Independence Realty Trust Inc (IRT) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Independence Realty Trust, Inc. third-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Andres Viroslav. You have the floor, sir.

Thank you Andrew and good morning to everyone. Thank you for joining us today to review Independence Realty Trust's third-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 12 p.m. Eastern time today. The dial-in for the replay is 855-859-2056 with a confirmation code of 58477002.

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, supplemental information 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 expectation.

Participants may discuss non-GAAP financial measures in this call. A copy of IRT's press release and supplemental information 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. Good morning and thank you all for joining our call today.

The third quarter was highlighted with a closing on the acquisition of Trade Street Residential which happened on September 17. The transaction added 19 properties, totaling 4,989 units with a focus on the southeastern part of the United States.

The integration of the 19 properties is now complete and we will see the full income benefit to the portfolio and fourth quarter. The acquisition gives us scale as a newer, high-quality portfolio and increases liquidity in our shares. IRT now has a portfolio of 50 properties with over 14,000 units in predominantly non-gateway markets that continue to experience above average job growth and benefit from a supply-demand imbalance with limited editions to new apartment supply.

As we mentioned on our last call given where IRT shares are trading we would not and did not issue equity to fund any portion of the Trade Street acquisition. We continue to believe there is an absolute disconnect between our current price of our shares relative to the value and performance of our portfolio. We continue to believe that IRT shares are extremely undervalued, trading today at approximately a 24% discount to our NAV. The recently announced transaction between Starwood and Landmark Residential validates both our business plan and our asset valuations.

Now that the acquisition is closed we have turned our attention to reducing IRT's leverage ratio primarily through prudent property sales. Within the next nine months we expect to fully retire the $120 million interim loan which was used to fund the Trade Street acquisition. We have identified a number of properties for sale which have realized their economic potential and are located well outside of our core southeastern footprint.

The initial three properties are on target to be sold by the end of the first quarter of 2016. These three dispositions should generate approximately $50 million of net proceeds which will be utilized to reduce the interim facility. We are currently under agreement to sell Centrepoint in Tucson for $33.4 million and expect to net $14 million in proceeds.

We also have an executed LOI on Belle Creek in Denver. We intend to take Tresa to market in the first quarter of 2016.

Additionally the mortgage debt on our Oklahoma City portfolio is maturing in April of 2016 giving us the flexibility to sell or refinance that portfolio, thereby providing additional funds to further reduce the current interim loan. We believe there is an excess of $55 million in net proceeds available if the Oklahoma City portfolio were to be sold. In total we can generate approximately $100 million through these sales which would pay down a significant portion of the $120 million interim facility.

At this point I'd like to turn the call over to Farrell to discuss IRT's portfolio and to give some color around the integration of the Trade Street assets followed by Jim who will go through the numbers. Farrell?

Thanks, Scott. We continue to see positive momentum, solid growth and stable occupancy in both the overall multifamily market and our portfolio. The portfolio today consists of 50 properties with an average occupancy of 94%, an average effective monthly rent of $950 per unit.

During the third quarter Scott mentioned we successfully integrated the 19 Trade Street properties into the IRT portfolio. The property was seamless and after seven weeks into the acquisition we have not identified any issues that would prove to be impactful to operations.

The success of the integration was largely the result of Trade Street utilizing the same regional management structure as IRT in addition to using the same property management software. We benefited from the two Trade Street regional managers joining our management team which maintained consistency of the properties. To date, of the 120 on-site staff inherited through the acquisition only eight have decided to leave.

We've already begun to realize certain cost synergies as part of the transaction. We terminated Trade Street's lease on its Aventura office space which eliminated an annual lease payment of $150,000. We expect to reduce the property management software cost by $100,000 due to our combined size. During due diligence we were able to identify and place property insurance on the Trade Street portfolio that maintained the same coverage at an annual savings of almost $100,000.

Most significantly, the combined Company's G&A savings is $5 million. The combined G&A is $9.7 million versus almost $15 million the companies operated separately. We will continue to identify and recognize cost savings created by the combined companies.

At the property level as we enter the 2016 budgeting process we will be able to effectuate cost savings in markets where we now have a larger presence. The additional scale gives us the ability to demand better pricing on advertising, landscaping and other vendor services.

