Independence Realty Trust, Inc. (IRT) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter Four Independence Realty Trust, Incorporated Earnings Conference Call. My name is Tracy and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the call over to Andres Viroslav. Please go ahead.

Thank you, Tracy, and good morning to everyone. Thank you for joining us today to review Independence Realty Trust's fourth quarter and fiscal 2014 financial results. On the call with me today are Scott Schaeffer, IRT's Chief Executive Officer; Jim Sebra, Chief Financial Officer; and Farrell Ender, President of Independence Realty Trust. This morning's call is being webcast on our website at www.IRTReit.com. There will be a replay of the call available via webcast on our website and telephonically beginning at approximately 1:00 p.m. Eastern Time today. The dial in for the replay is (888) 286-8010 with a confirmation code of 76638151. 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 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 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. Good morning and thank you all for joining our call today. During the fourth quarter we added 2,349 units by acquiring eight properties for $247 million. Though we have seen some modest cap rate compression in our markets, the compression is being more than absorbed by the lower financing cost. During 2014, we accessed the equity markets three times, and raised $201 million, which has been fully deployed into 20 properties, with an aggregate purchase price of $497 million. We grew the portfolio 262% since December 31, 2013, to $689 million consisting of 8,819 units. We continue to execute on our strategy of acquiring stable, multi-family properties, and supply constraints, non-gateway markets that exhibit strong rental demand with limited schedules to additions of supply. There are couple of drivers that will support additional rental increases, while keeping occupancy stable in 2015. First, there are $4 million or more 20-year-old to 34-year-old now than they were in 2007, and job growth for this cohort is accelerating creating billions of additional rental households. Second, the homeownership rate has dropped to 64.4%, a 20-year low, down from 69.4% in 2004. This 5% drop equates to $5 million new rental households. These factors continue to support IRT's strategy heading into 2015. At this point, I'd like to turn the call over to Jim Sebra to go through the financial report, and then to Farrell to discuss the IRT acquisitions and pipeline. Jim?

Thanks, Scott. During the quarter core FFO was $0.17 per share or $4.7 million, up 147% from $1.9 million for the fourth quarter of last year. This quarter we are reporting GAAP net income of $189,000. For the year, core FFO was $0.68 per share or $14.6 million. GAAP net income was $2.9 million for the year. During 2014, revenue was up $29.3 million as compared to 2013. The increase is primarily from the $28.6 million of revenue associated with properties acquired this year and those present for a full year. On a same store basis, rental revenue was up 3.8% this year as compared to 2013, as the rental rates kicked up 4% on average across the same store portfolio. Property operating expenses increased $14 million this year as compared to 2013. This increase is primarily from $13.3 million of operating expenses associated with the properties acquired this year or those that were present for a full year. OpEx at the same store properties increased by $700,000. The same store operating expense increase was largely due to $445,000 of increased real estate taxes. Our NOI margin for the portfolio was 52% this year as compared to 53% last year. Regarding the portfolio, occupancy was 92.7%, with a weighted average monthly rental rate of $788. As discussed on previous calls, when we acquire a property, some transition occurs resulting in tenant turnover, which is anticipated in our underwriting. Most of the properties acquired have successfully transitioned whereas in some that transition is still in progress. The same store portfolio reported an occupancy at 94.5% with a weighted average monthly rental rate of $790. During 2014, we incurred $1.7 million of asset management fees paid to our external advisor. Of this amount $1.6 million represented our base asset management fee equal to 75 basis points of the cost of the properties acquired post our IPO, leaving $154,000 in incentive management fees that were earned during 2014, when our core FFO yield exceeded the quarterly threshold of 1.75%. General and administrative expenses increased by $489,000 to $1.1 million in 2014, due to the increased cost of being a public company. General and administrative expenses include $206,000 of stock-based compensation this year. Interest expense increased by $4.8 million year-to-year due to new financing obtained or assumed to finance the purchase of the 20 properties that were acquired during 2014, and the financing with property acquisitions during 2013 that were present for a full year. As of December 31, our weighted average effective interest cost is 3.6%, and our consolidated leverage is 59.5%. Also during 2014, we increased our acquisition facility with Huntington Bank at $30 million, while reducing the cost by 25 basis points. During these volatile times and treasury rates, the facility provided flexibility, while giving us stability to leverage our capital. During 2014, we accessed capital markets three times through three common equity transactions, issuing 22.1 million common shares, and raising just over $200 million. We deploy these proceeds in the 20 property acquisitions during 2014, for an aggregate purchase price of $497 million. We ended the quarter with $689 million of gross investments in real estate, representing 8,819 units and $418.9 million of debt. We currently have enough capital to acquire approximately $70 million of apartment properties, as we permanently finance some of the assets we acquired late last year. Lastly, since our IPO in August 2013, IRT has paid $0.99 of dividends to shareholders and generated a total shareholder return of 22%. Farrell, will now discuss the portfolio and our recent acquisition. Farrell?

