south and the area's main commercial corridor to the north, both of which provide good, stable economic drivers for the properties.

The Cordova submarket contains 11,000 units with no new deliveries forecasted for the next several years and has consistently outperformed the market. The current vacancy rate in the submarket is 4.9%, compared to the overall market rate of 8.5%.

We purchased the first property, Walnut Hill, for $27.9 million. It contains 360 units and is our second acquisition from a tenancy in common, or TIC, ownership structure. IRT was able to acquire the property by providing the individual TIC owners the ability to receive either cash or operating units if desired for tax purposes.

Because the property was managed by a company not affiliated with the owner, there will be immediate operating efficiencies gained with our hands-on, active management provided by RAIT Residential.

We purchased a second property, Stonebridge Crossings, for $29.8 million, which added another 500 units to the portfolio.

The combined properties give us scale and efficiency within this submarket.

Both assets were purchased at a 6.2% cap rate. We have secured a seven-year loan on Walnut Hill from Freddie Mac in the amount of $18,650,000. This fixed-rate loan bears interest at 3.42% and payments are interest-only for the term of the loan, providing an immediate return on equity of 11%. We are currently under application with Freddie Mac for the Stonebridge property and expect to close that loan in mid-November. The loan is priced at 3.42% also, with interest-only payments for the seven-year term.

The third property we purchased in the quarter was Lenoxplace apartments, located in Raleigh, North Carolina. This is a market which we were actively looking to invest in, given its strong fundamentals. The property is situated at the convergence of highways 401 and 70, providing access to downtown Raleigh in less than 10 minutes and connecting two miles north to I-40, taking you to Durham and the Research Triangle.

We purchased the community for $24,250,000, at a 6.2% cap rate and closed a seven-year, interest-only loan at 3.72%, providing an immediate return on investment of 10.5%.

IRT's pipeline currently stands at $315 million, representing another 3,000 units in various stages of due diligence. The pipeline includes the previously announced Louisville portfolio, comprised of 1,549 units with a total purchase price of $162.5 million. This portfolio will give us critical mass in a market we currently are not in, similar to what we did in Oklahoma City.

The properties are well located in the affluent East End neighborhood of Louisville, a dense in-fill, mature area containing the most desirable suburban living in the city, with average incomes of $75,000 and average home prices of over $200,000. Several of the properties benefit from their proximity to the city's medical center, which includes Baptist Hospital East, Norton Suburban Hospital, the Brook Hospital - Dupont, the Jewish Hospital Medical Center, as well as all the ancillary medical offices that feeds off the hospitals.

Louisville has taken a proactive position to diversify from its historical reliance on manufacturing. While manufacturing is still important, with two Ford plants and GE's $1 billion appliance park, healthcare and hospitality now employ as many people as the manufacturing industry. Humana, Norton, KentuckyOne Health, and Kindred are all either headquartered or have a large presence in the city, and UPS' Worldport, the largest package-handling facility in the world, employs 20,000 people in the city.

Louisville has added back all the jobs it lost during the recession, and the region will continue to experience population and job growth, with a low cost of living, affordable housing, and a business-friendly political environment.

Back to you, Scott.

Thank you, Farrell.

Operator, at this time I'd like to open up the call for questions?

(Operator Instructions) Wilkes Graham, Compass Point.

Just a question on the pipeline. Given all the success you've had in acquisitions year to date and quarter to date, can you just talk about maybe what the environment looks like for portfolio deals, like Louisville versus individual assets? And are the returns, the levered returns, that much different between the two?

Louisville is the only portfolio we have on the pipeline currently. As we've seen with Louisville and Oklahoma, the opportunities do come up on a regular basis. They are a little bit more competitive, and we've been more successful in finding one-off transactions through our network. But, again, we're trying to grow the Company and when we see good opportunities, we'll pursue them.

And I might have missed it, but did you disclose what the size of the pipeline is now?

$315 million, including Louisville.

Including Louisville. Okay. So, about $150 million after Louisville?

Right. In various stages of underwriting and price negotiations.

Right. Okay. And can you talk about --? I know you mentioned what the mortgage rate you got on the Fannie debt, but can you talk about where you're seeing that market today?

It's getting even better for us. We're getting quotes on Louisville at 1.25 and less over the corresponding Treasury. So, it's tightening up, and we expect it to get even better the early part of next year, as pipelines get reset for lenders.

Great. Thank you.

Brian Hogan, William Blair.

I think you said it and just went through it pretty quick and I was trying to jot things down, but the operating expense same-store sales you said was unchanged?

Yes.

And then, the NOI, was that --?

NOI grew on a same-store basis from third quarter of last year to third quarter of this year about 9%.

9%. And so, that's some nice lease rate improvement. And then, on the same note there, what is the same-store occupancy rate? I think you said it (multiple speakers).

Same-store occupancy at the end of the quarter was 94.3%.

Okay. Thank you. And then, I guess it goes to one of the previous caller's question, but competition for the -- on all your deals, have you seen it increase? Obviously, you said cap rates have come down. Can you describe the level of competition? Is it more intense?