Looking to IRT's existing portfolio as I mentioned we continue to see stable occupancies with the ability to push rents as we balance occupancy and rent growth. Our same-store revenue was up 5.2% year over year and expenses increased 8.8% over the same time period producing NOI growth of 2%. The increase in expenses is directly attributed to the anticipated underwritten real estate tax reassessment of our Oklahoma City portfolio and higher payroll costs as we have fully staffed the majority of the same-store portfolio after the completion of evaluating, transitioning and training of the on-site employees.

With that I will hand it over to Jim.

Thanks, Farrell. Before discussing the numbers let's first discuss and point out the supplemental tax packet we published this quarter. As indicated in the press release the supplemental information packet is available on our website irtreit.com in the investor relations section.

The supplemental contains additional information on our operating performance, same-store performance, leverage metrics and portfolio data. We invite you to review our supplemental and various definitions for further information.

Core FFO this quarter was $0.20 per share or $7 million, up 73% from $4 million for the same quarter of last year. This quarter we are reporting GAAP net income of $24 million driven primarily by the $64 million gain on the Trade Street acquisition. More on that later.

During the quarter operating revenue was up $2.8 million as compared to the second quarter, a 12% increase related to the additional $2.6 million of revenue associated with the 19 Trade Street properties we acquired on September 17. The increase in revenue in the remaining portfolio is driven by higher occupancies and improved rental rates.

Property operating expenses increased $1.4 million this quarter as compared to the second quarter, again primarily driven by the operating expenses associated with the Trade Street portfolio. NOI for the portfolio at quarter-end was $13.5 million with an NOI margin of just over 53%. The portfolio's average occupancy was 94% during the quarter with a weighted average effective monthly rent per unit of $950.

With regard to the same-store portfolio, we provided additional information in our supplemental package including three- and nine-month same-store comparisons and a five-quarter trend. While we presented the same-store information this quarter it should be noted that the same-store portfolio for the three months ended September 30, 2015 was small, comprised of only 19 properties totaling 5,342 units or about 38% of our portfolio. The same-store portfolio for the nine-month period ended September 30 was even smaller, comprised of 10 properties aggregating 2,790 units or 20% of the portfolio.

For the nine months ended September 30, 2015 the same-store NOI growth was just over 5% as compared to the same-store period in 2014. And for the three months ended September 30, 2015 NOI growth was 2% compared to the same period in 2014.

While NOI in both of the same-store portfolios improved as revenues grew by approximately 5% operating expenses, however, increased thereby compressing both the NOI growth and the NOI margins. During Q3, 2014 there were approximately $100,000 of some one-time operating expense reductions that did not repeat in the third quarter of 2015. Without these one-time savings in Q3 last year same-store NOI would have increased 4% for the three-month period ended September 30, 2015.

As I noted previously, the same-store portfolios are small and as a result small dollar changes may cause large percentage changes. During the quarter the same-store portfolio reported an average occupancy of 93.8% with a weighted average effective monthly rent of $811 per unit, up 3.6% from the third quarter of last year.

During the quarter we incurred $1.3 million of asset management fees paid to our external advisor. Additionally as part of the Trade Street transaction IRT amended its advisory agreement and changed the structure of its base management and incentive fees in order to align them better with the market. Ultimately the new advisory agreement fee structure will reduce the asset management fee payable to IRT's external advisor when compared to the previous fee structure.

Interest expense increased during the quarter by $800,000 as compared to the second quarter of this year. This increase is entirely related to the interest expense we incurred associated with the new and/or assumed debt in connection with the Trade Street transaction.

We ended the quarter with $1.4 billion of gross investments, real estate representing just over 14,000 units and $1 billion of debt. During the quarter we did spend $1.5 million on recurring capital expenditures or $140 per unit.

Our recurring CapEx typically runs higher in the second and third quarters as the weather supports the maintenance efforts. We do target annually to spend approximately $350 to $400 per unit.

Turning now to the Trade Street acquisition, we close the transaction on September 17, 2015. We acquired all the outstanding common shares in OP units of Trade Street at $7.50 per share of which 50% was paid in cash and 50% was paid through the issuance of IRT shares at $9.25 per share. To close the transaction we paid $139 million to Trade Street shareholders and issued 15.1 million common shares and 1.9 million IRT OP units.

