Independence Realty Trust Inc (IRT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Independence Realty Trust, Incorporated Q4 2015 earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Andres Viroslav. Sir, you may begin.

Thank you, Chelsea, good morning to everyone. Thank you for joining us today to review Independence Realty Trust's fourth-quarter and FY15 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'll be a replay of the call via webcast on our website and telephonically beginning at approximately 12:00 PM Eastern time today. The dial-in for the replay is 855-859-2056, with a confirmation code of 38518766. Before I turn the call over to Scott, I'd like to remind everyone that there may be forward-looking statements made in this call. These forward-looking statements reflect 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, supplement 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 expectations.

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 measures 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 feelings 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?

Thanks, Andres, and thank you all for joining our call today. 2015 was a year of continued growth for Independence Realty Trust highlighted by the acquisition of Trade Street Residential. This transaction resulted in enhanced scale and liquidity, improved portfolio quality and a more clearly defined footprint focused in the southeastern part of the United States.

IRT ended the year with 49 properties over 13,700 units in predominantly non-gateway markets that continued to experience population growth, above average job growth along with limited editions to supply. All resulting in a supply/demand imbalance. It' s important to note especially in light of the current market conditions and talk of a Global economic slowdown potentially impacting the US market, that our non-gateway markets have historically proven stable and resilient through varying economic cycles.

As we enter 2016 we are focused on operational performance of our portfolio and are committed to reducing leverage particularly the interim loan utilized to acquire Trade Street Residential. As we've announced and previously discussed with you, we are selling three non-core communities plus one community we believe that has reached its economic potential. As of this call one property sale has closed and the other three are under contract and are scheduled to close throughout the next 60 days.

The proceeds from these dispositions will retire approximately 50% of the $120 million interim loan. As Farrell will discuss, the balance will be retired through: one, refinancing communities which are currently our KeyBanc facility with very attractive fixed-rate terms which will allow us to eliminate future interest-rate exposure without significantly increase in our current interest expense; two, entering into a new unsecured facility which will term-out the remaining balance of the line after the four property sales and refinancings are completed; and finally, we may sell additional properties from our Oklahoma City portfolio once the current loan matures.

We expect to have the interim loan completely retired prior to the end of second quarter. As I've discussed before I believe there's a disconnect between IRT share price and Company fundamentals. At our current share price we are trading at an implied 6.7% cap rate based on our 2016 projected NOI, while we are selling the four properties at a weighted 5.24% cap rate. Finally let me reiterate that we simply do not need to nor will we issue equity to retire the interim loan. We have a clear path to the extinguishment of this debt before the end of the second quarter.

At this point I'd like to turn the call to Jim to go through the numbers and then to Farrell to discuss IRT's portfolio, provide some color on what he is seeing in our markets, and to give details around the property sales and refinancings. Jim?

Thanks, Scott. The core of (technical difficulties) was $0.22 per share or $10.28 million, up 123% from $4.8 million for the same quarter of last year. This quarter we are reporting GAAP net income of $4.4 million driven primarily by the $6.4 million gain on the sale of the Centrepoint property in Tucson Arizona. More on that later. From an earnings point of view all categories found increases in Q4 and FY15 as compared to prior periods. Obviously our acquisitions from 2014 and our Trade Street merger in September 2015 are the drivers of those changes.

All the properties we acquired have been successfully transitioned and we are actively upgrading and renovating units, where we see good returns on our invested capital. With regards to the same-store portfolio we are continuing to see positive performance in NOI growth. While the supplemental package contains further detail on the same-store performance, a few items of note. The same-store portfolio for the fourth quarter is still relatively small at 21 properties or 6,150 units with the same-store portfolio for the year at only nine properties or 2,470 units.

For the quarter, NOI growth in the same-store portfolio was driven by rental increases of 4.2% leading to a 5.2% increase in total revenue and an increase in NOI of 6.1% over Q4 of last year. For the year NOI growth in the same-store portfolio was driven by 5.5% increase in rental rates leading to a 5.9% increase in total revenue and an increase in NOI of 7.5%. We ended the quarter with $1.4 billion of gross real estate investments representing 13,724 units and $975 million of debt.

