Independence Realty Trust Inc (IRT) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Independence Realty Trust's Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Lauren Tarola, Investor Relations Representative. Ma'am, you may begin.

Thank you. Good morning, everyone. Thank you for joining us today to review Independence Realty Trust's fourth quarter and full year 2017 financial results. On the call with me 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 IR website at www.irtliving.com. There will be a replay of the call available via webcast and telephonically, beginning at approximately 12:00 p.m. Eastern Time.

Before I turn the call over to Scott, I would like to remind everyone that there may be forward-looking statements made during 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 SEC filings 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.

Within IRT's press release, supplemental information and SEC filing, we include a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures. IRT does not undertake responsibility to update forward-looking statements in this call or with respect to matters described herein, except as may be required by law. With that, I'd like to turn the call over to Scott Schaeffer.

Thank you for joining us this morning. This past year was transformational for IRT. First, I'll address our operations; second, our capital recycling and value-add initiatives; and lastly, our outlook for the future.

First, our operational growth continued to surpass the majority of our multifamily peers, with 2017 same-store NOI growth of 4.8%, demonstrating our ability to continue to increase rents, while maintaining strong occupancy levels and keeping expenses under control.

For 2017, average occupancy grew 80 basis points to 94.6%. We continue to be focused on managing our operating expenses and increasing our NOI margin, which was 60.1% during 2017. We are confident that the fundamental drivers of our nongateway markets, both population and job growth, will outperform the national averages and provide the ability to increase rents that will drive shareholder value. Looking at the year in review, we completed several transformational investments and dispositions, which strengthened our portfolio and positioned us for long-term growth. First, on November 28, we completed the final disposition of our 2017 capital recycling initiative. The strategic asset sales and subsequent acquisitions allowed us to upgrade our portfolio by selling legacy Class C properties, while adding scale in our target markets through the purchase of core Class B assets.

In aggregate, the 4 properties we sold had an average monthly rent of $802, while the 3 newly purchased communities generate monthly rent of $1,048. The recycling of properties will continue in 2018, as we look to pare our individual market exposure, while adding additional assets in our core markets.

Next, on January 3, we closed on the final 2 properties of our previously announced acquisition of a nine-community portfolio. This was the first transformational acquisition under our internalized management team, and clearly shows our commitment to the long-term strategy. This accretive acquisition increases our presence in markets where we already have existing operations and aligns with our focus of owning middle-market communities across non-gateway MSAs that offer attractive supply demand dynamics, enabling long-term sustainable portfolio growth.

We also see an opportunity to further grow NOI in this recently acquired portfolio through select value-add projects over the next year. As a reminder, we raised equity in September to help fund this acquisition. Due to the timing and the close of the 9 properties, with 2 happening subsequent to year-end, this equity raise impacted our quarter-over-quarter core FFO comparison, as the proceeds were not fully invested until January 3, 2018. Additionally, subsequent to year end, we purchased a 312-unit community in Columbus, Ohio, further adding scale to one of our core target markets.

In the fourth quarter, we began to execute on our value-add initiative. Overall, we expect to see incremental returns in 2018, though the majority of the benefit will be recognized in 2019 and beyond, with a target cash on cash return on investment of approximately 20%. In aggregate, we believe that the $8.5 million of incremental annual NOI created by our value-add initiative will add significant value to the portfolio.

Our outlook for the future is bright. Low unemployment, along with rising wages, is a positive for the economy and multifamily owners, as it will increase discretionary income, and will afford us the opportunity to continue to increase rents, which ultimately is a hedge against any corresponding inflation. While there's volatility in the capital markets, we want to stress, the fundamentals in our portfolio remain strong, with ample liquidity to fund our business needs and our investment opportunities remain unchanged. As we move through 2018, we'll remain focused on improving our portfolio, while opportunistically growing our presence in our core asset class and markets.

And I'll turn the call over to Farrell for an in-depth discussion of our markets, capital recycling transactions and value-add projects, and then on to Jim to review our financial results, capital structure and 2018 guidance. Farrell?

Thanks, Scott. We continued to see stable rent growth and high occupancy across the majority of our portfolio in the fourth quarter. Our same-store revenues increased by 3.5%, and operating expenses were up 2.1%, generating net operating income growth of 4.3%.

