Independence Realty Trust Inc (IRT) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2015 Independence Realty Trust Earnings Conference Call. My name is Katina, and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Andres Viroslav. Please proceed.

Thank you, Katina, and good morning to everyone. Thank you for joining us today to review Independence Realty Trust's First Quarter 2015 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 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 p.m. Eastern time today. The dial-in for the replay is (888) 286-8010, with a confirmation code of 69032060.

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'd like to turn the call over to IRT's Chief Executive Officer, Scott Schaeffer. Scott?

Thank you, Andres, and thank you all for joining our call today. We spent the first quarter absorbing the growth we experienced during 2014, which culminated in eight property acquisitions representing 2,349 units in the fourth quarter alone. The portfolio continues to perform well in the first quarter, as we continue to push with occupancy and rental rates when possible. Same-store net operating income and same-store rental rates were up 5% and 4% respectively in the first quarter.

We continue to see market fundamentals supporting our strategy of acquiring stable, multi-family properties in supply-constrained, non-gateway markets that exhibit strong rental demand with limited additions to supply. Further reduction in the home ownership rate, which recently hit 63.8%, which is the lowest level in 25 years, is a trend that continues to support our strategy. We continue to see ample opportunity to grow the portfolio, and financing terms remain favorable for the properties we target.

At this point, I'd like to turn the call over to Farrell to go through the portfolio, the market environment, and pipeline, and then to Jim to give the financial report. Farrell?

Thanks, Scott. In 2014, we added 20 communities containing just over 6,000 units to Independence Realty Trust's portfolio. Considering this pace, we used the time during the quarter to integrate recent acquisitions, implementing our procedures, evaluating staff, and improving the resident profile with a focus on the upcoming leasing season.

We are seeing first-hand that the multi-family market fundamentals are showing no signs of slowing down. Rent per occupied unit in our same-store properties increased 4% Q1 2015 over Q1 2014. The increase in rental rates drove same-store NOI growth of 5.4% over the same period.

Home ownership is continuing its downward trend, as Scott mentioned. The stigma of renting continues to dissipate, with more and more millennials and boomers choosing to rent over buying homes. Single-family starts, the industry's largest competition, have not come back for a variety of reasons, the largest being that banks are still hesitant to lend to homebuilders and potential homeowners, providing an even larger pool of renters.

New apartment starts, while always a concern, are mitigated by the fact that the majority are in a handful of high-growth markets, and are backfilled on the void created by a lack of inventory growth and a much larger tenant base, as mentioned.

Overall, our portfolio is performing well. The occupancy as of the end of Q1 stood at 94%. Strong occupancy coming out of the winter, combined with the completion of specific capital items performed to enhance the portfolio, has positioned IRT to take advantage of the upcoming leasing season in the second and third quarters. We've upgraded several clubhouses, renovated fitness centers, added outdoor barbecue areas, as well as other improvements to our amenity packages, so that we can deliver a first-class experience at a lower cost.

In regards to the pipeline, we are under contract to purchase a 236-unit property in Indianapolis, built in 2003, for $25 million. The property will be the third community IRT owns in this market, leveraging our existing staff and resources. The community is located in the Castleton section of Indianapolis, which is a heavily-developed, mature neighborhood in the northeast section of the city. The community benefits from a dense retail quarter, which includes the Castleton Square Mall, the largest in the state, and a large office component which both provide a substantial employment base for the community to draw from.

The balance of the pipeline contains 5 properties totaling 1,200 units, representing an aggregate purchase price of $140 million and are in various stages of due diligence. I'll now turn it over to Jim.

Thanks, Farrell. During this quarter, core FFO was $0.19 per share, or $5.9 million, up 127% from $2.6 million for the first quarter of last year. This quarter, we are reporting a GAAP net loss of $241,000.

During this quarter, revenue was up $13.6 million as compared to last year. This increase is primarily from the $13.4 million of revenue associated with properties that we acquired during 2014. On a same-store basis, rental revenue was up this quarter as compared to first quarter last year, as rental rates ticked up 4% on average across the same-store portfolio.

Property operating expenses increased $6.2 million this quarter as compared to the first quarter last year. This increase is associated with the properties acquired during 2014, as operating expenses at the same-store properties were flat this quarter as compared to first quarter last year.

