Independence Realty Trust Inc (IRT) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Independence Realty Trust, Inc. Company Earnings Second Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Ms. Lauren Tarola, IRT Investment Relations representative. Ma'am, please begin.

Thank you. Good morning, everyone. Thank you for joining us today to review Independence Realty Trust's Second Quarter 2017 Financial Results. On the call with me today are Scott Schaeffer, our Chief Executive Officer; Jim Sebra, IRT's Chief Financial Officer; and Farrell Ender, President of IRT.

Today's call is being webcast on our website at www.irtliving.com. There'll be a replay of the call available via webcast on our Investor Relations website and telephonically beginning at approximately 12 PM Eastern Time today.

Before I turn the call over to Scott, I would like to remind everyone that there may be forward-looking statements that made during the 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 during 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 report on Form 8-K, available at IRT's Investor Relations website, along with IRT's other SEC filings. IRT does not undertake an obligation to update forward-looking statements in this call or with respect to matters described herein, except as may be required by law.

At this time, I will turn the call over to our CEO, Scott Schaeffer.

Thanks, Lauren, and thank you all for joining us today. I am pleased to report another strong quarter as we continue to execute on our investment, operational and financing strategies. We reported second quarter core FFO of $13.4 million, up 24% year-over-year on the back of 5.6% same-store NOI growth. Rental rates reached a record high for our portfolio with average effective monthly rent per unit reaching $1,010, up 3% sequentially and 5% year-over-year. Average occupancy across our portfolio was very strong as well, increasing to 94.9%, up 110 basis points compared to the first quarter of 2017.

Our portfolio performance reflects our commitment to operational excellence, as well as our value add initiative, both enabling rental rate growth while maintaining strong occupancy rates. The value-add initiative has been and will continue to be a key component for our long-term growth strategy. We are continuously evaluating each community to identify areas where we can improve unit interiors, common spaces and exteriors to reduce tenant turnover and associated costs, increased occupancy, resulting in enhanced portfolio of returns. We currently have 9 value-add projects underway and we'll look to add additional properties to the redevelopment pipeline for 2018.

In addition to value-add opportunities, we are also evaluating our communities through a capital recycling lens, looking to dispose of assets that no longer meet our middle-market quality standards and rotate capital into communities that both fit our investment thesis and represent an opportunity to unlock value. Year-to-date, we've executed nearly $147 million of transactional activity, disposing of 3 Class C properties, and purchasing solid Class B communities in attractive locations.

During the second quarter, we disposed of 3 communities, totaling $59.6 million that were previously identified as held for sale, and acquired 2 high-quality middle-market communities, one in Lexington, Kentucky and one in Raleigh-Durham, North Carolina. Farrell will discuss these transactions in more detail, but I want to highlight that these acquisitions are a perfect fit with our stated investment criteria, acquire quality Class B assets located in select amenity rich submarkets across key non-gateway MSAs that offer attractive supply-demand dynamics.

Turning to the balance sheet. We maintained a simple flexible balance sheet, with 95% of our debt fixed rate with no near-term maturities. We are focused on our leverage ratio, and we'll look to reduce that metric overtime to accretive acquisitions and organic NOI growth. Lastly, as previously announced on June 20th, we marked the end of our shared services period with RAIT, and the official completion of our management internalization. We are now a fully independent REIT, with new corporate headquarters here in Philadelphia, with all operations managed internally.

We are also pleased to announce another milestone that was completed yesterday, our transfer from the NYSE MKT to the New York Stock Exchange. Through this new trading platform, we intend to reach more investors, increase liquidity and raise visibility, which ultimately will enhance value for our shareholders.

As we look toward the second half of 2017, we are committed to our strategy for long-term growth and feel our simple balance sheet and straightforward approach to owning and operating well-located, middle-market communities in non-gateway markets, are differentiators.

And with that, I'll turn the call over to Farrell to discuss our operations in more detail. Farrell?