Same-store revenue was elevated across a number of our markets, exceeding 5% in 7 of our 20 markets. Columbus grew revenue at 6%. St. Louis grew by 5.8%. Suburban Chicago was up 5.7%, and Indianapolis was up 5.2%. Our one community in Charlotte experienced the largest revenue growth of 13%. This was primarily due to a 390 basis point increase in occupancy, and the elimination of concessions that were necessary to compete with new supply in 2016. Additionally, Orlando and Atlanta saw some of the strongest revenue growth of 7.2% and 7.4%, respectively, as both markets continue to impress with strong job and population growth.

Our one community in Orlando is a Class A mid-rise property in the Millennia submarket. It has faced significant new supply, but has always managed to stay well occupied, with the ability to continue to increase rents. A new community adjacent to ours will begin lease up over the next few months, and accordingly, we may see some softness in late 2018. Orlando, and more specifically, the Millennia submarket, has historically absorbed new supply, given its strong job and population growth.

Atlanta's outperformance highlights the strength in the growing areas outside of the city, as well as the ability to drive rents in the more mature suburban markets closer to the city center. The first property in our 3 community same-store portfolio is located in Alpharetta, 30 miles north of the city in an area known as a tech hub of the south. With several technology companies operating there, providing skilled high-wage jobs, this Class A community experienced revenue growth of 4.9% and had average -- and had an average rent of $1,386.

The other 2 communities are located in Sandy Springs and Smyrna, which are 2 mature suburban sub-markets with high barriers of entry. The combined revenue growth for these communities was 9.2%, reinforcing the ability to push rents in supply constrained infill suburban locations with significant job and employment growth.

Touching briefly on one of our larger markets. In Louisville, where much of our exposure is concentrated around the city's inner Beltway, revenue was up 2.7% in the quarter. We continue to believe Louisville will provide stable consistent revenue growth with 2% to 3% growth expected over the next year. The city has benefited from both public and private investment. The recently completed $2 billion Ohio River Bridges Project, which consisted of building 2 new bridges, will further increase the city's reputation as a logistics hub, and home to UPS' Worldport. Additionally, 1,500 hotel rooms have been delivered in the past year to support diverging tourism industry and a $200 million expansion of the Kentucky International Convention Center.

Our Greenville and Charleston markets continue to be challenging. Greenville's revenue was down 4%, and Charleston's revenue was flat during 2017. Our properties in these markets are Class A and compete directly with new construction. In 2017, Greenville added 1,242 units or 6% of its total inventory, and is projected to add another 3% in 2018. Charleston added 3,000 units or 6% of its total inventory in 2017, and is projected to add another 6% in 2018. Because of the pressure of this new inventory, we're projecting revenue growth in 2018 in both of these markets to be 1.5%.

Oklahoma City, which now represents only 5% of our gross assets, is slowly improving as we mentioned on our last call. Revenue growth was 2.8% during the fourth quarter, with occupancy of 92.5%. For 2018, we are forecasting similar revenue growth.

As Scott mentioned, we also completed the acquisition of the nine-community portfolio we announced on September 5, with 3 properties closing in the fourth quarter and the remaining 2 closing on January 3. At this point, all the communities have been successfully integrated onto our platform, with the properties fully staffed and employees trained on our procedures. We've installed our revenue management process, implemented our management practices and raised the rental criteria, which will generate an improved tenant base. In addition, over the next 6 months, we will begin a value-add program at 5 of the properties with a total cost of $9.7 million. With our hands-on active management, we believe the portfolio will generate outsized revenue growth with lower operating expenses. We expect the portfolio to generate an additional $2 million of NOI once our best practices are fully implemented and the value-add is complete.

On January 4, we also purchased an additional community in Columbus, Ohio. The 312-unit property was acquired for $36.8 million, representing a 5.9% economic cap rate. Columbus has a growing population and is the 14th largest city in the United States. Furthermore, it has an expansive job market that spans a wide range of industries, with several major companies having headquarters there, including Cardinal Health, Nationwide Insurance, L Brands and Honda. Ohio State University, also located in Columbus, provides a steady flow of talent to the market. This combination of outsized population and job growth align perfectly with our investment strategy, and are the driving factors to making Columbus a core market for long-term growth.

Lastly, I want to conclude with an update on our value-add projects. We have identified 14 communities, totaling 4,137 units at a cost of approximately $46 million. We anticipate an average monthly rent premium of $171, which when coupled with anticipated expense savings, will generate returns in excess of 20%. We are on target to deliver 2,500 units in 2018 and the balance in 2019. With that, I'll turn the call over to Jim for an update on the financials.

