Independence Realty Trust Inc (IRT) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q2 2016 Independence Realty Trust, Inc. earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you, Sean, and good morning to everyone. Thank you for joining us today to review Independence Realty Trust's second-quarter 2016 financial results. On the call with me today are Scott Schaeffer, IRT's Chief Executive Officer; Jim Sebra, IRT's Chief Financial Officer; and Farrell Ender, President of Independence Realty Trust.

This morning's call is being webcast on our website at www.irtreit.com. There will be a replay of the call 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 the confirmation code of 47294804.

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 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 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?

Thanks, Andres, and thank you all for joining our call today. Earnings for the second quarter came in as expected at $0.22 per share of core FFO.

The portfolio performed well this quarter, with 5% same-store NOI growth, which offset the reduction in NOI from the previously announced property sales. The Trade Street portfolio continues to exceed our expectations and delivered a 13.5% year-over-year NOI growth.

During the quarter, we completed our plan of retiring the interim loan utilized to acquire the Trade Street portfolio last September. In total we sold four properties and used the net proceeds generated from these sales, plus the proceeds from refinancing three properties off our KeyBanc facility, to reduce the interim loan to approximately $35 million.

We retired the remaining balance with a new $40 million senior term loan facility that has a lower interest cost and a two-year term. These transactions lengthened our debt maturity profile, reduced our unsecured recourse debt, and lowered our debt to gross assets to 64%.

Looking ahead, our focus remains and driving NOI growth through rental rate increases while actively managing operating expenses. We believe our portfolio has more growth ahead. We continue to manage an active pipeline, as we see solid opportunities to grow the portfolio.

At this time I'd like to turn the call over to Farrell to discuss IRT's portfolio, followed by Jim, to go through the financial results. Farrell?

Thanks, Scott. We continue to see positive fundamentals in our business, which led to another quarter in which we saw all of our key metrics improve year-over-year. The total portfolio saw occupancy increase 80 basis points from 93.6% to 94.4%.

Rental rates increased from $840 last year to $961 in Q2 of 2016, and up from $952 sequentially. NOI margin increased from 53.7% last year to 56% in Q2 of this year, slightly up from 55.7% last quarter.

Looking at our same-store portfolio, NOI grew by 5% year-over-year, driven by a revenue increase of 3.1% and an increase in expenses of 1.1%. The average rental rate increased 2.9% from $832 to $856. Occupancy increased 30 basis points to 93.9%, and NOI margin increased almost 1 percentage point to 53.8%.

The Trade Street same-store saw a 5.4% increase in revenue, a 4.3% decrease in operating expenses attributed to lower insurance, personnel, and repair and maintenance costs. This yielded an NOI growth of 13.5%. Combining the same-store portfolio and the Trade Street portfolio, NOI growth year-over-year was 8.9%.

Our portfolio benefits from being in well-located suburban non-gateway markets with limited exposure to new construction. We expect the fundamentals in our market will remain strong throughout the balance of the year.

For example, we ended July with total occupancy of 94.9% and average occupancy for the month of 94%. Rent growth, combined for new and renewed leases, averaged 4.8% during the month of July.

Renewals and new leases that we have signed to date for August and September had average increases of 5.8% and 5.2%, respectively. We expect these rates to remain consistent as we get through the summer and fall leasing season.

We saw solid NOI growth year-over-year in the majority of the markets in which we have the greatest exposure. Louisville, representing 12% of our total NOI, experienced 2.8% revenue growth, 1% expense growth, and 4.2% NOI growth. Memphis, with a 10.7% share of our total NOI, experienced 4.4% rent growth, a decline in expenses of 12%, and NOI growth of 24%. The expense savings was a combination of a decline at the two former Trade Street properties and successfully re-tenanting two communities in the same-store portfolio, which reduced bad debt and turnover expenses compared to the second quarter of 2015.

Raleigh, which contributes 10% of our total NOI, had revenue growth of 8.3%, combined with expense growth of 0.5%, yielding NOI growth of 14.5%. And Atlanta, with 9.5% of our total NOI, had revenue growth of 11.5%, expense savings of 1.8%, generating NOI growth of 22.6%.