Thanks, Jim. We were active in the fourth quarter acquiring eight communities, totaling 2,349 units, with an aggregate purchase price $247 million, representing a blended cap rate of 6.1%. As we stated, we ended the year with 30 properties in the portfolio, containing 8,819 units. The first property we purchased in the fourth quarter is located in Groveport, suburb of Columbus, Ohio. Built in 2000, and containing 240 units, we purchased the community from the original developer. The acquisition was structured as an UPREIT transaction whereby we issued $48,000 worth of OP units. The property is located in Southeast Columbus and in close proximity to the Rickenbacker Inland Port, one of the few cargo only dedicated airports in the world, and home to several international freight service companies, as well as serving to regional hubs or FedEx and UPS. The submarket contains 8,300 units with a current vacancy of 3.1%. We purchased the community for $17.50 million and financed the property with a loan from Freddie Mac in the amount of $11,375,000 with a fixed interest rate of 3.7% for 10 years. The Louisville portfolio, which we have mentioned on previous calls, closed in early December. The portfolio contains 1,549 units, with a total purchase price of $162.4 million, and provides us immediate scale in the Louisville market. The properties are well located in the affluent east end neighborhood with average income of $75,000, and average home prices of over $200,000. We financed this acquisition with another loan from Freddie Mac at 65% of the purchase price, and a fixed interest rate of 3.59% for 10 years. The nation's 28 largest city with a population of 1.3 million, Louisville is home to a diversified economy which outperformed the national average in job and income growth over the past decade. Moody's reporting a 4% increase in average income in 2014 over 2013, and projects a gain of 18,000 jobs in 2015, representing a 2.8% increase. The city has benefitted from significant hires at the two Ford plants, GE Appliances and UPS. Additionally, the $2.6 billion Ohio River Bridges Project will add two six lane bridges to the MSA, which will continue to provide construction jobs over the next three years. And once the project is completed, the added infrastructure is expected to stimulate the overall economy. In the fourth quarter, we also completed the purchase of our second asset in Little Rock. In addition to adding scale and leveraging synergies with Carrington Park, which we acquired in May; Stonebridge at the Ranch is arguably the best community in the market. Like Carrington, Stonebridge is located in Chenal Valley, the area's most desirable upscale community. The property was built in 2005, with stone facades and direct access garages. We purchased the community for $31,580,000 and have locked $21.5 million 10-year loan at 3.22% which we anticipate closing in the next 30 days. Lastly, and another UPREIT transaction we purchased a 300 unit community in South Austin for $35,250,000. The property was completed in 2002, owned by a Syndicate, and operated by third-party management, which we believe will provide immediate upside in operations. The property is located within the main commercial corridor in South Austin, just west of I-35, providing easy access to downtown Austin and the airport. Austin's growth is well documented and the Metro Area is expected to surpass 2 million people in 2015. Our ability to offer another UPREIT structure allowed IRT to purchase the property at a discount to market value. Subsequent to closing the property, we secured a $22.9 million 10-year loan with a fixed interest rate of 3.43%. We continue to leverage our relationships and build on our reputation. We added 20 apartment communities with an aggregate purchase price of $497 million in 2014. The pipeline includes seven properties with a total value of $205 million. I'll now turn it back to Scott.