Thanks, Scott. We continue to see strong performance in our key markets, stability across our portfolio, as well as a rebound in fundamentals and market's initial softness in the previous quarters. New supply in many of our markets remains low, as a percentage of overall inventory, especially when compared to gateway markets. As we mentioned in the past, softness in the portfolio has been mainly confined to our Class A communities that have more direct exposure to new supply. We have seen this in Charlotte and Orlando, markets with above average deliveries, and we're seeing it now in Greenville. Our Class A community there have seen a decline in rents of 1.1% as compared to last year, as we work to maintain occupancy as 2 new competing properties have come online and are currently in lease up.

In our top-performing markets, Little Rock and Charlotte, revenue has grown 9.8% and 8.2%, respectively, compared to last year. Little Rock's growth comes a year after rents dipped as a result of new properties delivered in the area, impacting the overall market. With those new buildings now occupied, going forward, we expect stable occupancy and normalized rent growth for our 2 communities.

Charlotte's performance can be attributed to the termination of the concessions we offered to remain competitive with the new construction which impacted the community throughout 2016.

Two of the more challenging markets, Greenville, which I previously mentioned, saw a 1.1% decline in rent; and Oklahoma City saw revenue growth of 1%. After a couple of quarters of committing additional resources and reallocating staff in Oklahoma City, we have confidence that the portfolio is stabilized, closing the quarter with blended occupancy of 92% across our 5 communities with the ability to slowly start pushing rents.

In our 4 largest (inaudible) Louisville, Memphis, Atlanta and Raleigh, we saw stable occupancy and strong year-over-year revenue growth of 5.2%. Average occupancy across the portfolio increased to 94.9%, up 110 basis points compared to the first quarter of 2017 and up 50 basis points from Q2 2016.

Rental rates were also higher, with average effective monthly rent per unit reaching $1,010, up 3% sequentially and 5% year-over-year. The combined growth of our occupancy and rental rates resulted in same-store NOI growth of 5.6% year-over-year and 5.4% for the first 6 months of the year. We continue to execute on our investment strategy, demonstrated by our 5 transactions during the quarter. We have prioritized disposing of our assets held for sale, while taking an opportunistic approach to identifying and purchasing communities to economically attractive submarkets in non-gateway cities. As Scott mentioned, during the quarter, we purchased 2 communities to strengthen our portfolio at a blended economic cap rate of 6.1% on pro forma year 1 underwriting.

Both acquisitions were primarily funded through a combination of cash and our line of credit. The first community in Lexington, Kentucky was purchased for approximately $14 million. It has 160 units, and is located in Georgetown, a part of the Scott County submarket of Lexington. We have been managing the property -- we've been managing the property since 2009 and have a clear understanding of what it takes to unlock incremental value at the property. As we stated last quarter, we see the opportunity and ability to implement a light value-add program, consisting of floor and lighting and hardware. These upgrades cost an average of $2,600 per unit, and generate a $70 monthly rent premium.

We also acquired a 328 unit community in Raleigh, North Carolina for approximately $43 million. Located in the South Durham submarket, the area has been known for mobilizing recent graduates of favoring Universities to its attractive growing job market. The area is characterized by strong healthcare market with UNC Rex Hospital and Duke Health Enterprises and a top tier technology hub with employers like IBM, Citrix, Cisco and Sasol operating in the area. In addition to the economic opportunity, the market has seen substantial population growth of 13.4% between 2010 and 2016.

We also strengthened our portfolio by closing on the sale of 3 of our 4 Class C assets previously held for sale. With a combined sale price of $59.6 million and a blended economic cap rate of 5.6%, we are confident that our capital recycling activity strengthens our overall portfolio and positions us to be flexible and acquisitive when new opportunities arise. Our one remaining Class C property in Jackson, Mississippi is under contract, and we anticipate it closing during the third quarter.

Finally, we have constantly evaluating our portfolio to find new ways to create a better living experience for our tenants and value for our shareholders by improving our communities through value add projects. We define value add as any investment that will result in an ability to increase rents and provide a meaningful reduction in costs. We have identified 1,600 units located in 9 communities with value-add initiatives currently underway or plan to begin in the near future with anticipated completion by the end of 2018. These improvements are averaging $6,700 per unit, and expected an annual return on invested capital of 25%.

As I mentioned in our first call, we are beginning a large renovation project at our Jamestown community in Louisville. The average cost of the unit interior upgrades is $8,465, which will provide an average premium of $143 per month in rent. We also have a similar initiative underway in Memphis, averaging $4,000 per unit, with expected average rent premiums of $111 per month. Beyond these 9 properties, we anticipate the ability to implement similar value add on an additional 8 properties totaling 2,500 units.

