Trade Street Residential's (TSRE) CEO Richard Ross On Q2 2014 Results - Earnings Call Transcript

| About: Trade Street (TSRE)

Trade Street Residential, Inc. (NASDAQ:TSRE)

Q2 2014 Earnings Conference Call

August 11, 2014 11:00 ET

Executives

Steve Swett - Investor Relations, ICR

Richard Ross - Chief Executive Officer

Ryan Hanks - Chief Operating Officer

Randy Eberline - Chief Accounting Officer and Principal Financial Officer

Heather Straub - Director, Property Operations

Analysts

Alexander Goldfarb - Sandler O’Neill

Dan Donlan - Ladenburg Thalmann

Operator

Greetings and welcome to the Trade Street Residential’s Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Swett with ICR. Thank you. You may begin.

Steve Swett - Investor Relations, ICR

Good morning. We would like to thank you for joining us today for Trade Street Residential’s second quarter 2014 earnings conference call. In addition to the press release distributed this morning, we have filed a quarterly supplemental package with additional detail on our results in the Investor Relations section on our website at www.tradestreetresidential.com.

On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include those related to revenue, operating income, financial guidance as well as non-GAAP financial measures such as same-store results, FFO and core FFO. As a reminder, forward-looking statements represent management’s current estimates. Trade Street Residential assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company’s filings with the SEC and the definitions and reconciliations of non-GAAP financial measures contained in the supplemental information package available on the company’s website.

This morning’s conference call is hosted by Trade Street Residential’s Chief Executive Officer, Richard Ross, company’s Chief Operating Officer, Ryan Hanks and the company’s Chief Accounting Officer, Randy Eberline. Management will make some introductory comments after which we will open up the call to your questions.

Now, I will turn the call over to Richard.

Richard Ross - Chief Executive Officer

Thank you and welcome to our second quarter earnings conference call. Joining me on the call today is Ryan Hanks, our Chief Operating Officer, and I would also like to introduce Randy Eberline who joined us in May as our Chief Accounting Officer and Principal Financial Officer. Randy has extensive finance and accounting experience including over 20 years of senior roles at real estate related companies. We are glad to have him as a part of our team.

I will begin with an overview of highlights in the quarter and review our results. Ryan will then discuss our recent acquisition activity and current market environment. Randy will then provide additional details on our financial results, balance sheet and capital structure. After our prepared remarks, we will open up the call to your questions.

During the second quarter, we continued to improve our operations and position our platform for future growth. Our progress in the quarter and year-to-date is a direct result of the steps we have taken to improve our capital position and acquire the right properties, in the right locations and at the right price. We have an attractive and growing portfolio of modern, well-located Class A luxury apartment communities in our target suburban markets in the Southeastern United States and Texas, where we can capture increasing economies of scale over time.

Turning now to our operating results; during the second quarter, our portfolio continued to perform well with our key metrics exceeding our expectations across all of our regions. We were encouraged by another quarter of solid results, in which we increased our same-store portfolio occupancy by 60 basis points to 96.2% and our same-store average rent increased 3% to $879 per unit compared to the prior year quarter. As a result, we generated a 4.2% increase in same-store revenue compared to the prior year period.

Our operating expenses increased 7.2% over the comparable quarter. However, the comparable period included the benefit of $107,000 property tax settlement that we received in the second quarter of 2013. Excluding the benefit of this one-time item, our same-store operating expenses were up 2.7% resulting in a 5.5% increase in our same-store NOI. In our newly acquired and non same-store stabilized communities, rents and lease up rates also continue to outperform our expectations. Across our entire portfolio, we ended the quarter at 90.8% occupied with an average rent of $989 per unit. NOI generated by our non-same stores stabilized communities exceeded our same store NOI during the quarter for the first time in our relatively brief history. Average occupancy for these communities during the quarter was 96.1%, with an average rent of $1,094.

As of the end of the second quarter, we had four communities in lease-up, all of which we expect to stabilize by the end of the third quarter. As these communities continued to mature over the next several quarters, we expect to continue to generate strong portfolio revenue and NOI growth. We are excited by this progress and our ability to consistently recycle our capital into high quality luxury communities in some of the most attractive markets in the country. The average age of our portfolio is now at 10.8 years compared to 15.5 years at the end of 2013.