During 2015 we spent $5.1 million on recurring capital expenditures or $472 per unit. As Scott mentioned we are actively selling properties to repay the KeyBanc interim bridge facility. Today the bridge -- the balance on that facility is $105.9 million as we use the proceeds from the Centrepoint property sale to reduce the interim bridge facility. Currently we've identified three additional assets for sale. In total we are expecting to receive $42 million from the sales of these assets that will be used to further reduce the interim bridge facility.

In our press release we introduced core ethical guidance for 2016 between $0.82 and $0.88 per diluted share. At the midpoint this represents a 6% growth in core FFO per share over 2015. The two drivers of this improvement is NOI growth of 4.5% to 5.5% at the same-store portfolio and NOI growth at the Trade Street portfolio between 6% and 7% in 2016. This guidance also assumes that the interim bridge facility is repaid through asset sales and the refinancing of the Oklahoma City portfolio and other properties in 2015.

Lastly we're forecasting capital expenditures totaling $9.8 million across the portfolio for 2016, $3.1 million of which is related to revenue-enhancing projects, with the remaining $6.7 million or $517 per unit related to normal recurring capital expenditures. With respect to the first quarter of 2016 we're expecting core FFO of $0.21 per share. Please bear in mind that this guidance reflects the impact of the sales of the previously discussed property sales. Farrell?

Thanks, Jim. I'd like to begin by providing additional details regarding the previously mentioned property sales. There are three properties that fall outside our geographic focus. Scott mentioned Centrepoint was sold in December for $33.6 million, netting $14.2 million in proceeds. The sale price represented a 5.7% nominal cap rate. Both Bell Creek and Tresa at Arrowhead are currently under contract with buyers performing due diligence and we expect them to close in early to mid April. These two sales will generate net proceeds of approximately $32 million after cost and repayment of property level debt. The blended nominal cap rate on these sales is 5.08%.

The fourth property which is scheduled to close today is located in Atlanta. The purchase price $18 million equal to a 4.93% cap rate and will generate net proceeds of $10 million. In total we expect to generate approximately $56 million in net proceeds from these four property sales. We are currently in the process of placing the Oklahoma City portfolio on our KeyBanc facility. The existing loan matures on April 1 and we anticipate to refinance -- we anticipate the refinance to occur in early March netting $20 million after repayment of the existing debt. The facility provides us the flexibility should we decide to sell one or more of the properties later in the year.

We are in the market to permanently finance three of the Trade Street properties that are on our KeyBanc facility given the favorable market for long-term fixed rate financing. The loans will not exceed 65% of value, with fixed interest rates of approximately 3.5% for a term of up to10 years. Once the refinancings are complete we expect to generate $20 million in additional proceeds for IRT.

Lastly we'll be drawing $6 million from our KeyBanc line which is not fully drawn when we close the facility in September. Total proceeds generated from the property sales and refinancing activity is approximately $102 million, all of which going toward reducing the interim loan. The remaining $18 million balance of the interim loan will be retired either through an unsecured -- a new unsecured facility or additional property sales. As of December 31, the IRT portfolio contained 13,724 units, consisting of 49 communities with 93% occupancy and an NOI margin of 56.2%.

As Jim discussed same-store NOI for our 21 properties same-store portfolio grew 6.1% over the fourth quarter last year resulting from a 5.2% rent growth, a 40 basis point improvement in occupancy, and a 4.2% increase in expenses primarily driven by an increasing realty taxes. Our nine property same-store portfolio for the year, while smaller, experienced NOI growth of 7.5% over the last year with revenue up 5.9% and expenses up 4.3%. During 2015 we saw the biggest increase in rent growth in Atlanta and Austin. Our worst-performing market during the year was Little Rock where we saw rents flat at our two communities.

We expect that market to improve as limited additions to supply are forecasted over the next couple years and the recent announcement that Bank of Ozarks will be building a new corporate campus adjacent to one of our committees, will provide an ongoing source of potential residents. We have yet to experience any negative impact in our Oklahoma City portfolio tied to the decline of the oil and gas industry. The city has made a significant effort to diversify their economy, and to date job losses due to oil and gas have been more than offset by gains in the private and public sectors, with the overall unemployment rate in December reported at 3.3%.

The majority of our tenant base is employed in the retail and service industry and we are monitoring the portfolio closely for any potential impact resulting from declines in the energy sector. In regards to the Trade Street portfolio performing well, the properties experienced year-over-year NOI growth of 10.1%. We are continuing with previously identified value-add capital projects which include unit renovations, additional carports, and installation of washers and dryers.