As Jim will discuss in more detail, we feel our strong operations and capital recycling and value-add strategies will continue to deliver strong same-store growth as we move through the second half of the year. I'll now hand the call off to Jim for a financial update.

Thanks, Farrell. For the quarter, net income available to common shareholders was $18.7 million, and diluted EPS was $0.27 per share. Core FFO per share was $0.19, up sequentially, but down $0.03 year-over-year due to an increased share count, as a result of the management internalization and deleveraging that incurred in Q4 2016. Adjusted EBITDA increased, up 4.3% year-over-year to $19.5 million. Our operations are strong again this quarter, with total revenue of $39.6 million compared to $39.1 million last quarter and $38.3 million in Q2 2016.

Same-store total revenue increased 4.3% year-over-year to $36.2 million, while property level operating expenses increased by 2.2% to $14.3 million. Same-store NOI increased 5.6% year-over-year.

Turning to the balance sheet. We closed the quarter with 46 properties aggregating $1.3 billion of gross assets. Our indebtedness was $765 million, down both sequentially and year-over-year, as our recent capital recycling activity has helped to lower our debt exposure. Unencumbered assets as a percent of the total portfolio count have increased this quarter to 33%, up from 29% in Q1 2017. By total NOI, unencumbered assets represents 31% of our portfolio in Q2 2017.

As previously stated, we are committed to reducing our net debt to adjusted EBITDA ratio to the mid-7s in the long term. We plan to meet our target by growing NOI organically and strategically recycling capital, using those gains to further grow NOI. For the quarter ended June 30th, this ratio was 9.7x. However, adjusting for acquisitions and dispositions that occurred late in the quarter, our pro forma ratio is 9.5x. As we move into the second half of the year, we've updated our guidance for fiscal year 2017, as outlined in our press release, and I will highlight some of the key metrics as well. Given our strong same-store -- revenue and NOI growth over the first 6 months of the year, we are increasing our same-store revenue growth assumptions to 4% to 4.5%, up from 3.5% to 4.5% previously. Same-store NOI growth has increased to 4.5% to 5.5%, up from 3.5% to 4.5% previously. We've also narrowed our range of G&A expenses and are still on target to achieve the $2.5 million of savings related to the recently completed internalization that we previously highlighted. We increased the midpoint of our core FFO guidance by raising the low end to $0.73, up from $0.72 previously. We left the top end of our guidance unchanged at $0.76 per share.

Lastly, the completion of our recent internalization and uplisting to the NYSE marks a significant milestone in IRT's evolution as a leading owner and operator of high-quality middle-market multifamily communities. In conjunction with our recent evolution, we are changing our dividend payment policy to better align with our REIT industry peers. Beginning in Q1 2018, IRT will pay dividends on a quarterly rather than a monthly basis. We will remind all investors of this policy change closer to the date as well.

With that, Howard, we would like to turn the call over to you for any questions.

(Operator Instructions) Our first question or comment comes from the line of Drew Babin from RW Baird and Company.

I was hoping you could talk about the specifics behind the significant decrease in property tax growth expectations for this year. Was that the result of appeals coming in successfully or I was hoping you could walk me through that.

Yes. It's both a combination of appeals coming in successfully, and the initial assessments coming in lower than what we forecast originally.

Okay. And then quickly on G&A, during the quarter, with the shared services agreement, how much did the shared services agreement impact that? And I guess kind of absent that, is the remaining G&A number kind of a good run rate, going forward?

Yes, I mean, the G&A that we've presented on the face of our financials for the 6 months ended June 30 was $4.8 million. I'll just let -- I'll make sure you know that, that includes about $1.1 million of stock comp expense. So when you kind of remove the stock comp, it's about $3.7 million for the year-to-date, and that's kind of pretty much a good run rate for the full year in terms of roughly 7.4% or [$25] million.

Okay. And then in the transaction market right now, just curious what you're seeing across kind of your regions. Is it mostly lease up deals that are hitting the market? Or is there a significant kind of base of core deals at pricing that's reasonably attractive.