In summary, we will remain disciplined with our capital and continue to opportunistically grow our presence across the Sunbelt, while remaining focused on improving our operating metrics and increasing our cash flow. Our experienced and committed executive team is focused on executing our key growth and profitability initiatives for the remainder of 2014 and beyond.

I will now turn the call over to Ryan to discuss our markets and acquisition activity.

Ryan Hanks - Chief Operating Officer

Thank you, Richard. Let me begin with an overview of our market environment and then provide some details on our recent acquisition activity. We continue to see strength in our core markets in the Southeast and Texas where regional economies continue to lead the nation in a variety of metrics including job gains and population growth and improving municipal budgets. As these positive trends persist, we expect to experience steady demand improvement across our portfolio. Combined with improving demand, we continue to see the benefit of limited supply as new residential construction remains below prior peak levels. While pockets of multi-family development have caused short-term oversupply on a submarket by submarket basis, the overall lack of housing construction for multi-family and single family continues to benefit existing landlords like Trade Street.

Now I would like to update you on our recent transaction activity. In April we closed on the acquisition of Waterstone at Big Creek, a newly constructed 270 unit luxury apartment community in Alpharetta, Georgia for approximately $40.5 million. Construction of Big Creek was recently completed in November of 2013 featuring a full range of high end amenities. The property is in close proximity to numerous upscale retail locations and Downtown Atlanta. The purchase price was funded with cash on hand of approximately $3.5 million and $37 million drawn from our revolver. We are pleased with the addition of this high quality property which expanded our presence in the Greater Atlanta metro area.

In addition, we are under contract to purchase an additional 100 units that are currently under construction on an adjacent parcel for $15 million and are expected to be completed during the first quarter of 2015. With the addition of Big Creek year-to-date we have acquired six apartment communities totaling 1,800 units for an aggregate investment of $238.4 million. As of the end of the quarter the company owned 21 properties comprising of 5,255 units with an average age of 10.8 years.

In July, we completed the sale of Post Oak which provided approximately $7.7 million of net proceeds for the company and further reduced the average age of our portfolio. Post Oak was an older asset in a non-core market, so we are pleased to complete this disposition. As we have done in the past we will continue to explore dispositions as a means to recycle capital, exit non-strategic assets and reduce the age and enhance the quality of our portfolio. Beyond our identified pipeline, we will continue to be selective in pursuing attractive properties that best meet our investment criteria. We continue to see excellent off-market opportunities in our target markets.

I will now turn the call to Randy to discuss our financial results and balance sheet items.

Randy Eberline - Chief Accounting Officer and Principal Financial Officer

Thank you, Ryan and good morning everybody. I would like to provide some additional comments regarding our second quarter financial performance and then discuss our balance sheet and capital structure. Starting with our second quarter results, for the second quarter 2014, we reported core funds from operations or core FFO of $2.2 million or $0.06 per diluted share compared to a deficit of $268,000 or $0.03 per diluted share in the prior year period. Year-to-date, we reported core FFO of $3.2 million or $0.09 per diluted share compared to a deficit of $870,000 or $0.14 per diluted share in the prior year period. In the quarter, our core FFO included the impact of approximately $300,000 of non-recurring expenses related to the unusual weather patterns we saw this spring and certain transition expenses that were not eliminated in calculating our core FFO.

Our core FFO, excludes certain non-routine and/or non-cash items that impacted the comparability of our financial performance in the second quarter, such as costs incurred for the acquisition of Big Creek, management transition, and long-term incentive compensation. Including these items, FFO for the second quarter of 2014 was $1.6 million or $0.04 per diluted share as compared to a deficit of $1.1 million or $0.13 per diluted share in the prior year period. Year-to-date, FFO was a deficit of $9.1 million or $0.26 per diluted share as compared to a deficit of $2.7 million or $0.43 per diluted share in the prior year period.