Thank you, Farrell. At this point, Operator, I'd like to open the call up for questions.

Thank you. [Operator Instructions]. Your first question comes from the line of Vincent Chao from Deutsche Bank. Please proceed.

I just wanted to go back to the, some of the same store metrics there. Jim, I think I heard you say $700,000 of same store OpEx increase, but what was the percentage increase and then I don't know, if I missed it, but was the same store NOI growth for the quarter?

Same store NOI growth for the quarter was a negative 4% because of the increased real estate taxes that I mentioned.

Okay. And then I guess that wasn't like a one-time bumper for a true-up right or was it? I guess I'm trying to understand that's a run rate now going forward.

A good portion of it was a one-time true-up from historical period.

Okay, okay. And is that the -- well the $445,000 was a total impact of higher real estate tax, not necessarily the one-time bump?

Correct. But the one-time bump is included in that.

Okay, okay. Can you give us a sense of what that was the one-time?

Back half of it. The back half was one-time.

Okay, okay great. Thank you. And then I guess just I asked a question just last quarter about energy markets and sort of the oil price impact and obviously oil price has got significantly worse since then. At that time you said you haven't seen any impact Oklahoma the day to there seems pretty much fine, it seems like occupancies are moving higher, so it doesn't seem to be impacting anything, but just curious if you could provide any color from a qualitative perspective if you're hearing or seeing anything that that might be notable just a result of energy markets?

Sure it's, Farrell. Obviously we were centered as well and we went back and looked at our lease audit and we have very few tenants that are directly employed with Oil and Gas Company. So we were really not seeing any impact of the properties as of now.

Right.

When we did our original due diligence in the market, what we discover was the overall economies much more diversified than it was in the past. So state government, manufacturing, the SAA is based there, there's large air force base, all of that, each of those individually are a larger portion of the economy than oil and gas. And probably the most interesting thing we learned when we're doing our original due diligence is that overall we see benefits from being one hour from Cushing, which most people don't know what Cushing is, but it's a city that is the largest oil storage and transportation facility in the world. So the cost of getting oil from Oklahoma City to Cushing is significantly less than anywhere else and basically all the oil in the Cushing is up there. We've seen is that oil transportation from Oklahoma City to Cushing is up $3 a barrel first, $15 to $16 in the Dakota and Texas. And if you look at how many rigs are ideal, based on our research, there's about 6% of Oklahoma City's rigs right now are idle versus 30% in Dakota and Texas. So we'll continue to monitor it, but right now we see very little impact in the portfolio.

Okay. Thanks for that detail. And just one last question for me, just noticed them I mean I know the overall occupancy was relatively flat quarter-on-quarter, but if you look at sort of the individual properties there's quite a bit of chunkiness there, quite a few pretty significant moves up and down. I'm just curious if you could comment on sort of the volatility you're seeing at the property level. And I guess, I would have expected some of the revenue management systems that you guys employ would help smooth some of that but just curious to get any color?

You say chunky, we say lumpy.

Okay, sure.

The fourth quarter is usually the most challenging just because of the seasonality. So most of it driven by seasonality but there were the two, the Crossings is a deal in Jackson that we purchased that we're still working through the re-tenanting. And again, you're looking at a snapshot, if you look at the portfolio today; every property is 90% or higher occupied. And then the King's -- the King's property in Saint Louis, we had some corporate units that we knew we're going to vacate at the end of the year. And it's such a small property, its 152 units. I want to say it was about 10 corporate units. So when they are vacated it obviously drops, the occupancy substantially, but we're again leased at that property 93% today.

Thank you for your question. Your next question comes from the line of Bob Napoli from William Blair. Please proceed.