In addition to these upgrades at the Trade Street portfolio we continue to identify opportunities to create value and increase NOI throughout our whole portfolio. In 2015 we focused our managers on driving other revenue sources, such as pet fees, admin fees and trash collection. On a same-store basis this other revenue was up 12.3%. In 2016 we're testing a market with upgraded units of four different communities, while continuing to upgrade clubhouses, fitness centers and other amenities to provide the best living environment we can for our residents.

Finally in regards to the overall market, job growth in 2015 across our markets averaged 2.28% above the national average of 2% and population growth in our markets was 1.44% versus 1.08% nationally, resulting in total absorption of 96% as compared to the national average of 88%. These statistics continue to support our investment philosophy of targeting well-located communities in non-gateway markets that are experiencing population and job growth without the higher level of new supply impacting gateway markets. Back to you, Scott.

Thanks, Farrell. Operator, at this point I'd like to open the call up for questions.

Don Donlan, Ladenburg Thalmann.

Thank you and good morning.

Good morning, Don.

We're just kind of curious on the sale of Cumberland Glen. I'm not sure if that had previously done your disposition plan, but what kind of lends you to the fact to sell that asset versus some of the others?

You're right it hadn't been on our targeted sale list because it is within our footprint; however, there's a lot of money flowing into the market right in the area of this property because it's close to where the Atlanta Braves are building their new stadium. And we found that the property if upgraded would generate a very good return on investment.

But at the same time we found that we could sell it at a price that would be equal to the value after we had upgraded it, so we decided that we ought to just sell it and let the new buyer bear the risk of the redevelopment if you will.

Okay, that makes complete sense. And then what about -- on the Oklahoma City, I'm kind of surprised you are looking to divest those assets, you only acquired those back in early 2014, so what kind of -- the thought process there, especially given the negative sentiment around oil sensitive markets even though you haven't seen too much of an impact per your comments. Just kind curious what's leading that versus some of the other markets you maybe have?

Well when we bought that a couple years ago we bought it right. It was a purchase at a cap rate that, if I remember correctly was north of 8.5%, and the reason was because we needed to assume, or any purchaser would need to assume really unattractive fixed-rate financing that encumbered the properties. So we bought it knowing that, that financing would mature within a couple of years, and it matures in this April as Farrell discussed. The only reason that we would be looking to sell that is because it is an easy way frankly to retire the interim debt and to reduce leverage.

And we recognize that the leverage of this Company is higher than we want it to be. That is our focus is to reduce leverage, so we're maintaining flexibility but after we pay off the interim line, that if it's still appropriate we would sell these properties. Because we can sell them today at a cap rate that is probably 6% or slightly below, so there's a very nice appreciation aspect and equity tied up in there that we would then used to reduce leverage at the Company at that time, so it's all about recognizing that the leverage needs come down and this is a good way to do that.

Sure, understood. And then maybe, Jim, moving to the balance sheet a little bit here, was just curious what we should expect on the new facility from a pricing perspective versus maybe what you have now?

Yes. We're in the process of negotiating that, so I can't comment on exact pricing. We do expect it to be lower than our current interim bridge facility, at a large (multiple speakers) obviously. It will probably be co-terminus with the date of the line of credit.

Okay and then you talked about some, doing some longer-term financing. Where are you seeing rates right now for some of the assets that you're thinking about putting longer-term fixed-rate debt on?

Dan, it's Farrell. We're out to market with three properties that we're financing and if [Life] Company execution is the best right now, so we're looking at $150 million to $170 million over the corresponding treasury and we're in the process of going through lender review and in the next week or so we should have bids from lenders and be able to choose and disclose in the next 60 days.

Okay, and then as far as reducing leverage, I'm not sure there's opportunities out there but is there any way that you guys could potentially acquire another portfolio that's significantly less levered than you guys that would help you kind of deliver from that aspect? Is there any opportunities like that out there in the marketplace?

Well I'm sure there are, but we're somewhat constrained at the moment by the price of our equity, and I wouldn't want to be issuing equity at current prices in order to acquire real estate because I just don't think the dilution would offset -- it would be too great relative to the benefit of the additional properties. So we have a pipeline, there's still lots of opportunities available in our markets, we can still buy assets at cap rates that make a lot of sense. So we believe in the model going forward, but with the current turmoil in the markets and with our current share price we're not really, I should say interested or planning on issuing equity.