Thanks, Farrell. First, we'll review earnings and operating performance for 2017, followed by a brief review of our balance sheet and capital structure, and ending with our 2018 guidance.

For the quarter, net income available to common shareholders was $6.3 million versus a loss of $41 million in the fourth quarter of 2016 due to the cost associated with our management internalization during 2016. Full year 2017 net income available to common shareholders was $30.2 million, as compared to a loss of $9.8 million in 2016. Remember, during the fourth quarter of 2016, we completed a series of transactions to both internalize management and reduce our leverage. As such, the results for 2017 are not directly comparable to 2016.

Core FFO per share was $0.18 for the quarter ended December 31, up $0.01 year-over-year, representing consistent bottom line results amidst some portfolio transformation. Full year core FFO of $0.73 per share was down year-over-year from $0.79 per share in 2016, due to the dilution occurring in 2017 from the internalization and deleveraging transactions that occurred in the fourth quarter of 2016. Fourth quarter adjusted EBITDA increased 17% year-over-year to $21.7 million, while full year adjusted EBITDA grew 9% to $81 million.

We reported same-store NOI growth of 4.3% for the fourth quarter, and 4.8% for the full year of 2017. Both were driven by the increase in rental rates and average occupancies during 2017. Same-store total revenue grew 3.5% in the fourth quarter, and 3.9% for the full year. Same-store property level operating expenses grew 2.1% in the fourth quarter and 2.5% for the full year. We saw continued expansion in our same-store NOI margin, which increased 50 basis points in the full year of 2017 to 60.1%, as we continue to focus on managing our expenses and turning every available dollar of revenue into earnings.

On the G&A front, during 2017, we accomplished our goals of reducing G&A, as compared to our historical run rate as an externally managed REIT. For 2017, our G&A, excluding stock-based comp, was $7.6 million or 50 basis points of our gross assets, significantly lower than all of our small cap apartment peers.

Turning to our balance sheet and capital structure. We finished 2017 with 52 properties aggregating total gross assets of $1.6 billion, up from $1.4 billion at year-end 2016. During 2017, while our gross assets have increased 13%, we recycled out of all of our Class C properties, and have increased our presence in several key markets, including Columbus and Indianapolis. Since both the number of properties we own and the gross assets increased in 2017, our total debt rose by 4.7% year-over-year to $778.4 million.

During 2017, our leverage, as measured by debt to gross assets and net debt-to-EBITDA, both improved. Our total debt to gross assets ratio declined 200 basis points from 54.3% at year-end 2016 to 52.4% on a pro forma basis at year-end 2017. Our fourth quarter net debt-to-EBITDA was reduced from 9.7x for 2016 to 9.2x on a pro forma basis for 2017. Because we had some additional acquisitions early in 2018, we've provided the leverage metrics on an actual and on a pro forma basis in our supplement. At year-end 2017, our debt is effectively 100% fixed rate through 2021, with no significant debt maturing until then.

During Q4, we completed a $100 million unsecured 7-year term loan, with an interest rate equal to LIBOR plus a spread based on our leverage. Today, that interest rate was equal to LIBOR plus 165 basis points, approximately 20 basis points inside the market for similar transactions. We effectively fixed the interest rate on this floating rate term loan by using an interest rate collar for the entire 7-year term. The proceeds were used to reduce borrowings outstanding on our revolving unsecured line of credit, freeing up liquidity and extending maturities.

Also, during the fourth quarter, we were active on our ATM, and issued 1,164,900 common shares at an average price of $10.38. We raised net proceeds of approximately $11.9 million.

We continue to make progress improving our capital structure and expect to make continued progress on this front through organic NOI growth, growth in NOI from our value-add initiatives and strategically recycling capital. One part of our longer-term strategy is increasing our unencumbered assets. As of year-end, on a pro forma basis, after the close of the previously mentioned acquisitions, our unencumbered assets as a percent of our total portfolio increased to 40.6%, up from 28% at year-end 2016. By total NOI on a pro forma basis, our unencumbered assets represents 43% of our portfolio.

Shifting gears to 2018. As Scott mentioned, we are focused on 3 priorities: continuous reviewing and improving our operations, executing on our value-add initiatives to drive outsized NOI growth into 2019, and recycling capital, where appropriate, to improve scale and focus.

