Independence Realty Trust Inc (IRT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q2 2015 Independence Realty Trust earnings conference call. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Andres Viroslav. Please go ahead.

Thank you, Grant, and good morning to everyone. Thank you for joining us today to review Independence Realty Trust second-quarter 2015 financial results. On the call with me today are Scott Schaeffer, our Chief Executive Officer; Jim Sebra, our 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 PM Eastern time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 40907553.

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 remain 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 the 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 on 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. First of all, we believe there is an absolute disconnect between the fundamentals of our business and the recent performance of IRT's common stock. The portfolio is performing well and good things are happening highlighted by our previously announced acquisition of Trade Street Residential and continuing opportunities to grow the way we have over the past two years.

For the second quarter total revenues grew, occupancies remained stable and we continue to push rental rates when possible. Jim will go into these details shortly.

On MAY 11, 2015, we announced that we entered into an agreement to acquire Trade Street Residential. The S4 has been filed and we expect it to be declared effective by the SEC shortly. The transaction is expected to close by the end of the third quarter.

We also recently received a commitment from KeyBanc on a new $325 million revolving credit facility plus $120 million interim facility. We expect to use both of these facilities to fund the Trade Street acquisition. The acquisition provides many positives for IRT and moves us a step closer to our goal of building IRT into a leading owner of multifamily properties in predominantly non-gateway markets.

First, IRT will have an enhanced scale as our asset base will increase by approximately $650 million to $1.4 billion as the portfolio increases from 31 to 50 properties and our number of units will increase 55% to 14,044 units. Also liquidity in IRT shares should improve since half the merger consideration will be in the form of IRT stock. Approximately 16 million shares will be issued to current Trade Street shareholders at closing.

Second, the addition of Trade Street's high quality apartment communities will reduce IRT's average property age to 20 years while improving average base rents, occupancy levels and operating margins on the combined portfolio.

Third, the acquisition accelerates IRT's market penetration as a leading non-gateway multifamily property owner by expanding IRT's geographic diversity into eight new markets while enhancing IRT's presence in three existing markets with a focus on the Southeast region.

Finally, we expect the transaction will have an immediate financial benefit for IRT. The transaction is expected to be accretive in 2016 core FFO with meaningful identified run rate cost savings and NOI upside from value-added CapEx. The S4 fully details the transaction and pro forma impact on IRT but I would like to take a moment to summarize our plan for funding the transaction and our longer-term plans regarding our balance sheet.

To fund the transaction, we will assume and acquire $161 million in mortgage financing, draw down $262 million from our new credit facility, and fully utilize our new $120 million interim facility. The Trade Street shareholders will receive approximately 16 million IRT shares and we will use approximately $11 million of cash from IRT's balance sheet. We will not issue common equity at current levels to fund any portion of this transaction.

After closing the transaction, we expect IRT's debt to total assets to be approximately 71%. To reduce our leverage, we have identified three properties for sale which we believe have reached their economic potential and don't fit within our post Trade Street geographic focus. The proceeds would be used to retire short-term debt thereby reducing our leverage.

Looking forward our goal is to have leverage reduced to approximately 50% of assets within two years.

At this point I would like to turn the call over to Jim to provide details on our results and then to Farrell to discuss IRT's portfolio and provide some color around the Trade Street assets. Jim?

Thanks, Scott. I will discuss our operating results for the quarter first and end with a discussion of our merger with Trade Street.

During the quarter, core FFO was $0.19 per share or $6.3 million, up 85% from $3.4 million for the same quarter of last year. This quarter we are reporting a GAAP net income of $337,000.

During the quarter, revenue was up $11.2 million as compared to last year. This increase is primarily from $9.9 million of revenue from 12 properties that were acquired after the second quarter of last year. Property operating expenses increased $5 million this quarter as compared to last year, most of which was associated with properties acquired since Q2 of last year.

NOI for the portfolio was $12.2 million with an NOI margin of approximately 53%. At quarter end, the portfolio's occupancy was 92.5% with a weighted average monthly rental rate of $840.

As discussed on previous calls when we acquire properties 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.

With regards to the same-store portfolio, rental revenue was $11.7 million, up 5.1% this quarter as compared to last year as rental rates ticked up across the same-store portfolio. Operating expenses at the same-store properties were $5.6 million, up $200,000 or 3.5%.

Same-store NOI was $6.1 million this quarter, an increase of 6.5% over the second quarter of last year. At quarter end, the same-store portfolio reported occupancy at 92.2% with a weighted average monthly rental rate of $787.

