Independence Realty Trust (NYSEMKT:IRT)
Q4 2015 Earnings Conference Call
February 18, 2016, 09:00 AM ET
Andres Viroslav - Investor Relations
Scott Schaeffer - Chief Executive Officer
James Sebra - Chief Financial Officer
Farrell Ender - President of Independence Realty Trust
Daniel Donlan - Ladenburg Thalmann & Co.
Brian Hogan - William Blair & Company
Good day ladies and gentlemen, and welcome to the Independence Realty Trust Incorporated Q4 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to introduce your host for today’s conference, Mr. Andres Viroslav. Sir, you may begin.
Thank you, Chelsea and good morning to everyone. Thank you for joining us today to review Independence Realty Trust's fourth and fiscal 2015 financial results. On the call with me today are Scott Schaeffer, IRT's Chief Executive Officer; Jim Sebra, IRT's Chief Financial Officer; and Farrell Ender, our President of Independence Realty Trust.
This morning's call is being webcast on our Web site at www.irtreit.com. There will be a replay of the call via webcast on our website and telephonically beginning at approximately 12:00 p.m. Eastern Time today. The dial-in for the replay is 855-859-2056 with a confirmation code of 38518766.
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 current views with respect to future events and financial performance. Actual results could differ substantially and materially from what IRT has projected. Such statements are made in good faith pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Please refer to IRT's press release, supplemental information and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations. Participants may discuss non-GAAP financial measures in this call. A copy of IRT's press release with supplemental information and 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 would like to turn the call over to IRT's Chief Executive Officer, Scott Schaeffer. Scott.
Thanks, Andres, and thank you all for joining our call today. 2015 was a year of continued growth for Independent Reality Trust highlighted by the acquisition of Trade Street Residential. This transaction resulted in enhanced scale and liquidity, improved portfolio quality and a more clearly defined footprint focused in the South-Eastern part of the United States.
IRT ended the year with 49 properties over 13,700 units in predominantly non-gateway markets that continue to experience population growth above average job growth along with limited additions to supply, all resulting in a supply demand imbalance. It's important to note especially in light of the current market conditions and talk of the global economic slowdown potentially impacting the U.S. market that our non-gateway markets have historically proven stable and resilient through varying economic cycles.
As we enter 2016, we are focused on operational performance of our portfolio, and are committed to reducing leverage, particularly the interim loans utilized to acquire Trade Street Residential. As we’ve announced and previously discussed with you we are selling three non-core communities plus one community we believe that has reached this economic potential. As of this call, one property sale has closed and the other three are under contract and are scheduled to close throughout the next 60-days.
The proceeds from these dispositions will retire approximately 50% of the $120 million interim loans. As Farrell will discuss the balance will be retired through one refinancing communities which are currently own our KeyBanc facility with very attractive fixed rate terms, which will allow us to eliminate future interest rate exposure without significantly increasing our current interest expenses.
Two, entering into a new unsecured facility, which will term out the remaining balance of the line after the four property sales and refinancings are completed; and finally we may sell additional properties from our Oklahoma City portfolio once the current loan matures.
We expect to have the interim loan completely retired prior to the end of the second quarter. As I discussed before I believe there is a disconnect between IRT’s share price and company fundamentals. At our current share price, we are trading and implied 6.7 cap rate based on our 2016 projected NOI while we are selling four properties at a weighted 5.24% cap rate. Finally, let me reiterate that we simply do not need to nor will we issue equity to retire the interim loan. We have a clear path to extinguish of this debt before the end of the second quarter.
At this point, I would like to turn the call over to Jim to go through the numbers and then I'll discuss IRT portfolio to provide some color on what are you seeing in our markets and to give details around property sales and refinancing. Jim.
Thanks Scott. Core for both quarters was $0.22 per share or $10.8 million, up a 122% from $4.8 million for the same quarter of last year. This quarter we are reporting GAAP net income of $4.4 million driven primarily by the $6.4 million gain on the sales of the Center Point property in Tucson, Arizona, more on that later.
From the earnings point of view, all categories saw an increase in Q4 and fiscal 2015 as compared to prior period. Obviously, our acquisitions for 2014 and our Trade Street merger in September 2015 are the drivers of those changes. All of the properties we acquired have been successfully transitioned and we are actively upgrading and renovating units where we see good returns on our invested capital.
With regards to the same-store portfolio, we are continuing to see a positive performance in NOI growth, while the supplemental package contains further details on the same-store performance a few items off note. The same-store portfolio for the fourth quarter is still relatively small at 21 properties are 6150 units with the same-store portfolio for the year add only nine properties or 2470 units.
For the quarter, NOI growth in the same-store portfolio was driven by rental increases of 4.2% leading to a 5.2% increase in total revenue and an increase in NOI of 6.1% over Q4 of last year. For the year, NOI growth in the same-store portfolio was driven by 5.5% increase in the rental room leading to a 5.9% increase in total revenue and an increase in NOI of 7.5%. We ended the quarter with $1.4 billion of gross real estate investments representing 13724 units and $975 million of debt. During 2015, we spent $5.1 million on recurring capital expenditures or $473 per unit.