No, we're not seeing an increase in competition. As you can see by our execution in the pipeline, we're being able to source deals pretty consistently.

And the cap rate is coming down and you're just willing to do that because of the lower cost of funds, is it?

Yes, as Scott mentioned, our cost of funds has come down more than cap rates have come down, at least in our experience.

There's clearly competition; there has always been competition. We don't think it has increased over what we were seeing a year ago. But we still have to be competitive. Most of these deals are sourced off-market, but the way you get them off-market is still by paying what the seller believes they're worth.

And since there is competition out there, we have to be willing to pay a market rate, which we do. We do think we get some benefit because of the fact that these are off-market and they're not widely distributed for sale.

But at the same time, we're paying reasonable amounts for these properties, and the cap rate decline is just a factor of interest rates. And as we've always said, cap rates move with interest rates. We think they move -- there's a slight delay. Interest rates have come down. Spreads have come down from where they were six months ago.

And my last question, the dividend. You just declared the dividend for the fourth quarter here, $0.18, where it's been for this year. But obviously, you're adding the Louisville portfolio and it generates a lot more income. What are your thoughts on the dividend?

Our thoughts are that the third quarter, there was a little bit of a drag on earnings per share because of the equity offering that we did in the beginning of July. And in the fourth quarter, we will have all of the money that we raised in July invested and levered during the fourth quarter. So, we expect the number to be a little better, going forward. But because we're still paying out such a high ratio of our earnings, we felt it was prudent to just keep the dividend static.

Sure. Thank you.

John Benda, National Securities Corporation.

So, on the Louisville portfolio, is that comparable to what you guys picked up in Oklahoma City where it was kind of low-occupancy, low-rent, and that's all coming to a stabilized rate? Or, is that stabilized today?

I would say it's a higher-class asset and it's stabilized today in a more affluent suburban area of Louisville as compared to Oklahoma City, if you just look at a price per unit and rent per unit.

Okay. And then, just real quickly, on the loan on Walnut Hill, could you go over that one more time? I think I might have missed that.

Sure. 3.42%, seven years, full-term IO (interest only).

Okay. And then, on the Oklahoma portfolio, where are you guys seeing a time frame for stabilized occupancy? And is it in line with underwriting?

Oklahoma?

Yes.

[We're past it.] Oklahoma's a good representation of what Jim mentioned in terms of transition. So, we've got them all at 90% or higher currently. We inherited them any where from mid-80%s to mid-90%s. They all dropped when we took over, when we transitioned new management, LRO, and all our standard operating procedures. And now that we've been in there for six months, they've all turned to the positive.

Okay. All right. Thanks very much.

Craig Kucera, Wunderlich Securities.

I wanted to go over your pipeline and from a big-picture level how to think about some of the numbers? So, based on what you're saying, if you close this last in this quarter at a 6.2% cap, we're seeing some downward pressure on financing costs. Is sort of a going-in 6% and financing at 3.25% the kind of, at least, spread -- maybe not the actual numbers -- but at least the spread we should be thinking about on these assets?

That's correct.

Okay.

6% to 6.5% cap rates. 6% is the low end of what we're seeing.

Okay. Got it. So, then when I think about -- I know you don't disclose your monthly effective rents for the Raleigh and Cordova assets that closed this month, but can you give us a ballpark estimate of what the monthly rents are for those, just from a modeling perspective?

Raleigh is about $800 a month, and -- sorry. You said the [Memphis] deals?

The Cordova -- yes, there were two deals where you didn't disclose the [revs] just because it wasn't a full month of operations and just from a ballpark number (multiple speakers)?

The Stonebridge asset is about $690 a month, and Walnut Hill is $920.

Got it. And Lenoxplace is $800?

$785, to be exact.

Okay. Thank you.

Vincent Chao, Deutsche Bank.

I just want to go back to Oklahoma City real quick. It sounds like occupancy has picked up there, but just curious, are you done with that churning out process in terms of when you initially took over you talked about some churn and getting rid of some student renters and that kind of --? Is that process now done?

Four of the five assets, I would tell you, are completely stabilized and in the low- to mid-90%s. There's one that is taking a little bit longer but should be there, I would tell you, in the next month or two.

Okay. And then, just more broadly speaking, you have some markets that are tied to energy and that kind of thing in terms of Denver and maybe even Oklahoma City to some degree. I'm just curious, with oil prices where they are, do you think that's going to have much of an impact in some of those markets that have been stronger given some of the energy demand?

No. There's been tremendous, as we know, economic activity because of the energy situation, but it's long term. And until we start seeing the energy companies, the drillers, pull back, which there's no sign of that, they will be no impact on these properties.

Okay. Thanks.

There's diversified economies. So, it's not just all relying on the energy industry or sector.

Okay. Thank you.

No further questions. I'll hand it back to Scott for any closing remarks.

Well, thank you for joining the call today and your interest in Independence Realty Trust. We look forward to talking with you next quarter. Have a good day.

Ladies and gentlemen, that concludes your call for today. You may now disconnect.