Our NOI margin for the portfolio was 53% this quarter, compared to 51% during the first quarter of last year, as we continue to scale the platform and improve operating efficiencies. From a same-store perspective, NOI increased 5% year-to-year.

Regarding the portfolio, occupancy was 94% with a weighted average monthly rental rate of $827. 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 have successfully transitioned, whereas in some, that transition is still in progress.

The same-store portfolio reported an occupancy of 94.2% with a weighted average monthly rental rate of $792. During this quarter, we incurred $1.2 million of asset management fees, paid to our external advisor. Of this amount, $1 million represented our base asset management fee, and $200,000 represented our incentive management fees.

G&A expenses increased by $331,000 this quarter to $500,000, due to the increased costs of being a public company. G&A expenses include $70,000 of stock-based compensation this year. Interest expense increased by $2.7 million during Q1 as compared to Q1 last year. This increase is due to the financing obtained to purchase the properties acquired during 2014.

As of March 31, 2015, our weighted average effective interest cost is 3.6% and our consolidated leverage is 59.5%. We ended the quarter with $690 million of gross investments in real estate, representing 8,819 units, and $423 million of debt. During the quarter, we spent $1 million on capital expenditures, $300,000 of which were associated with revenue enhancing or acquisition-related CapEx, and $700,000, or $80 per unit, on recurring CapEx at the properties.

Scott, this concludes the financial presentation.

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

Thank you. (Operator Instructions) Your first question comes from the line of Vincent Chao, representing Deutsche Bank. Please proceed.

Hey, good morning, guys. I just want to make sure I've got my numbers square here on the same-store side. I thought, Jim, you had said same-store NOI was plus 5% year-over-year in the quarter, and then same-store rental rate, I think, was up 4%? But just curious, it looks like just from the press release, that occupancy on a same-store basis was down a little bit. So, I just wanted to get the same-store revenue growth? And then I think same-store expenses, I think you said, were flat this quarter?

Yes, same-store revenue increase was up 3% Q1 this year, versus Q1 last year.

Okay, and it was 5% on NOI and flat for expenses, correct?

Yes, 5% NOI and flat on expenses.

Okay, great. And then, just maybe, just thinking about the disclosure in the 10-K in terms of some of the financial items that got brought up, you noted in that -- in the K that you were putting some plans in place to address that. Just curious, if you could update us on where you're at with that process -- are all the changes that are planned to be made, are they now implemented? Or are they still being implemented? And at what point do you feel like you'll be able to comfortably say -- hey, we've tested this out, and everything is working as we think it should be?

Yes, the remediation efforts are well in hand. Things are progressing nicely. The majority of the items that we discussed are in place already, with the remaining items over the next 30 days, 45 days. We should be able to report that things have been in place and tested here by the end of the third quarter.

End of third quarter, okay. And is that in any way impacting some of the acquisition volumes? Nothing this quarter and you've got one deal now under contract and a pipeline, but just curious, is this impacting in any way sort of what you're doing on the deal side?

No, not at all.

Okay. So, the slowdown here, is it indicative of you know, just a natural lull, or is there anything going on in the markets that's changed in your opinion? Maybe it's competition, or pricing, or anything like that?

It was, by design, as we digested all of the activity late in the fourth quarter that we wanted to take the first quarter to integrate the properties that we acquired. There's nothing in the market that has changed that will change our ability to grow going forward.

Okay, and then just one last one for me. I've been asking about the Oklahoma and some of the energy markets for a while, here. Looks like Oklahoma -- the portfolio actually did pretty well in the quarter. Just curious if there's any additional comment you can make in terms of demand in that market, and any impacts again from energy? I know we talked about it last quarter, but just curious if there's any updated thoughts there?

I was waiting for you to bring it up. Actually, I mean, the occupancy is even better than it was reported at the end of the quarter. I mean, we're looking at a couple opportunities there. I think it actually -- the energy situation actually presents some opportunity as people pull back and are concerned about it. I mean, you know our view on it. We think the economy there is really diverse, and could potentially be an opportunity to add to the portfolio.

All right, thanks.

Your next question comes from the line of Wilkes Graham, representing Compass Point. Please proceed.

Hey, good morning, guys. Just a couple of housekeeping questions, first. Did you have an -- did you pay an incentive fee in the first quarter?

Yes, it was $200,000.

Okay, and do you know how much maintenance CapEx you spent?