For 2018, our guidance for core FFO is a range of $0.74 to $0.79 per share. We expect organic same-store NOI growth at our communities of 3% to 4%. This reflects expected revenue growth of 3% to 4%, and operating expense growth between 2.5% and 3.5%. While this indicates more modest growth than we saw in 2017, as increases in occupancy help drive higher revenue growth, we believe that a strong macroeconomic environment will remain a tailwind for the U.S. multifamily market.

We anticipate continued GDP expansion will drive job growth, and ultimately provide a healthy level of demand for apartment housing. Further, we feel very comfortable with the asset composition and geographic footprint of our portfolio, and believe our core nongateway markets will continue to benefit from both broader economic expansion, as well as anticipated migration trends that will allow our markets to outperform and drive a favorable supply demand dynamic.

While controllable operating expenses are expected to grow with inflationary pressures, we anticipate increases in real estate taxes and insurance to outpace inflation. First, on real estate taxes, several of our properties are in MSAs that reassess annually. We plan for and were successful during 2017 in limiting these increases, but we are being cautious for 2018.

As for insurance, we believe insurers will increase premiums, given the significant losses they sustained from 2017's severe storms, and are preparing accordingly. Additionally, the harsh winter conditions across much of the eastern seaboard resulted in expenses related to frozen water lines and higher-than-anticipated snow removal cost during Q1 2018. These conditions will weigh on our same-store NOI growth for Q1, resulting in an expected range of same-store NOI growth of 1% to 2%. Removing the effects of weather, we anticipate that our same-store NOI growth to step up incrementally throughout the year, as the benefit of the value-add program begins to come online.

As Scott and Farrell mentioned, the 14 value-add projects are expected to generate a total of $8.5 million of incremental NOI, though due to the timing of construction, we only anticipate approximately $750,000 to be realized during 2018. Additionally, given the uncertainty around timing and execution of future transactions, we have made no capital recycling assumptions in our full year guidance. We will continue to be transparent in updating you on our capital recycling efforts going forward. Lastly, as previously mentioned, this quarter transitioned from a monthly dividend to a quarterly dividend distribution. We expect our Board of Directors to declare the dividend by the middle of March, and we will issue a press release at that time.

With that, I'll turn the call back to Scott.

Thank you, Jim. Operator, let's open the call to questions at this time.

(Operator Instructions) And your first question comes from Drew Babin with Robert W. Baird.

Just one quick question. Should you continue to see acquisition opportunities sort of in your pricing range in the markets where you like to be, sort of that B to B+ range as far as property quality goes? Obviously, there is growth in your portfolio and in your FFO if you don't do anything per your guidance. But I guess if the right opportunity presented itself, can you kind of talk about potential sources of equity capital and kind of where they rank the way you're thinking about things right now?

Sure, Drew. So obviously, at current market stock prices, we're not interested in issuing equity to fund acquisitions. However, we are looking at the portfolio for recycling opportunities. As I stated, one of our goals is to pare our exposure to some individual markets where we don't see additional growth being appropriate. And as that happens, we would, if it made sense, recycle that capital into new acquisitions in more target markets. But we're constantly looking at what the portfolio will look like after these transactions and weighing whether or not it will make sense in the current environment.

So I guess in other words, should you see the opportunity to recycle capital, would you be hesitant, I guess, to do that, if there was going to be any type of earnings dilution other than maybe just some temporary cash drag?

Yes, absolutely. I mean, our goal has always been to grow when it makes sense to support both of our goals, which, one, is to be accretive to earnings, and also to help us reduce leverage. And as again, as I've stated, I'm not interested in just growing for the sake of growth. It's got to make sense for the company -- company's long-term goals.

Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

Kind of along the same lines as Drew's question, I mean, what markets are you most focused on growing the portfolio? And how big is the acquisition pipeline as we sit here today?

So the first answer to your question, through the 9 property portfolio that we bought, we expanded in Columbus and Indianapolis and Atlanta, which are all markets that we'll continue to look at growing. We have focused on Tampa, Orlando and Raleigh as well, which are all markets that have the fundamentals we've talked about: job growth, population growth and relatively limited supply. And we're seeing a tremendous amount of opportunity now on the pipeline mainly because the NMHC which is our National Conference, was in January when a lot of properties were launched for sale. So we have a pretty robust pipeline. It's just now focusing on what's actionable in the markets that I've mentioned.

So I guess it's reasonable to assume that you are seeing opportunity out there. It's just a matter of what the pricing is on those assets and what the opportunity is from a funding perspective and the disposition side? Is that a fair characterization?

That's correct.