Sure. Sure. This will be my last question, and I think that something we kind of touched on a little bit here, but if we look out at year, maybe two years now, and you still see this valuation draft between private market and public market value. Is more asset sale, the potential sale of Company, is that on the table?

Absolutely, everything is on the table. We recognize that the shareholders own this Company and that at the current price of our shares it doesn't make sense relative to the net asset value.

Frankly if you use a $550 million cap on our 2016 NOI, the NAV of shares is over $11. At $575 million cap it's just about $10, so when you see where the shares are trading that's why I say there's disconnect.

We bought the Trade Street portfolio only really the first full quarter subsequent to that acquisition. As we all know the capital markets have been a little bit volatile, so we are going to continue to run the portfolio, increase rents, grow NOI and we will be looking at alternatives to create shareholder value in the future. And if it means selling off assets then that's what we'll do.

Okay, Scott, really appreciate the candor.

You're welcome.

Brian Hogan William Blair.

Good morning.

Good morning.

Kind of a follow-up on the last question, with leverage what is your target leverage?

Well, when we IPO'd this Company in the growth mode we said that we would have leverage not exceed 65% of the asset value, and we are slightly north of that now because of the acquisition of Trade Street and the fact that we took on a little more leverage rather than issuing equity. So we're a little bit above where we want to be. We recognize that a public multifamily Company should be in the 50% and below range.

We think that we'll get there over time; there's a lot of value tied up in the assets that we bought because we bought them at attractive cap rates, but our first focus is to eliminate or retire that interim debt because it has maturity that's now about a year out. And that's the most important thing, is to retire that and then to continue to work through these deleverage over time.

Once we're done with the property sales, we should have a leverage of about 11 times EBITDA. We want to get that down into the single digits.

All right. What are you seeing with cap rate trends today? I mean obviously you discussed with your property sales, they look like they're pretty attractive, but given the widening of credit spreads and the macro concerns what are you seeing on evaluations today?

I would tell you in the fourth quarter it felt like they were starting to widen out a little bit. We had some calls from brokers where deals fell apart, and I think that was primarily due to what you said, that the widening credit spreads and Freddy and Fanny really being at their cap. Coming into January in the first quarter, there's a lot more equity -- fresh equity and lender allocations are fresh.

So the debt is very attractive. As you said based on where we're seeing our sales going, I think end cap rates are pretty stable, they pulled back in a little bit in the first quarter as compared to the fourth quarter.

All right.

If I may interrupt, you had two phenomenon in the fourth quarter -- late in the fourth quarter. Not only did you have spreads widening but you also had the treasury increasing. If you think back to even early December the treasury was [220] and I think [230], and today it's [170], so you had both not only the treasury moving but spreads widening which of course does impact what people will pay for real estate.

We all know that real estate values are tied to interest rates and people's desire for their return on equity, and as those interest rates went up, in December that was impacting what people would and could pay, but now with the treasury back down and as Farrell says with new allocations with the lenders, we're seeing that transactions are happening at cap rates close to where they were throughout last year.

And then rental rate growth, what do you think you can continue -- I know you highlighted revenue growth of 4% to 5%. Is that what you're seeing in the rental rate increases? Obviously the characteristics of the properties in the cities you're in are pretty strong, is that what you can drivers?

We think -- that's what the Company forecast and we think that's very achievable. Keep in mind we do have a range to our guidance, and maybe we'll be able to produce a little more of that depending on macroeconomic conditions in 2016.

And then one last question for me, you do have relatively high dividend payout ratio, you are covering your dividend with your earnings comfortably I mean, but what are your thoughts on -- do you need to reduce the dividend at any point or --?

No, we don't. It is covered, the portfolio is very stable. We are reasonably projecting increases in NOI going forward, so there's no need to look at the dividend or to look at cutting the dividend.

Remember that this is a relatively small Company and any savings that would be, or capital retention that would be achieved through a dividend reduction is nominal so it's not on the table. We are comfortable with the dividend where it is, it is covered, we have again a stable portfolio, we've had a development portfolio or land portfolio. This is a stable portfolio of cash-flowing properties with increasing NOI so the dividend is fine.

All right, thank you

I'm not showing any further questions at this time. I would now like to turn the call back to Mr. Scott Schaeffer, Chief Executive Officer, for closing remarks.

Thank you for joining the call today and your interest in Independence Realty Trust. We look forward to speaking with you next quarter. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.