I think we commented it was $700,000 this quarter, or about $80 a unit.

Okay. That's total CapEx, or just the recurring?

That's just the recurring, so the total CapEx that I commented on was $1 million, $300,000 of which was related to revenue enhancing or acquisition-related matters, where it's the $700,000 maintenance recurring.

Okay, got it. Okay. And then just can you comment on just how the acquisition market looks, in terms of the cap rates you're seeing, either in or out of your pipeline, versus mortgage rates?

Sure. I mean, it's competitive, but we're still seeing plenty of opportunities. The deal we mentioned in Indianapolis is a 6.2 cap, and we have a very healthy pipeline. As Scott mentioned, we digested a lot, especially in the fourth quarter, and this is the start of leasing season. We really just wanted to make sure the portfolio is ready to take -- you know, an opportunity there for the upcoming leasing season. But, we're -- there's plenty of opportunity in the pipeline. We're continuing to leverage our relationships and leverage the reputation that we've created over the past year-and-a-half.

Are you seeing other portfolio opportunities out there as well?

We're looking. I mean, obviously, it's easier to grow when you're buying [bulk] portfolios. They get a little bit more competitive, but there are definitely opportunities out there.

Okay, thanks.

Thank you.

Your next question comes from the line of Brian Hogan, representing William Blair. Please proceed.

Good morning, just one more housekeeping, make sure I got it right. The property in Indianapolis, that was a cost of -- did I hear $23 million?

$25 million.

$25 million. All right, appreciate it. And then the CapEx, not the recurring, but the enhancements, $300,000, do you expect that to continue, or is that kind of a one-time and go back to the maybe recurring of [$700,000] consistently?

Sure. It mainly is associated with when we are acquiring a property we have identified CapEx that we think will create value. So, we should continue to see it as we roll those capital plans out, and continue the acquisition pipeline.

Great. Going back to Indianapolis, sorry, the -- it's under contract, but do you expect to close by quarter end?

Yes, we were anticipating, trying -- we are literally trying to close it today, although it'll probably roll into next week.

Okay, and then the rest of the pipeline, then, obviously it's under various stages of due diligence. But you have to have some -- say, is that like -- within the next six months? Or is that --

I would say even sooner. I mean, we're at the LOI stage with a couple of them, so we anticipate going under contract, at least one additional property in the very near future.

And another one in the second quarter, so possibly two properties?

Correct.

All right. And then, just characterize the level of competition in the markets you're seeing, and which markets are most attractive to you today?

Yes, I mean, listen. We've always said there's competition out there; there's a lot of people looking to buy apartments. We think we're very good at what we do. We've created a really good reputation for closing on properties that we get under contract, and we're leveraging all of RAIT's relationships. As you've seen in the past, we have [fixed-indication] relationships, which have funded a lot of our pipeline. We're looking at the same markets we've always been in: we're looking to expand in Columbus; we're expanding in Indianapolis, as you can see. So, just growing the existing platform. You really get economies of scale when you have multiple properties in one market.

All right, thank you.

The next question comes as a follow-up from the line of Vincent Chao, representing Deutsche Bank. Please proceed.

Hey guys, just curious, on the enhancement CapEx -- just curious what the incremental returns you're getting on that capital, or maybe if you think about it in terms of the total cap rate on the acquisitions, inclusive of the enhancements, what does that add to the cap rate that you're reporting?

It depends obviously on what we're doing. We think a clubhouse and fitness center rehab should add $35 to $50 a month in incremental rent. Yes, so 50 basis points on a cap rate. That's a nominal type of CapEx program where we're just going in and doing amenities, so that we're on par with a relatively newer property. We're evaluating unit rehab, and we expect if you do that to return capital within four to six years. It's usually a 10% to 14% cash-on-cash return.

10% to 14% incremental return?

Correct.

Okay, and for the most part though, it sounds like it's more of the common area enhancements that are being made today?

Yes, I mean, when we buy a property, we really aren't looking at any heavy value-add. It's going in, improving the aesthetics of the property, creating an amenity package where it's comparable to the higher-class property, but you're paying $200 to $400 less in rent. So, you're getting a nice product at a lower cost.

Okay, thanks.

Ladies and gentlemen, this concludes our question-and-answer session. I'll now turn the call back to Mr. Scott Schaeffer for any closing remarks.

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

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.