Much of this growth can be credited to a successful upgrade program at one of our communities, where we've upgraded 20 units at a cost of $5,500 per unit and are receiving an average of rent premium of $160 per month. It equates to a 35% return, and we will continue upgrading the property as tenants vacate.

In regards to the pipeline, we've seen cap rates for communities on our pipeline remain in a high 5% to low 6% range over the past six months as the debt markets have been relatively stable. The drop in Treasuries was met with lenders implementing floor rates on Treasury pricing, which absorbs some but not all of the benefit of the lower bond pricing.

We are currently seeing rates for seven- and 10-year fixed-rate debt in the 3% to 3.5% range. We continue to look at opportunities through our various relationships while managing our available capital and remaining capacity on our line. I will now turn the call over to Jim.

Thanks, Farrell. GAAP earnings this quarter was $0.61 per share or $29 million, up from $337,000 for the same quarter of last year. Core FFO this quarter was $0.22 per share or $10.8 million, up 69% from $6.4 million for the same quarter last year.

Our acquisition of Trade Street in September of last year and the gains on sales of properties this year continues to be the primary driver of our positive changes in earnings and core FFO.

From a P&L perspective, trends in revenue expenses continue to match our expectations. During the six months ended June 30, 2016, we had gains on the sale of three real estate assets of approximately $32 million. We ended the quarter with $1.3 billion of gross assets, representing 12,982 units and $880 million of debt.

During the quarter, we sold two properties, which generated $30 million of proceeds after repayment of the debt underlying the properties. We also entered into permanent financing on three properties, generating $106 million of proceeds. These proceeds were used to pay down our interim and revolving facilities with KeyBanc.

We also entered into a new $40 million senior term loan facility with KeyBanc, the proceeds of which were used to repay the remaining balance of the interim facilities. These activities have reduced our leverage to 64% as of June 30, 2016.

Our strategy of, one, recycling capital to delever and, two, growing Trade Street's NOI and cash flows through cost reductions are driving continued improved performance throughout IRT's balance sheet and earnings. As part of our strategy we also entered into a five-year interest rate swap that converts $150 million of our floating-rate debt to fixed-rate debt. After considering the effects of hedging, 85% of our debt is now fixed, and that's down from only 52% fixed at the end of March.

Before handing the call back to Scott, let's discuss our earnings guidance for 2016. Previously we guided that our core FFO would be between $0.82 and $0.88 per share. We are increasing our core FFO guidance to a range of $0.84 to $0.88 for 2016. The earnings release contains further information on the assumptions inherent in that guidance.

For Q3, we're expecting core FFO to be between $0.21 and $0.23 per share. Scott?

Thank you, Jim. Sean, let's go ahead and open up the call for questions.

(Operator Instructions) Brian Hogan, William Blair.

Good morning. Now that you're through with property sales, you've got your line refinanced, and in your prepared remarks you talk about an active pipeline, can you expand on that comment? Where are you looking at? Is it in your existing geographies to get more scale? And how competitive is the process?

Yes. We're looking to expand in a couple markets that we have single assets in: Orlando, Columbus. It's competitive, but we have significant relationships. We're looking at a couple OP deals where we have a unique situation to be able to offer that ability.

But it's a process of managing relationships, managing the pipeline, and managing our available capital.

All right. Construction activity, you mentioned it was -- you're in locations that don't have a lot of activity going on. But can you comment on that? Are you seeing increased building activity?

Obviously, rents are growing up at a nice pace. Do you see more competition from newbuilds?

Yes, this is Farrell. I don't want to say they don't have construction; it's just not near to the level that you'd see in other markets. On a macro level, if you look at -- it goes hand-in-hand with the supply of multifamily, with the supply of single-family.

And the supply of single-family homes are down significantly. Multifamily is just filling the gap right now.

The Reis data that just came out for 2016, incorporating the first half of the year, shows that on average our portfolio will have a 90% absorption rate, where the national average will be 75%. So again, we're just seeing less.