To fund the closing we assumed or issued $150 million of property level debt, utilized $270.5 million of our $325 million KeyBanc line of credit and fully funded the $120 million interim term facility also provided by KeyBanc. The credit facility bears interest on a sliding scale ranging from 155 basis points over LIBOR to 245 basis points over LIBOR based on our corporate leverage. The interim term loan bears interest at LIBOR plus 500 basis points.

Since the Trade Street transaction closed on September 17th we have not experienced a full period of operational performance. However, two items of note during the quarter related to the transaction.

First, we incurred and expensed $40.8 million of acquisition and other Trade Street related transaction expenses comprised primarily of $20 million of defeasance cost and $15 million of professional fees. Secondly, we recorded a gain of $64 million resulting from the merger as property appraisals were approximately $30 million higher with the remaining gain associated with a lower stock price at closing.

Under GAAP we're required to record the asset acquired and liabilities assumed and stock issued at their fair value on the closing date. As the IRT stock price just prior to closing was $7.27 per share, that's $1.98 lower than the negotiated reference price of $9.25 per share. This lower stock price from an accounting perspective lowered the consideration delivered to Trade Street shareholders thereby contributing to the gain.

Before handing the call back to Scott here's some information on the fourth quarter that we're expecting. As we've previously discussed, we expect the Trade Street properties will be a accretive to core FFO as their first-generation leases continue to turn.

From a same-store perspective we are forecasting the same-store portfolio for the fourth quarter of 2015 should see revenue increases of approximately 4% and operating expense increases of approximately 2% which will result in same-store NOI increases in excess of 5%. With the Trade Street portfolio and the same-store forecast I just mentioned we are expecting to see core FFO of approximately $0.21 to $0.22 per share in the fourth quarter.

Scott, this concludes the financial presentation.

Thank you, Jim. Operator, at this point I think we should open a call up for questions.

(Operator Instructions) Wilkes Graham, Compass Point.

Good morning. Scott I appreciate all the detail on the delevering plan with the assets.

Do you mind just you went through it -- it was sort of a lot of information pretty quickly. Can you just go through the assets that you plan to sell again and did you expect $100 million of gross proceeds or was that equity?

Thanks, Wilkes. The three properties that we have identified for sale are the property in Tucson which is named Centrepoint, the property in Denver which is Belle Creek and Tresa which is basically in Phoenix. As we said they are all outside of our core operating region today.

The combined net cash proceeds after the sale of those properties will be about $50 million. That's cash free back to the Company that would be able are available to retire part of the interim loan.

The Oklahoma City portfolio, we acquired it with an above market fixed-rate financing in place that we assumed that made the prepayment of that loan at the time prohibitively expensive. That loan matures in April of next year and at that point we can pay it off at par.

So again what I was saying was we are going to continue to monitor the situation but having that loan mature gives us the flexibility to sell those properties which would generate another $55 million give or take of free cash or refinance them if we've been able to retire the interim loan through other ways in the interim. It gives us the ability to refinance those and continue to own them.

So either way we think that we're in a good position because we can always sell the Oklahoma City portfolio and generate the cash. And it also is outside of our footprint. But there are five properties there so it's a little easier and meaningful to run those together if we decide to keep them.

Okay, I appreciate all that. On the incentive fee, the new incentive fee, have you established what the new hurdle is?

We have. It's actually in the agreement, it's $0.20 of core FFO per quarter.

Per quarter, yes. $0.80 okay.

And then, Scott, let's say you get through you pay off that piece of debt, does that delever you to a level where you're comfortable? Do you feel like you need any new equity app for that and either way once you get to that level how do you see your strategy going forward?

Well, it reduces, once we sell those assets it reduces the leverage the combined leverage down to about 60% of assets which is still slightly higher than we would like it to be. We think it should be in the 50s as an equity REIT going forward and it's about 11% or 11 times I should say EBITDA.

So again being a relatively small REIT where we're distributing the lion's share of our earnings into dividends the only way we can grow is by new forms of capital. So there's no real urgency for growth in this environment but if we want to grow in the future we're going to have to do that by finding new capital sources.

But again I can't stress enough we're not going to issue equity at these levels, these price levels. So I hope that answers your question.

It does. Thank you.

That's it for me. I appreciate it.

Brian Hogan, William Blair.

Good morning guys. A question, a follow-up to the last one, do you think you have any capacity to continue to do any acquisitions? Obviously there's a lot of timing when you sell properties in this and that.