During the quarter, we closed on our previously announced acquisition of a 236 unit property in Indianapolis for $25.3 million. The property was 91% occupied at closing with an average effective monthly rent of $925 per unit. We acquired this property with cash and subsequently financed the property with $14.8 million of borrowings on our existing line of credit.

During the quarter, we incurred $1.3 million of asset management fees paid to our external advisor. Of this amount, $1.1 million represented our base asset management fee and $200,000 represented our incentive management fee.

Interest expense increased by $2.3 million during the second quarter as compared to the second quarter last year. This increase is due to the $229 million of financing obtained to purchase the properties acquired after the second quarter of last year. As of June 30, our weighted average effective interest cost is 3.6% and our consolidated leverage is 61.9%.

We ended the quarter with $717 million of gross investments in real estate representing just over 9000 units and $457 million of debt. During the quarter, we spent $2.2 million in capital expenditures, $1 million of which was associated with revenue enhancing or acquisition-related CapEx and $1.2 million or $133 per unit on recurring CapEx. Normally our maintenance CapEx runs higher in the second and third quarters as the weather supports the maintenance effort. We target to spend approximately $350 to $400 per unit annually on maintenance CapEx.

Turning now to Trade Street. We expect the transaction to close by the end of the third quarter. As Scott mentioned, we did file our first amendment to our Form S4 registration statement and have asked the SEC to declare it effective so that we can begin the proxy process.

As Scott mentioned, we have agreed to acquire Trade Street through a merger transaction at $7.60 per share of which approximately 50% will be paid in cash and 50% will be paid through the issuance of IRT shares at a $9.25 per IRT share reference price. This is a good transaction for IRT as it increases our operating scale by adding $650 million of assets to our balance sheet comprising just under 5000 units and reducing the average age of our portfolio to 20 years along with a host of other benefits.

To fund the closing of the merger, we received a commitment from KeyBanc on a new $325 million 3-year credit facility and an 18-month $120 million interim term facility. The credit facility bears interest on a sliding scale ranging from 165 basis points over LIBOR to 245 basis points over LIBOR based on our corporate leverage.

At closing, we are expecting to draw $276 million on this credit facility which includes $14 million to refinance our existing line of credit. The bridge term loan bears interest at LIBOR plus 500 basis points and is expected to be fully drawn at closing.

In addition, we are obtaining and assuming $160 million of first mortgage financing on six properties acquired from Trade Street. These mortgages will have interest rates ranging from 3.2% to 4.3% and maturities ranging from September 2020 through September 2023.

While we have committed financing from our investment bankers, these KeyBanc facilities provide longer-term and more flexibility to fund the merger and our remaining plans for growth as the credit facility has an accordion feature up to $450 million.

As Farrell will discuss, the Trade Street properties are experiencing positive NOI growth as their first generation leases term. We have forecast that the Trade Street properties will provide approximately $38 million to $39 million of NOI annually. By adding this into our historical portfolio, we are expecting to see core FFO of approximately $0.21 to $0.22 per quarter once the transaction has closed.

At this point we will turn the call over to Farrell to discuss the portfolio. Farrell?

Thanks, Jim. Scott mentioned the current IRT portfolio is performing well inclusive of two outliers. Windrush, one of our communities in Oklahoma City, is located 2 miles from the University of Central Oklahoma and has exposure to its student body. For this reason the property historically experiences a short-term drop in occupancy in June with occupancy ramping back up in July and August as the school is open for session. The community is 94% pre-leased and has experienced an average occupancy of 94% over the past 12 months.

In regards to Bayview, which we purchased in May, the previous management entered into a corporate lease program with a local hospital in 2010 for 29 units or 12% of the property at below market rents. Prior to closing, we came to terms with the hospital to terminate this contract and phase out the corporate units. We have recognized an average monthly rental increase of $191 equal to 23% on the seven units we have released to date.

As the portfolio continues to scale and becomes more granular, these fluctuations will have less and less of an impact on any given quarter.

We are continuing to see strong fundamentals in the multifamily sector. Our rents -- our markets are experiencing stable occupancy and continued rent growth both year-over-year and quarter-over-quarter. On a macro level, total deliveries for 2015 are reaching pre-recession levels but in a much different environment. There is significantly more renters in the rental pool both by choice and necessity.

The Urban Institute projected between 2010 and 2030 growth in rental households will exceed that of homeowners with an increase of 30 million rental households compared to 9 million homeowner households. There is several factors that are contributing to this. Millennials are finally working and creating households and generally postponing the decision to marry and have children which extends the amount of time they remain in the rental pool. There is a general attitude shift between renting and owning whereby renting has become more acceptable and a lifestyle choice.