As Scott mentioned, we are actively selling properties to repay the Key Bank's interim bridge facility. Today the balance on that facility is $105.9 million as we use the proceeds with Center Point property sales to reduce the interim bridge facility. Currently we have identified three additional assets for sale, in total we are expecting to receive $42 million from the sale of these assets that will be used to further reduce the interim bridge facility.
In our press release, we introduced core FFO for 2016 between $0.82 and $0.88 per diluted share. At the mid-point this represent a 6% growth in core FFO per share over 2015. The two drivers of this improvement is NOI growth of 4.5% to 5.5% at the same-store portfolio and NOI growth at the Trade Street portfolio between 6% and 7% in 2016. This guidance also assumes that the interim bridge facility is repaid after sales and the refinancing of the Oklahoma City portfolio and other properties in 2016.
Lastly, we are forecasting capital expenditures totaling $9.8 million across the portfolio for 2016, $3.1 million of which is related to revenue enhancing projects with the remaining of $6.7 million or $517 per unit related to normal recurring capital expenditures. With respect to the first quarter of 2016, we are expecting core FFO of $0.21 per share. Please bear in mind that this guidance reflects the impact of the sales of the previously discussed property sales. Farrell.
Thanks Jim. I would like to begin by providing additional details regarding previously mentioned property sales. There are three properties that fall outside our geographic focus. Scott mentioned Center Point was sold in December for $33.6 million netting $14.2 million in proceeds. The sales price represented a 5.7% nominal cap rate. Both Belle Creek and Tresa at Arrowhead are currently under contract with buyer's performing due diligence and we expect them to close in early to mid April.
These two sales will generate net proceeds of approximately $32 million at the costs and repayment of property level debt. The blended nominal cap-rate on these sales is 5.08%. The fourth property which is scheduled to close today is located in Atlanta, the purchase price $80 million equal to a 4.93% cap-rate and will generate net proceed of $10 million. In total, we expect to generate approximately $56 million in net proceeds in these four properties sales.
We are currently in a process of placing the Oklahoma City portfolio on our KeyBank facility, the existing loan matures on April 1, and we anticipate the refinance to occur in early March netting $20 million after repayment of the existing debt. The facility provides us a flexibility should we decide to sell one or more of the properties later in the year.
We are in the market permanently financed three of the Trade Street properties that are on our KeyBank facility given the favorable market for long-term fixed rate financing. The loans will not exceed 65% of value, at fixed interest of approximately 3.5% for a term of up to 10-years. Once the refinancings are complete, we expect to generate $20 million in additional proceeds for IRT.
Lastly, we will be drawing $6 million from our KeyBank line which was not fully drawn when we closed the facility in September. Total proceeds generated from the property sales and refinancing activity is approximately $102 million, all of which going towards reducing the interim loan.
The remaining $80 million balance of the interim loan will be retired either through an new unsecured facility or additional property sales. As of 12/31 the IRT portfolio contained 13,724 consisting of 49 communities with 93% occupancy and an NOI margin of 56.2%.
As Jim discussed, same-store NOI for our 21 properties same-store portfolio grew 6.1% over the fourth quarter last year resulting from 5.2% net growth, 40 basis points improvement in occupancy and 4.2% increase in expenses primarily driven by an increase in real estate taxes. Our nine properties same-store portfolio for the year while smaller experienced NOI growth of 7.5% over the last year with revenue up 5.9%, expenses up 4.3%.
During 2015 we saw the biggest increase in rent growth in Atlanta and Austin, our worse performing market during the year was Little Rock where we saw rents flat at our two communities. We expect that market to improve as limited editions to suppliers forecasted over the next couple of years and the recent announcement that Bank of Ozarks will be building a new corporate campus adjacent to one of our communities will provide an ongoing source of potential revenue.
We have yet to experience any negative impact in our Oklahoma City portfolio tied to the decline of oil and gas industry. This city has made a significant effort to diversify their economy and to-date job losses due to oil and gas has been more than offset by gains in the private and public sectors, but the overall unemployment rate at December reported at 3.3%. The majority of our tenant base is employed in the retail and service industry and we are monitoring the portfolio closely for any potential impacts resulting from declines in the energy sector.
Regards to the Trade Street portfolio, its performing well, the property has experienced year-over-year NOI growth of 10.1%. We are continuing with previously identified value add capital projects which include unit renovation, addition of car parks, installation of washers and dryers. In addition to these upgrades at the Trade Street portfolio, we continue to identify opportunities to create value, increase NOI throughout our whole portfolio.
In 2015 we focused our management on driving other revenues sources such as pet fees, animal fees, and trash collection. On a same-store basis this other revenue was up 12.3% in 2016 we’re testing the market with upgraded units in four different communities while continuing to upgrade club houses, fitness centers and other amenities provide the best living environment we can for our residents.
Finally in regards to the overall market, job growth in 2015 across our market averaged 2.28% above the national average of 2% and population growth in our markets was 1.44% versus 1.08% nationally resulting in total absorption of 96% as compared to national average of 88%. These statistics continue to support our investment philosophy of targeting well located communities in non-gateway markets that are experiencing population and job growth without the higher level of new supply impacting gateway market. Thanks. Scott.