The markets that we are exposed to -- Orlando, Dallas, Austin, Charlotte -- we have less exposure given the amount of property we have in those markets. And the product is, in most cases, different than the new product being delivered. We're A-, B+ properties that are not competing with new construction.

You have to remember that our average rent is $950 or $960 a unit, and you cannot afford new construction at those rent levels. So even the markets where there is some new construction, it's not near us and that new construction doesn't really compete for our tenant.

All right. With rental rates being, I think you mentioned up 5%, thereabouts, here this summer, what is your ability to continue to push that rent?

And then take that one step further: you're reducing costs and making good strides there. How much room is left there? And then, do you have an NOI margin target in mind?

Well, we always want the NOI margin to be higher, and we've been able to increase that margin really steadily quarter-over-quarter. In a B+ class apartment, when you get into the mid to high 50%s, you're probably at maximum margin,. So I'm not sure there's a whole lot of room left there, but we'll continue to do it. And as we push rents and control expenses, you'll see incremental increases in that margin.

As far as pushing rents, we still believe there is real room. You have to remember, again, at a $900 apartment per month, if you raise it 5% you're talking about $45 a month. And I'm not sure that, even in a period where you have low wage growth, that people are going to get up and move over $45. So we still think there is a lot of room for continued rent growth in our properties.

Then one last one for me at the moment is, the payout ratio ticked down in the quarter but is still relatively high relative to your peers. Do you have a target in mind?

Obviously, growing operating earnings is the best way to do it. But would you benefit from a slight dividend cut to get it down along with your peers? Would it help your valuation out? Because you are paying out a lot of your earnings.

Well, we are paying out a lot of earnings and I think at the size company that -- the dividend -- and first of all, let me say we have no plans, thoughts of a dividend cut. So that's not on the table, even being remotely discussed here.

The dividend is covered. Any savings that we would have from a different dividend strategy would not amount to enough capital to really move the needle in any direction.

The portfolio is well occupied, very stable. We're continuing to push rents and grow NOI and core FFO. So we're comfortable with the dividend where it is, even though it may be a high payout ratio relative to our peers, because we recognize the income and NOI is only growing, which will then give us more cushion in coming months.

All right. Thanks for your time. Nice quarter.

Patrick Kealey, FBR.

Morning, guys. This is actually Matt on for Pat. Just a quick question. Regionally when we're looking at rental trends within your core markets, where are you seen the most strength in being able to push rents higher?

Austin and Florida. Austin just continues to impress. We saw double-digit range growth at one of our properties and high single-digit rent growth at the other. It's really, I think, just a testament to the strategy of doing a B to B+ asset class.

Okay, great. On the other hand, are there any markets where you're starting to see maybe a little bit of moderation?

Our two most challenging markets are Oklahoma City and Little Rock, where we're basically flat across the board. And Oklahoma City is obvious reasons; Little Rock is just a smaller market, less dynamic, less job growth.

Okay. Perfect. That's very helpful. Thank you.

Dan Donlan, Ladenburg.

Thank you. Most of my questions have been answered, but was just curious on the Trade Street portfolio. I know a lot of the properties there were newly delivered in 2015 and into late 2014. Just curious if they have more odd leasing cycles.

Typically you see most leases in an apartment building come due in the spring, but since some of these communities were delivered at all different times during the year, was just curious how you guys are dealing with that. Is there opportunity to see greater rent growth in the back half of the year? Is that still there in terms of seeing the initial leases that maybe were signed upon completion finally starting to turn? Or is most of that low-hanging fruit over with at this point in time?

Dan, it's Farrell. We've gotten through most of it. We've gone through two cycles. There is the opportunity at the Atlanta property, Big Creek where we're still in the first leasing phase of phase 2. But it's not going to be significant on the overall portfolio.

Okay. Appreciate it. That's it for me.

I'm showing no further questions at this time. I would now like to turn the conference back to Scott Schaeffer.

Thanks, everyone, for joining our call today. We look forward to speaking with you after the third quarter. Thanks.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.