And then when you mentioned pare trading out of individual markets, any sense what markets you're focused on selling out of more near term?

We're constantly looking at it and looking at the opportunities that would match the sale process. When Scott talks about markets that we may not expand into, we're in Huntsville in a single asset community -- single asset. We're in Austin with a single asset. Those are 2 markets that we don't necessarily know if we'll be able to grow in. So it's those type of markets where we have 1 property, and may not be a long-term fit for us. But if you look at Tampa and Orlando, those are markets where we have 1 asset, which we're actively trying to expand into.

No, that's helpful. And then as far as guidance, on as far as the revenue growth of 3% to 4% you assume, can you kind of give us a sense of what markets stack up towards the higher or above the high end of that range for this year?

So I touched on it briefly on the call. I mean, a lot of the properties, the markets that we mentioned that are -- were in the high range in 2017 are really what we're projecting to be on the high range in 2018, so it's your Atlanta, it's your Raleigh, the Tampa, Orlando markets with, again, good population, job growth and really under that 3% inventory growth in 2018, which will provide that supply demand and balance that we've talked about in the past.

Okay. And then last one for me, also along with that 3% to 4% revenue growth, Jim, just curious, where does that put you as far as leverage at year end just based on the core growth that you're projecting for this year?

For the end of 2018, we should be right around 9 to 9.1x.

Our next question comes from Brian Hogan with William Blair.

Follow up on that leverage question there, with your acquisition opportunities, would you increase leverage and to what level? Obviously, you're focused on deleveraging over time. But I was just curious what your targets are for leverage range was?

No. We're not looking to increase leverage. Our goal is to continue to reduce it. If we can do that through over-equitizing acquisitions, that's one way. It will also reduce organically as the NOI grows and as we see the benefit from the value-add initiative. But our goal is to reduce leverage, so we will not be increasing it for acquisitions.

Right. And then can you remind me of your target over time?

Yes. I mean, the leverage targets over time are kind of debt to gross assets, low-40s -- low 40%, and the net debt-to-EBITDA in the low 7s%.

All right. With the property that you just acquired, can you articulate the cap rates? And then if you adjust for the value-add projects that you're doing on those properties, what is the adjusted cap rate?

Yes. So we bought the portfolio on a 6% economic cap rate. Once we implement -- finish implementing all of our standard operating procedures and complete the value-add, that cap rate will be 7% on a stabilized basis, and that's roughly the $2 million of NOI being created by efficiencies and the value-add that we mentioned.

All right. And then kind of take a step back and you talked a lot about -- by market on the call. But demographic shifts, given the strength of the home purchase market, and I know you, Scott, you mentioned the tax reform. What is your thoughts on the ability to push rent further? Obviously, you have occupancy rates within your target range, but is it still 3% to 4%? Is it longer term or what do you think?

Yes. So I think it's 3% to 4%, and I -- there are some markets that we have exposure to where we're seeing home purchasing impacting renewal rates, but it's relatively minor. And I do believe in a rising interest rate environment that the rent by analysis will move into -- more into our favor. And I think tax -- the tax reform act, if anything, will be a benefit as well. I mean, clearly, in the -- some of our B assets, we're not competing with houses that have $10,000 real estate tax bills. But some of the A markets and A assets we have, we clearly are. So all of that has to be factored in. So I think on balance, that we're positioned well for, for that kind of growth going forward.

And one last one for me, have you seen any change in the portfolio or sorry, the occupancy churn? Is it -- how fast does it turn over, and have you seen any material change in that?

No. And just to dovetail on Scott's response, we monitor, obviously, move-outs. It's consistently stayed about the 20% range for move-outs to new homes, and we'll watch that throughout 2017 to see if that changes, and we'll update you on our calls.

Our next question comes from Vincent Chao with Deutsche Bank.

Just wondering if you can talk about the 3% to 4% revenue growth outlook for 2018, can you just break that down between sort of occupancy, rate growth and maybe some of the value-add NOI that you're expecting? I think it sounded like occupancy gains, you wouldn't expect as much here this year. But just curious if you could break that down a little bit?

Yes. I mean, the value-add is about 1% of that, and the rest is rental rate growth.

Okay, we should expect flat occupancy then?

That's what we've modeled and forecasted.

Got it, okay. And then just -- can you just remind us in terms of the underwriting like for the Chelsea, for instance, I mean, we've talked about sort of going in cap rates and things like that. But as you think about the overall IRRs for these projects, what's the right spread for your cost of capital today that makes sense for an acquisition to pencil? And maybe, what are your IRR expectations for Chelsea?