You guys have certainly put the capital you raised to work very quickly, appreciate that. And now you've grown the business though in a pretty substantially from last year I mean more than triple the size of the portfolio, much more diversified in a lot more markets. And you're putting to work most of the capital that you've raised. What are your thoughts from here and 2015 or and I -- Farrell I wasn't clear on the pipeline, if you could may be go over the pipeline and what are your thoughts on are you -- at this point are you in enough markets that you're investment is going to be focused on the markets you're currently in, are you going to still look at new markets, are you going to absorb what you bought over the last year, before we see material increases or may be some thoughts around that subject would be helpful?

This is Scott, Bob.

Hey, Scott.

I'll let Farrell talk about the pipeline in a moment.

Sure.

But our plan is to continue to opportunistically acquire properties in markets that we believe have the supply/demand imbalance that we've looked for in the past. So we're going to continue to grow. We have digested the acquisitions that we made last year, and we're very comfortable with the way they're operating today, and do believe that we will be able to keep occupancies stable, and push rents on average 4% through 2015. We clearly want to continue to add to the markets that we're already in just on the economies of scale point of view. But we are looking at new markets as well because again we're still very, very small and there are a lot of markets out there that we like that we're not in. So when we see an opportunity to go in to those markets we will.

Okay. And the pipeline, Farrell?

Sure. And, as you know, its fluid, so the deal comes on. Right now there's -- if you look at today there is seven properties, about half, half or about where markets we're in, and the other half of the markets that we want to be in. And like Scott said, if we add our property in Columbus, we would pleased to be another couple there, so if we have those economies of scale, and we can transfer new employees around as needed. So we're definitely focused on markets we're in, but I have always said we're opportunistic and we don't know where our deals are coming from, so we continue to look at the pipeline that we're at.

And then just, I mean, Scott, on the RAIT call yesterday you suggested that RAIT was looking at selling some multifamily properties and I mean were those -- were the IRT be a likely buyer of those or would they -- or there is anything that conflicts that would prevent that or what are the -- and how does that work?

Bob, we've maintained from day one that IRT would not be purchasing properties from RAIT.

Okay.

And RAIT would not be financing IRT's property acquisitions going forward. And we're going to stick with that. These are properties that RAIT has owned now for a period of time and we just think for RAIT it makes sense for them to sell them. I really want to avoid any and all appearances of conflict. So IRT is not looking to acquire them. Also, I should note that the cap rates that we expect to get, the purchase prices that we expect to receive are far higher than what IRT would be willing to pay.

Okay. All right. Very good. The RAIT owned 7.3 million shares, I mean just speaking for RAIT if you can, I don't know is the -- is that RAIT contention to hold, continue to hold those shares?

Yes, it is.

And then last question for me right now was just on the CapEx side with the acquisitions that you've made, is there any unusual level of CapEx that you need to, on some of the new properties, I mean Louisville was an older property, as you know, what are your current thoughts around CapEx for the current properties in 2015?

I mean, Louisville had some improvements made to it by the prior owner. There is really not that much that needs to be done. And as you can see that what we're buying basically are newer -- newer assets, I mean Louisville was an outlier, but we think it's a great portfolio. So whenever we buy an asset, we do the physical plan inspection, and typically what we're doing on the deals we're buying is increasing the amenity package, get the clubhouses, the pool, in barbecue areas to take it to another level. It's really not that much money.

Thank you for your question. Your next question comes from the line of Wilkes Graham from Compass Point. Please proceed.

Farrell, just a quick question on the pipeline. I just couldn't hear what the dollar amount was. Did you say it was $235 million?

$205 million.

$205 million. Got it. Okay. Thanks. And then, Scott, just following up on some of your previous comments, can you give us an idea on whether you look at the pipeline or you just look at assets, how the market in general that you -- if you take a hard look at may be where cap rates are today and how that relates to where mortgage rates are that you can get?

Well, we have done this review and cap rates -- let me go back. We believe that mortgage rates have dropped from where we were a year ago by about 115 basis points, and cap rates have come down, but not that much. So we actually think that the acquisitions that we're seeing today from a cash-on-cash return basis are actually better than what we were seeing a year ago. So we're excited about the opportunities that exist to grow the company.