Turning now to our balance sheet and capital structure, as of June 30, 2014, we had total consolidated debt outstanding of approximately $350 million with a weighted average interest rate of 3.83% and weighted average term-to-maturity of 7.4 years. Of the total debt outstanding, approximately $298 million or 85% is fixed rate debt with a weighted average interest rate of 4.03% and a weighted average term-to-maturity of 8.25 years. As of today, after completion of the previously disclosed sale of Post Oak and payment of our second quarter dividend, our available liquidity consists of approximately $22.3 million of unrestricted cash on hand and $5.6 million of availability on our revolving line of credit.

Finally, I would like to call your attention to some additional disclosure that we have added this quarter to the supplemental operating and financial data. We have added tables to show average monthly rent and information pertaining to our acquisition pipeline and assets held for sale. We will continue to look for ways to enhance our disclosure and expect to provide some guidance metrics beginning with 2015.

In conclusion, the steps we have taken to-date to simplify our capital structure, expand our capital base and strengthen our balance sheet provide us with financial flexibility to improve our business platform.

And now, I would like to turn the call back to Richard for some final thoughts.

Richard Ross - Chief Executive Officer

Thanks, Randy. Again, I would like to thank you for joining us today to discuss our results and updates on our business. We are pleased with our accomplishments during the second quarter, in which we improved our operating metrics, expanded our geographical footprint in the Sunbelt and further established a solid foundation to enhance the quality and size of our property portfolio.

Our current team in place is experienced and aligned with shareholders and we are taking steps to grow our platform accretively in a disciplined manner. We entered the second half of 2014 with a strong capital position and we will continue to look for opportunities to grow our business, increase our cash flow and capture meaningful value for shareholders over time.

Operator, we are now ready to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Thank you. Our first question is coming from the line of Alexander Goldfarb with Sandler O’Neill. Please proceed with your question.

Alexander Goldfarb - Sandler O’Neill

Good morning.

Richard Ross

Good morning, Alex.

Alexander Goldfarb - Sandler O’Neill

How are you?

Richard Ross

Good.

Alexander Goldfarb - Sandler O’Neill

Just a few quick questions here. Where do you guys stand with regards to settling with the preferred A folks?

Richard Ross

At this point, there is an ongoing matter between the trustees and the beneficiaries of the trust that hold the Class As, so we can’t provide further comments at this point.

Alexander Goldfarb - Sandler O’Neill

Okay. But as far as the $13.8 million, call it $14 million that was the previously agreed upon settlement amount, you guys have about $10 million of cash at quarter close. There was $26 million held for sale not sure if that was only Post Oak or if it was Post Oak and some other stuff, but bottom line, do you guys from an operational and investment standpoint, do you have to segregate 14 – effectively $14 million of cash to be able to redeem the preferred A if something is settled with them?

Richard Ross

No, we are under no obligation to settle the preferred As nor segregate cash and as we mentioned in the call -- in the lead-in, we have $22 million of cash available on the balance sheet, another $5.5 million available on the lines. So that’s little over $27 million, $28 million of cash available today, with the only commitment being the acquisition of Big Creek which is coming in the first quarter next year.

Alexander Goldfarb - Sandler O’Neill

Okay, okay, okay so that update would then included the net sale of the Post Oak which then gets to where do we stand -- or not we, you -- where do you guys stand as far as interest in potentially the monetization of the land? Are there any – is any of that land on the market, are there any inquiries, are any of those markets seeing development where that land – where monetization looks something in the near-term?

Richard Ross

I can tell you at this point, all of the parcels are currently listed for sale, and we are ready to go once we have final offers and we are through that process. But right now, we are in the middle of the process, so I can’t give you anymore than that.

Alexander Goldfarb - Sandler O’Neill

But Richard, do you think that would be something this year or probably would be something that would occur next year?

Richard Ross

Hard to say on timing.

Alexander Goldfarb - Sandler O’Neill

Okay. And just finally Phase 2 of Millenia, any – what's the timing as far as getting that underway?

Richard Ross

Again, we are still in the evaluation process of underwriting that Phase 2, so I can’t give you any guidance of the timing at this point.

Alexander Goldfarb - Sandler O’Neill

Okay. Thank you.