I mean, I think, Chelsea, I think they -- the underwritten, it was a 5.9 economic cap rate. Our cost of capital is slightly booked at -- given the ATM proceeds raises, it's slightly below that. So I think we typically like to see kind of cap rates in that 5.9, low 6s in order for them to pencil out.

I -- this is Scott. I've always been a little reluctant to be acquiring assets on a IRR basis because we don't have a stated hold period like a fund might have, and we also don't know what exit cap rates are going to be. So you can make your IRR analysis, anything you want it to be, by just changing the assumption. So we're more interested in what's our cost of capital and what's the property going to return on a year 1, and then what is going to return once we have our management platform in place and any value-add done.

Okay. Maybe just one other question, in terms of the new and renewal spreads, can you just give us a sense of how those are tracking?

Yes. They're tracking better than they were last year, actually so we're seeing renewal spreads through the first quarter at 3.5% on renewal leases, and about 0.5% on new leases. And that's on 1,600 leases through March, so we'll see a couple -- there's probably a couple of hundred out there that still need to be either renewed or vacated as we work through that process, and it's about a 55% renewal rate.

(Operator Instructions) And our next question comes from John Massocca with Ladenburg Thalmann.

So kind of given what you're seeing in the acquisition market, have you seen any cap rate expansion driven by the recent moves in interest rates?

So it's interesting you ask. I've seen -- and I mentioned this on the last call. There has been some movement maybe 0.25% on the new supply, as people are concerned about supply and actually getting the pro forma rents and a longer lease up as the properties are being delivered. In the Class B space, not yet. We're waiting for -- there's a lag to a rise in treasuries, but there's a lot of liquidity in the Class B space. So I think it will just take some time for that to work through the market.

So you're saying, because there's so many -- it's because there's not enough transactions going on in the Class B space and supply is kind of tight there that you think there hasn't really been a reaction? Or is it just because there are deals that are already out there that are -- they're going to close before you see any expansion?

There seems to be a disconnect at the moment between buyers and sellers. Buyers are modeling because of modeling higher interest rates, are looking for higher cap rates on the acquisition side, but sellers have not come to the realization yet that they might be selling at a higher cap rate. So from what we're seeing is there's a little bit of a disconnect, but there's still -- to Farrell's point, there's still enough liquidity and enough people looking to invest in the Class B assets, that they're getting done without cap rates having moved much at this time. I do expect them to move. If interest rates stay elevated or keep moving up, I should say, I would expect that cap rates on the B space over time will increase.

Yes, and remember, much of what's closing now most of the people have their debt lined up, so they were locked into their rates, and really, as they go through the sale process now and through the second and third quarters, get -- just repriced at higher treasury rates. I mean, that's going to impact people's returns and thus what they're going to pay for the properties.

Okay, it makes sense. And then kind of on an actual property supply side, I mean, have you seen any supply pressures on your Class B properties? Or is all kind of the supply pressure you're talking about really been more focused on the Class A segment?

It's about a completely different renter, so it's really been on our Class A portfolio and in selected markets that can't support the supply. Like I said, Orlando has been very resilient. That's one of those markets where we'll see, as they continue that supply, if it will stay resilient.

Makes sense. And then kind of lastly, your controllable expense guidance seemed pretty reasonable at 1.6% to 2%. Heard some other players in the space talking about how pricing for contract labor's gone up and supply costs have gone up. I mean, what do you think is kind of allowing you to keep that low growth number?

I mean, we've just been focused on looking at our contracts and negotiating with them well ahead of time, so we can minimize the effect of that. And obviously, we'll be monitoring that throughout the year, and do the best we can to continue to keep it within that guidance range.

And to Jim's point, I mean, gaining scale in these markets, like Columbus and Indiana and having more leverage, given the larger contracts, helps reduce the expense.

I'm not showing any further questions at this time. I would like to turn the call back to Scott Schaeffer, our CEO, for any further remarks.

Thank you. 2017 was another transformational year for IRT. With the management internalization complete, we wasted no time in prioritizing our capital recycling initiatives that improve the composition of our portfolio, enhance economies of scale in existing markets, and created scale in our new target markets and significantly lowered our leverage ratio. As we look forward to 2018, we will continue to evaluate our portfolio to further capitalize on this progress. So thank you, all, for joining us today, and we look forward to speaking with you next quarter.

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