Credit remains challenging making it difficult for many to qualify for home loans and the general overhang from the recession persists. We believe these factors will continue to present opportunities in our business with stable occupancy and consistent rent growth.

On May 1, we purchased a 236 unit community built in 2004 and located in Indianapolis. We purchased the property from a tenant in common ownership structure with the third-party managing the property and believe that we can recognize operational upside relatively quickly in these situations for instance with the cancellation of the corporate lease contract. The property is well located in the Castleton neighborhood at the interchange of I-465 which is the city's beltway and I-69. It is a short distance to the one million-square-foot Castleton Business Park and the Castleman Mall, which is the largest mall in the state.

The acquisition is consistent with our approach to find newer communities in well located submarkets in close proximity to employment and retail.

This particular submarket contains 15,000 units with a 4.5% vacancy and average effective rent of $832. No units were added to the submarket in 2015 and only 99 additional units are expected to be delivered in 2016.

In regards to the Trade Street portfolio, we saw an opportunity to add a quality portfolio of communities in some new markets while expanding our footprint in existing markets. The acquisition creates immediate scale in the Carolinas and in cities that have strong fundamentals. The growth in Raleigh-Durham is well-documented. Greenville is a manufacturing machine with BMW, Michelin, GE, Fluor, and Lockheed Martin all with facilities or headquarters in the area.

Boeing is continuing to grow in Charleston and Volvo just announced the city is the location for its first US manufacturing plant. The Dallas assets are well located in Frisco, Plano and the Craig Ranch property will benefit due to its accessibility to the legacy office retail corridor which is experiencing significant development.

FedEx, Toyota and Liberty Mut0ual will create 10,000 additional jobs in the area located just 10 minutes to the Avenues of Craig Ranch.

In addition given that many of the communities are recently built, several of the properties contain first generation leases with rents that are typically below market as you can seed rental rate to lease the property more quickly. Because of this, we believe there is an ability on some assets to outperform market rent growth. We also intend to implement an interior renovation at two of the communities and install much-needed carports at two of the Dallas communities. These improvements are budgeted to cost $4 million and will generate an additional $1 million of NOI annually.

We're looking forward to close on the transaction and have a regionally based management platform that will make the transition as seamless as possible. Scott?

Thank you, Farrell. At this point let's open the call for questions.

(Operator Instructions). Wilkes Graham, Compass Point.

Good morning, everyone. I appreciate all of the detail on the financing of the Trade Street deal, can we just go over the numbers again on that? Jim, I think you said that the KeyBanc facility is $325 million of capacity, it is three years and it is LIBOR plus 165 to 245?

That is correct. The spread is based on our corporate leverage.

And you are going to draw $276 million right away?

That is correct and that includes us paying back or repaying or refinancing the Huntington Bank line of credit which has around $14 million outstanding today.

Okay. And then there is the $189 million bridge loan, LIBOR plus 500, what was the term on that?

It is $120 million interim term loan. And it has a 12-month term with a six-month extension option so 18 months total.

Okay. And then you've got the $161 million of mortgages. Do you know the weighted average interest rate on those?

It is right around 3.8%, it ranges from 3.2% to 4.3%.

And Scott, I was just trying to jot down everything you were saying. Where do you have debt to total assets sort of day one when the deal closes relative to the 50% you want to get to in two years?

71%.

Okay.

We think we can reduce that down to about 66% or 67% relatively quickly after closing by selling a number of properties that we have identified. As I said, we believe they have reached their value potential and they are really not within the Company's footprint post Trade Street closing.

So your point is obviously the stock is disconnected from fundamentals. You are comfortable just staying at a higher leverage range until the stock price is at a level that make sense to raise capital?

We are and we have -- again, we have identified these properties for sale. There is a couple of properties within the Trade Street portfolio that we think we probably will not want to hold long-term so we will appropriately generate cash capital from other areas rather than issuing common stock to start to reduce leverage.

How far down do you think you can get that leverage number in the next couple of years?

I would like it to be about 50% and I think we can get there.

Do you think you can get all the way there without raising equity at all?

Probably not all the way down to the 50% leverage but remember at the same time we want to continue to grow the portfolio. And it all is determined on where the equity is trading. We have no preferred stock outstanding at all. Other peers of ours are growing and growing and growing issuing ridiculously amounts of preferred stock. We haven't done that. So that is an opportunity in the future.