Operator

Thank you. The next question is coming from the line of Dan Donlan with Ladenburg Thalmann. Please proceed with your question.

Dan Donlan - Ladenburg Thalmann

Thank you and good morning.

Richard Ross

Good morning, Dan.

Dan Donlan - Ladenburg Thalmann

Hi, Alex covered a lot of my questions, but just kind of curious where you guys are on the lease up communities today, I think at the end of the quarter, they are around 73% occupied, do you know where we stand today on those four communities?

Richard Ross

Sure. So, of the four listed at quarter end that were in lease up, two of those have since stabilized. Today, Avenues at Craig Ranch is at 94% occupied, 99% leased, The Aventine Greenville is at 93% occupied, 98% leased. The other two which are still in lease up, we expect those to stabilize by the end of the quarter, Wake Forest is at 84% occupied, 90% leased, and those market rents are $1,060 a unit. Brier Creek were 84% occupied and 85% leased and those rents are somewhere around $1,200 a unit. We expect those last two to stabilize during this quarter.

Dan Donlan - Ladenburg Thalmann

Okay. And then as far as when you look at leasing for those properties on a going forward basis, how do you work around doing 12-month leases, let’s say, you want to – I think good portion of your leases to come due in the spring, how do you work around that from an operation standpoint?

Richard Ross

Heather Straub, our Director of Operations is here and I am going to let her address that because she is in trenches day-to-day.

Heather Straub

Hey everybody, it’s Heather. As soon as we start with the lease up, the first – our first plan of action is to actually look at the lease expiration pattern. So, our strategy works around that lease expiration pattern. So, we try to have the majority of our leases expiring when leasing starts picking up, so starting in March, we would plan our lease expiration to have our leases expiring anywhere from March through like August and we don’t just do 12 month leases. So, we are very savvy about the lease expiration pattern and we don’t want to get stuck with lots of leases expiring in the down season. So, we are keyed up very well right now to get through the Q4 and Q1 and be in a good position starting in Q2 of next year to start leasing again. And on those lease ups, our plan will be – since we will be in a strong position heading in the leasing season, we will start increasing rents as possible.

Dan Donlan - Ladenburg Thalmann

Okay, so you do 8 to 9 month leases?

Heather Straub

Definitely. We do whatever we need to do to keep our lease expiration. So, we control the lease expiration pattern. That’s how we run our business.

Dan Donlan - Ladenburg Thalmann

Sure, sure. That makes complete sense. I guess from that standpoint, the tenants are signing a 8 or 9-month lease though, do you give them a break on rent because of that?

Heather Straub

No. Actually, a lot of times, we are on revenue management. So, we sort of let revenue management dictate. We steer the ship, but we let it dictate a little bit. So, generally on those shorter term leases, we actually gain some rent on those, because the longer term leases generally cost them a little bit less though the shorter term leases cost them more, but there is a lot that goes into the equation based on our lease expiration pattern. So, if they want a lease that’s expiring in a month, we don’t want it. That will cost them more.

Dan Donlan - Ladenburg Thalmann

Okay, that makes sense. And then I guess as it pertains to the Wake Forest, is there any students, I just don’t know where it is – but is there any students in that facility?

Heather Straub

Yes. We don’t have a big student population there.

Dan Donlan - Ladenburg Thalmann

Okay, alright. And then I guess lastly kind of on the credit facility, you said you had $5.6 million available, is that going to increase, is there some assets you have that you are going to put some long-term financing on? Should we expect that capacity to increase later this quarter or into next quarter?

Richard Ross

The answer to that is no. We don’t expect that necessarily to increase, because we don’t have any current plans to put additional assets on that borrowing base.

Dan Donlan - Ladenburg Thalmann

Okay, that’s it from me.

Operator

Thank you. We have reached the end of our question-and-answer session. I would now like to move the floor back over to Mr. Ross for any additional concluding comments.

Richard Ross - Chief Executive Officer

Again, I want to thank you all for joining us today and we look forward to updating you on our progress in the coming quarters.

Operator

Thank you. This does conclude today’s teleconference. We thank you for your participation and you may disconnect your lines at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!