Yes, we do. There is about $17 million of cash that we have available that we could invest into further acquisitions. But as we continue to monitor the capital markets in the Company what we're going to do is what's best either to use that to retire debt, possibly buy back shares in the future if they remain at current levels or continue with acquisitions.

But we're not jumping in and doing that right now because we're not sure that's the best use of our cash. We have a number of properties that we're looking at that would be acquired for OP units. However, again the price of our shares comes into play, we would only do that if we could issue shares at a price that made sense relative to the net value and not the current market.

And then the Trade Street portfolio you acquired, are there any properties in there? I think on the previous call you may have mentioned that there might be two or three properties in there that might be available for sale or is that still the case or are you still evaluating?

We're still evaluating. We're looking into and we're talking to brokers on the Chattanooga properties. And then if you look at the combined company's exposure in Memphis potentially sell an asset or two in that market.

Okay. Going forward the interest rate, it looks like I calculate it on an all-in basis it was 4.4%, kind of tough to have a true average for the quarter I guess. But what interest rate should we assume going forward?

This is Jim. The supplemental does have a breakdown of our debt and I think the weighted average cost back as of 9/30 is in that 3.6% range. So I think that kind of is an appropriate expectation of where the cost should be going forward.

And then a final question for me is on the last call I think Scott you had mentioned you expect a $0.20 to $0.22 CFFO per share going forward after the Trade Street. And just kind of clarify, does that include the property sales and so the timing --

It includes the effect of the property sells but it doesn't include any cash being generated from the property sales.

Okay. And so that's still a case $0.20 to $0.22 this year?

Well, Jim in his statement today just gave guidance for the fourth quarter of $0.21 to $0.22.

Okay, great. Thank you.

Sean Heberling, Valdes & Moreno.

Good morning, gentlemen. Congratulations on completing that transaction. I was just curious what are your thoughts on perhaps using or issuing preferred shares to either acquire properties, pay down debts or perhaps repurchase your common shares given that they are trading at roughly 24% discount to NAV?

Well, we're well aware of what Bluerock did a couple of weeks ago and are looking at that as part of a number of alternatives available to us for additional capital. Again it's not ideal because preferred shares can be considered additional debt relative to the common. But we do recognize the benefit of having a perpetual preferred capital available to the Company to continue its growth and the fact that it would be accretive to our common shareholders.

Great, thank you.

Daniel Donlon, Ladenburg Thalmann.

This is actually John Massocca on for Dan. Good morning, gentlemen. Just quickly, do you guys have any kind of color on performance of I know it's only been a couple of weeks now but the TSRE assets, do you have any historical same-store performance for those properties, the ones that TSRE has owned?

Sure, John, this is Jim. Trade Street the properties have been generating some good positive same-store performance year over year for the first and second quarters in that kind of 8% to 10% range. For the third quarter the same-store NOI performance for the Trade Street assets versus third quarter of last year was again in that same range just under 10%.

Thank you very much. Then

Thank you very much. Then maybe you can touch a little bit more on I know you mentioned the Landmark transaction. Is that kind of maybe a similar comp to your type of assets or your assets are higher quality than what Landmark was sold in that transaction or what do you think that pricing says about both in the multifamily space and the portfolio transaction, the multifamily space?

It was a larger portfolio than what we have. However, the properties are largely in markets similar to ours.

I think that our portfolio is a higher grade portfolio of properties and my understanding is that cap rate there was sub-6. So as I look at our portfolio and where we're what we paid for it and how we're calculating our NAV, I think it's a very good comparable for our Company.

Okay. And then maybe a little more nitty-gritty here, the big difference in CapEx per unit I know there's some seasonality, but is that typical to have that much variability from quarter to quarter in terms of the CapEx per unit or is this something kind of one-time-ish this year?

Nothing one-time-ish. It was the second and third quarters are typically higher simply because the weather is better to support the maintenance efforts. First quarter was kind of roughly half of the third-quarter number and we expect the fourth quarter to be a lot lower than the third-quarter number.

Okay, that's it for me. Thank you very much.

We have no other questioners in the queue at this time. So I'd like to turn the call back over to Scott Schaeffer for closing remarks.

Thank you for joining us today. And we look forward to speaking with you after the fourth quarter. Have a good day.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone have a great day.