Thank you for your question. Your next question comes from the line of Dan Donlan from Ladenburg. Please go ahead.

I missed part of the opening remarks, but I caught at the Q&A. So without the one-time tax expense, what was the same store NOI growth?

Jim is looking to his papers. Give him a second.

Okay. And then I'm not sure if you have this readily available too. But it seems to me that that the same store is pretty insignificant or versus the rest of the portfolio. Could you maybe give us a sense of kind of the NOI of the same store and as a percentage of your run rate, NOI for the remaining portfolio as well?

The same store increase without the one-time tax though would have been closer to about 4% positive. The same store NOI for the fourth quarter was about $2.7 million. And the fourth quarter NOI in total, as you know, was $8.6 million to $8.7 million.

Okay. So -- and then that number should be even higher than that when you look at it on a run rate basis?

Yes, that's correct.

Yes, that's correct.

Okay. So its --

That was one month of Louisville and everything else we bought in the fourth quarter.

Okay. So it sounds like the same store is still probably less than 20% of your actual portfolio as it exists today?

I think we're at nine assets, Dan, versus there is 30 in the portfolio.

Right, right. Okay. And then as we -- it looks like what you purchased in the quarter or it sounds like it is since the slightly higher quality than may be what you've been acquiring in the past, is this just a function of what was available, is it or any type of shift to earning more newer properties that require less CapEx and what -- how should we think about the fourth quarter versus what you've been buying in the prior quarters?

Yes, I think that we're looking for that 10-year-old to 15-year-old product that is a step below a class A and is a lower cost alternative. I mean that's what we're targeting where we see an opportunity in Louisville, my older product will definitely take it, but the thought process is to be in that 10-year-old to 15-year-old range.

Thank you for your question. Your next question comes from the line of Craig Kucera from Wunderlich. Please go ahead.

Given all the activity you've had in acquisitions, how are you thinking about sort of CapEx, whether that's sort of a recurring CapEx per door number or how do you think about it for the portfolio as it stands today?

Sure I mean -- we, for 2015, we certainly kind of looking at recurring CapEx kind of budgeted around anywhere from 350 to 400 a door.

Got it. That's pretty consistent with where you've been in the past. And I know you don't report effective rent for acquisitions in the months that you close them and but you did disclose a little of over rents. Can you give us a sense roughly of where the Austin and Little Rock properties are renting on average just for modeling purposes?

Sure, and you must go further I mean on a --

Per unit.

Per unit and the Iron Rock is slightly larger unit, average rent there is a $1,100 that's I'm sorry that's a Little Rock deal just, and then the -- I'm sorry that's the Austin deal. The Little Rock deal at Stonebridge the rent is average rents are $910. They range between $0.95 and $1.0 tenant a foot.

Got it. I appreciate the color. The pipeline is a little lighter this quarter than it's been in the last few quarters and is that just a function of just sort of continued cap rate compression or is that just sort of where at that point in the year where activity starts to slowdown?

No, I think it's a factor of us digesting what we did in the fourth quarter. And we're still only -- we're not even two months removed from ending that quarter where we very, very active. So we just took a breather to digest in the first couple of months in this year what we just bought.

Right. And that makes sense. And I mean in the fourth quarter, I think, did you say that the average cap rate on acquisitions was another 6.1%?

Correct.

And so based on your commentary, then it sounds like, if you're feeling like spreads on debt, I think clearly compressed some of the cap rates, but you could potentially even dip down somewhere into the high fives and so in deals that's still [indiscernible] your cost of capital?

That's accurate. And if you look at where we're financing I mean we just re-loft the Little Rock deal at 3.22%. So the debt is getting extremely, extremely attractive.

Thank you for your question. I would now like to turn the call over to Scott Schaeffer for closing remarks.

Well thank you for joining our call today and your interest in IRT. We look forward to speaking with you next quarter. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.