I don't like where our common stock is trading, I think it makes no sense and I have made the point directly and I will reiterate it again, we are not going to issue shares anywhere near this level.

Jim, just to confirm. The maintenance CapEx was $1.2 million for the quarter?

That is correct, about $133 per unit.

I think that is it for me. Thank you.

Daniel Donlan, Ladenburg.

Thank you and good morning. Jim, can you walk through -- I think you said the same-store NOI was up 6.5% on the quarter. I wasn't able to find that number in the press release. Could you kind of walk through the components of what is driving that increase?

Sure, it is primarily driven by just an increase in revenue so the same-store revenue for the quarter was $11.7 million and that was up about 5.1% since the second quarter of last year.

But then expenses? (multiple speakers) Go ahead.

The property OpEx was $5.6 million and that was up about $200,000 from last year.

So I guess maybe -- so why is the same-store NOI up more than the revenues if the expenses went up? Is it just NOI margins because I'm having a hard time reconciling (multiple speakers)

The NOI margin improved over the quarter from Q2 last year to Q2 this year.

Okay, okay. All right. That is helpful. And as talking about the merger, I think you said that you saw the run rate of core FFO between $0.21 and $0.22. Is that right?

That is correct.

Okay. And what does that contemplate in terms of -- I assume that contemplates no equity issuance and then does that contemplate that you keep the bridge loan and the line of credit outstanding, the amounts that you guys just discussed?

It does not include any equity related capital raising and it does also factor in, as Scott mentioned, recycling some capital to repay the bridge facility.

Okay, that makes sense. But it doesn't have any terming out of the credit facility that you guys are going to take?

That is correct.

Okay. As far as a pro forma dividend, you are yielding like 9.7% right now. I think Trade Street is in the mid-6s. It seems like you are not getting credit at all for the dividend that you are paying. Any thoughts to kind of -- you discussed you wanted to delever, one of the easiest ways to delever would be to lower your yield or lower the dividend that you are paying. Could you provide us any color on that? Should we expect more of a reasonable yield going forward on the future company?

We have no intention nor will we reduce the dividend. We think that the yield should be lower because the share price should be higher. The company pro forma for the Trade Street closing as Jim said, has a core FFO that is $0.21 to $0.22 so there is more than enough to cover the $0.18 dividend and that is where we expect it to be as of now.

But I also want to clear one thing up on your first question regarding the growth in NOI and same-store. The revenues were up 5.1% year-over-year; the expenses were up 3.5% so that is where you get the 6% growth in NOI.

Okay. And then one of the things at Trade Street did is they had a nice supplemental that provided all the metrics of same-store NOI and what went into that. Is this something that you guys are going to contemplate doing? I think it would very much help investors be able to underwrite the portfolio and better understand the metrics because the 6.5% same-store NOI growth is something that is really positive relative to some of the other names and it wasn't mentioned in the press release?

We will be putting out a supplemental after the completion of the Trade Street transaction and it will be part of the quarterly process going forward.

Excellent. Okay. Thank you guys, really appreciate it.

Craig Kucera, Wunderlich.

Good morning guys. I was revisiting your comments from last quarter and it was before you announced Trade Street of course but you did mention you had about a $140 million pipeline. Is there any contemplation or ability to do that and are you committed to purchase any of those or have all those transactions short of been tabled for the near-term?

We are not committed at this point. We closed on one of them which we announced and we have enough capacity after the Trade Street closing to acquire another two or three properties without raising additional capital. I want to be clear about that. And that is how we are managing the pipeline forward.

So we can close Trade Street, we will close Trade Street, we have the capacity to close another two or three. We are managing through that pipeline, we have not committed to it yet but we expect that to happen before the end of the year.

Got it. Any future acquisitions beyond Trade Street, is that a component of your guidance or is your guidance sort of the acquisition of Trade Street on a standalone basis?

The guidance is the acquisition of Trade Street solely, not any other acquisition.

And it sounds like as you were discussing some of the assets that you are looking to sell, I think you mentioned three, those are likely to be Trade Street dispositions as opposed to existing IRT assets?

No, they are existing IRT assets that if you look at in our investor presentation if you look at the map, there is a number of properties that don't appear on the map but they are in a footnote and the reason they don't appear on the map is because they are we will call them outliers. They are not in the combined companies' geographic focus at the moment.

So we think it would be appropriate to sell those not only because of where they lie but because we also believe they have really reached their economic potential. They are in markets that have seen strong growth, values are extremely high and they are performing very well. So it is the time to sell.