No. We have a pretty healthy pipeline. I think it's representative of what we did this past quarter. We've targeted specific markets, like Tampa and Raleigh, which we bought in over the past year, and there's plenty of opportunity out there. It's our job to go out there and find it and I think that this -- this quarter's been pretty representative of what we've been able to buy.

Our next question or comment comes from the line of Craig Kucera from FBR Capital Markets.

I appreciate the color on the redevelopment, but can we kind of go back through that kind of what you're expecting to get through in 2018? Because I think I -- my notes were a little bit jumbled up.

Sure. So we have 9 properties that total 1,600 units that were going to be in the process or going to be renovated throughout -- remainder of this year and throughout 2018. And then beyond that, we've identified another 8 properties, approximately 2,500 units that will start Phase 2 sometime in 2018, and again that will take another year to fully renovate these properties.

Got it. And so the first 9 properties, I think, you mentioned you'd be spending an average of maybe $6,700 a unit. Is that roughly what you think you might spend on the other properties once you start them -- if you start them?

Yes, we're estimating $5,500 on average for upgrades on that second phase.

Okay, great. And just going back to the guidance, when you look across the board, your revenue expectations are higher, your expenses are lower. Were you being conservative earlier this year or have you seen some real market strengthening?

Yes, we were certainly being conservative. We have seen -- continue to be above our guidance in terms of same store. So we've seen some market improvement than what we originally focused, but we're certainly -- you know conservatism was certainly a point of the initial guidance.

Our next question or comment comes from the line of Dan Donlan from Ladenburg Solman.

Jim, just wanted to go back to the guidance question. You guys did $0.19 in the quarter. So just kind of curious if to get to the low and the high end -- to get to the low-end you'd have to see kind of reduction in kind of that run rate, so I'm just curious what's driving that. It feels like the timing of the asset sales and acquisitions in the second quarter would actually help you going forward, so maybe -- is it just simply that the Crossing sale is that kind of what is potentially driving the run rate down towards the -- if you're looking at the low-end?

Basically yes.

Okay. And so your acquisition guidance, you've already hit it -- it's $87 million. What are your thoughts there in terms of looking at new properties going forward?

This is Scott. We are always looking for new property, but we've maintained and we'll continue to be focused on the fact that we'll grow when we can do it accretively to earnings and continue to ratchet down the leverage. I don't want to just grow for the sake of growth. So we have -- as Farrell mentioned, we have a nice pipeline of deals that we're looking at. However, it's just that at this stage. And if we identify additional assets that we feel appropriate to recycle out of, then we would look to tap that pipeline to replace those earnings. The final property, C property, that we have to sell, since we have now met our acquisition guidance, when we sell that, that final asset, those proceeds will go to reducing leverage.

Okay, perfect. And then just curious on the remaining exposure on a Class -- as a percentage of NOI, Class A, Class B, Class C, you'll be out of the Class C when you sell the Crossing. So maybe just what -- if you sell that, where do you stand on an exposure based on NOI?

On an exposure to Class C, we'll be out of -- do you have the [figures on that]

Right, just Class A and B.

Yes. So Class A represented about $8.4 million of our quarterly NOI for Q2 and Class B was $13.5 million.

Okay, perfect. And then just lastly, just going back to the acquisition questions, the properties that you purchased this quarter, looks like the construction is early 2000s. Is that kind of the vintage that you guys are going to be looking at on a go forward basis? Or the stuff built in the last, call it, 5 to 7 years on your radar screen or stuff maybe even in the 90s, just kind of curious there as we look forward.

Sure, Dan, it's Farrell. I mean, ideally, yes, it's what we're looking for year late 90s, early 2000 product that has 9 foot ceilings, has decent finishes. We can go in there and do, like we talked about, an amenity upgrade to the clubhouse and fitness center, and create it to up par, things like that, that people come to expect today and just have good clean units. And in the case of these 2, South Terrace, we feel has a really strong value add component. We've managed it for a while and know the property, and Haverford to a lesser extent, you can do a smaller value add and generate significant returns.

Okay. And then -- sorry, last one on the value add, how long of a tale does this program have? Do you feel like you'll be rehabbing properties through 2019 as the current portfolio exists? Any color there will be helpful.