I didn't want to do it before Trade Street because I don't want to be reducing the company that is already considered too small by some. So after we close Trade Street, these then become properties that are easy to sell and again use those proceeds to delever.

Right. Lastly, what cap rate do you think you are going to fetch on those dispositions?

I would think in the 5% range.

Low 5s.

Great, thanks.

Brian Hogan, William Blair.

What were the cap rates that you brought those properties at?

They were part of the original portfolio so we will have to get back to you on it. It is above 6%.

Above 6%, above 7% probably. These are properties that IRT has had since the beginning.

Yes, since mid 2011.

Okay, so nice return. What are the NOI from those three properties and then are those dispositions included in your guidance in as well of the 21, 22?

Those dispositions are included in the guidance.

As in like removed?

It is.

Okay. So the NOI we can kind of back into that or can you --?

We are estimating about $50 million in cash proceeds from the sale of those three assets.

Okay, that is helpful. Thanks. The occupancy rates obviously they're going to move around from quarter to quarter and you mentioned a couple of factors. But broadly occupancy rates were down across most of the portfolio. What do you attribute that to, just pushing lease rates or --?

It is pushing lease rates and it is also timing. You are looking at a 6-30 date so it is the end of a month and your occupancies are usually lower as you move out. But there is nothing specific that we can point to and we are managing to a 94% to 95%. If you take out the two properties I mentioned, you've got a blended 94% occupancy on the entire portfolio.

Okay. And then what do you think is your ability to continue to push these rates?

We think it is very positive. As we mentioned all the factors that are going into these markets, everybody's focused on deliveries but it is really not having significant impact on the ability to push rents so we are going to continue to do it until we can't.

All right.

We believe we have another clear two years of rent increases within these buckets.

Of how much, about 3% per year?

3% to 5% depending on the property.

Okay. The two Trade Street properties that you mentioned that potential sale, are those included in the $0.21, $0.22?

We are looking at their portfolio and what we would like to dispose but we didn't talk about a sale. The two properties I mentioned were older properties, one in Atlanta and one in Dallas that have the ability to increase rents with the small value-added program so that is what we anticipate doing with those two.

All right. That is it for me for now. Thanks.

John Benda, National Securities.

Good morning, everyone. How are you today? So just on your thoughts of 3% to 5% rent increases over the next two years which I think are (inaudible) based on the demographics and the Trade Street acquisition, what is your forward ability to pursue additional one-off acquisitions as you see opportunities develop? You guys have a leverage goal that you want to meet, but you are also selling properties and so how are you going to address the situation that might come up where a property is very attractively priced, you want to add it to the portfolio but you don't want to get in the way of the leverage targets?

I think for the lack of a better term, a gametime decision if the property is that attractive, we will find a way again as I said, we have no preferred shares outstanding. Again many of our peers have been funding their growth through that type of issuance. We have an Oklahoma City portfolio that we acquired that is very lowly levered at very high rates relative to its value today. And again, we will have to weigh how attractive an opportunity is. As I stated even after the Trade Street closing without any new capital, we still have enough dry powder to do another two to three acquisitions. That will take us through the end of the year and we'll manage from that point forward.

I have to stress this Company started two years ago with $160 million worth of assets when we IPO'ed in August of 2013. We are now at $700 million worth of assets. We have done multiple follow-on offerings and we have done it in away by putting the money to work quickly without having it be diluted to earnings at all. So we have accomplished exactly what we have set out to do and think we will be able to continue to do that going forward. We have to get through the closing of this Trade Street acquisition and hopefully the markets will settle down and we will continue on with our plan.

Okay. Also with your comment on the properties that are being sold, (inaudible) existing portfolio reaching their peak in terms of the occupancy and the ability to push rents, how many more of those may roll on over the next 18 to 24 months that will give you additional opportunities to recycle capital?

There is more. There is definitely more. Again, we want to grow so these are outliers and that is why we have identified these now but there are more.

Okay, great. Thank you.

Rob Stevenson, Janney.

Good morning, guys. Just one quick question. Does the voting agreements with [Cinder] and Monarch have any sort of break provision if IRT's stock price drops below a certain threshold?

It does. The agreement, the merger agreement, not with them specifically. It is the merger agreement that does. 15% below the RMZ, a change down to more than 15% of the change in the RMZ.

Okay, thank you, guys.

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

Thank you for joining our call today. As we have mentioned multiple times, we look forward to moving this Trade Street transaction forward and closing and then speaking with you after the end of the third quarter. Have a good day, everyone.

Thank you ladies and gentlemen for your participation in today's conference. This now concludes your presentation. You may now disconnect. Have a good day.