So to get through everything we've identified, we'll more than likely do it through 2019, and then we'll continually evaluate the portfolio. I mean, as it ages, will some properties be added to that list? Probably. We just -- we'll continue to evaluate the portfolio.

Our next question or comment comes from the line of Brian Hogan from William Blair.

Quick question on the leverage. You said it was 9.5x pro forma. Was that pro forma for Crossings? I didn't quite catch that. And then as a follow-up...

It was not pro forma for Crossings. It's just pro forma for the 3 transactions that have -- 2 sales -- I'm sorry the 4 transactions, the 3 sales and the 1 acquisition -- the acquisitions that we did in the quarter. So once Crossings comes in, the net debt-to-EBITDA should kind of pro forma into the 9.3x, 9.4x on a go-forward basis.

Okay. And then you mentioned your target, Scott, I think, down around 7x. How long do you think you can-- it takes to get there?

It really depends on the NOI growth. I mean, NOI growth is the key driver of it, but our model suggests it's kind of end of 2019 time frame.

All right. And then actually, on the NOI, you have this nice NOI margin expansion and where do you think the margin can go from here? Is it into the low 60s? What time frame over the next several years?

Yes, I mean, again, it's a product of our NOI growth. I mean -- you're going to see -- we have probably a couple more percentage points to go [indiscernible] [out] to year [end], or see it get to the high 60s.

Not in low 60s or I guess...

Not the high 60s.

Low to mid-60s is where it will be. It's obviously running a Class B portfolio was a little more expensive than Class A and the rents aren't as high per unit or per foot. So the margins, we think, will top out in the mid-60s.

Okay. Let's shift to the ability to push rents. Obviously, you're doing the renovation type and value-add items. But just in general, are you seeing same ability to push rents 3% to 5%? And how long do you see that persisting?

I mean, I can't predict how much longer we'll see it, but looking forward for the rest of the year, I mean, we had the outliers that I mentioned both on the high and low end of the spectrum. But the portfolio in general in terms of revenue growth is falling between 2.5% and 5.5% pretty consistently.

We believe it's a function of the supply demand dynamic, and in our markets, we're really not seeing an increase in supply. Demand has maintained -- has been strong. We continue to see population and job growth, and as all that continues, we should be able to continue to push rents.

Okay. And last one for me, have you seen any shifts in the monthly turnover for the homeownership or for whatever reason -- I mean, what are the factors driving any shifts in the monthly turnover?

It's been pretty consistent that we have move outs, about 20% for homeownership and about 20% for relocation or job transfer. That's -- again, it may fluctuate a percentage point here or there. But generally, that's what people are again not renewing for.

And that's been pretty steady?

Yes.

Our next question or comment comes from the line of [Vlad Warshawsky] from Deutsche Bank.

Just a quick question on the cost of capital. Just like with the share price, where it is today, are you -- any intent to maybe de-lever more aggressively? When would you be comfortable in maybe doing something like that?

Well, we recognize that our leverage is higher than we want it to be and higher than it will be as we continue to move forward, but it still is very dilutive to delever the balance sheet through additional equity raises. So our plan had been, as Jim mentioned, to delever organically as NOI increases, but also, as we acquire new assets to equitize them a little more than we have in the past and through that process, ratchet down leverage even more, so that's the plan.

Got it. And then I guess you're trying to recycle out of the Class B assets. Are there any markets, in general, that you want to be maybe out of that -- you have a concern for 2018 or 2019?

Well, just to be clear, we're recycling, and have recycled out of the Class C assets, not Class B. Class B is our focus, and that's the -- where you'll see additional growth, moving forward. There are some markets, and we continue to evaluate the portfolio as a whole and markets where we have some limited exposure, and we don't intend to grow into more likely than not in the future will be markets that we exit, but we have not made any determination at this point.

(Operator Instructions) Our next question or comment comes from the line of Steve Shaw from Compass Point.

What was the total CapEx budget for Phase 2 of the value-add?

$14 million for Phase 2.

Thank you. I'm not showing any additional questions at this time. I'd like to turn the conference back over to management for any closing remarks.

Thank you for your continued interest in IRT. We appreciate you joining us today, and I hope to speak with you in the near future. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.