Thanks Farrell. Operator, at this point I would like to open the call up for questions.
Thank you [Operator Instructions] And our first question comes from the line of Dan Donlan with Ladenburg Thalmann. Your line is now open.
Just kind of curious on the sale of Cumberland Glen, I'm not sure if that has previously been on your disposition plan, but what kind of led you to decide to sell that asset versus some of the others?
Dan you’re right it hadn’t been on our targeted sale list, because it is within our footprint. However, there is a lot of money flowing into the market right in the area of this property because it's close to where the Atlanta Braves are building their new stadium.
And we found that the property if upgraded would generate a very good return on investment, but at the same time we found that we could sell it at a price that will be equal to the value after we had upgraded it. So we decided that we ought to just sell it and let the new buyer bear the risk of the redevelopment if you will.
And then on the Oklahoma City it’s kind of a surprise that you’re looking to divest those assets, you only acquired those back in early 2014. So what’s kind of the thought process there and especially kind of given the negative sentiment around oil sensitive markets, even though you really haven’t seen too much of an impact for your comments. Just curious what’s leading that versus some of the other markets that you maybe have?
So when we bought that a couple of years ago, we bout it right, it was purchased at a cap-rate if I remember correctly was north of 8.5% and the reason was because we needed to assume or any purchaser would need to assume really unattractive fixed rate financing that are encumbered to properties.
So we bought knowing that that financing would mature within a couple of years and in fact it matures in this April as Farrell discussed. The only reason that we would be looking to sell that is because it is a easy way frankly to retire the interim debt and to reduce leverage and we recognize that the leverage of this company is higher than we want it to be that is our focus as to reduce leverage.
So we’re maintaining flexibility, but after we pay off the interim line that if it's still appropriate we would sell these properties, usually we can sell them today at a cap-rate that is probably six or slightly below so there is a very nice appreciation aspect and equity fight up in there. We would end use the leverage of the company at that time. So it's all about recognizing that the leverage needs to come down and this is a good way to do that.
Sure, understood. And then maybe Jim moving to the balance sheet a little bit here, was just curious what we should expect on the new facility from our pricing perspective versus maybe what you have now?
Yes I mean we are in a process of negotiating that so I can't comment on that pricing, we do expect it to be lower than our current interim bridge facility and [indiscernible] probably be close term risk with the date of the line of credit.
And then I mean you talk about doing some longer term financing, where are you seeing kind of rates right now for some of the assets that you are thinking about putting longer term fixed rate debt on?
Dan it's Farrell. We are out to market with three properties that we are financing and the life company execution is the best rate now. So we are looking at 150 or 170 over the corresponding treasury and we are in the process of going through lender review and in the next week of or so we should have bids from lenders and be able choose and close in the next 60 days.
Okay. And then as far as reducing leverage, I'm not sure if this opportunity is out there, but is there any way that you guys could potentially acquire another portfolio that’s significantly less levered than you guys that would have some kind of delever from that aspect. Is there any opportunity like that out there in the marketplace?
Well, I'm sure there are but we are somewhat constrained at the moment by the price of our equity and wouldn’t want to be issuing equity at current prices in order to acquire real estate, because I just don’t think the dilution would be too great relative to the benefit of the additional properties. So we have a pipeline, there are still lots of opportunities available in our market.
We can still buy assts at cap-rates that make a lot of sense, so we believe in the model going forward, but with the current turmoil in the market and with our current share price we are not really I should day interested or planning on issuing equity.
Sure. Well that leads me to my last question and I think it’s something you kind touched on a little bit here. But if we look out a year maybe two-years from now and we still see this valuation gap between private market and public market values, is more assets sale or potential sale of the company, is that on the table?
Absolutely everything is on the table. I mean we recognize that the shareholders own this company and that at the current price of our shares it doesn’t make sense relative to the net asset value. Frankly, if you use a 550 cap on our 2016 NOI the NAV of the shares over $11. At a 575 cap it's just about $10.
So when we see where the shares are treading that’s why I say there is disconnect and we bought the Trade Street portfolio really the first full quarter subsequent to that acquisition. As we all know, the capital market have been a little bit volatile. So we are continue to run the portfolio, increase rents, grow NOI and we will be looking at alternatives to create shareholder value in the future. And if it means selling off the assets then that’s what we'll do.
Okay. That’s really appreciated.
You are welcome.
Thank you. And our next question comes from the line of Brian Hogan with William Blair. Your line is now open.
Hello, good morning.
Kind of a follow-up on the line question. What is your target leverage?
Well, when we IPOed this company in the growth mode, we said that we would have leverage not exceed 65% of the asset value and we are slightly north to that now because of the acquisition of Trade Street, in fact we took on a little more leverage rather than issuing equity. So we are a little bit above where we want to be, we recognize that public, multifamily company should be in the 50% and below range. we think we'll get there over time.
There is a lot of value tied up in the assets that we bought, because we bought it in an attractive cap-rate. But our first focus is eliminate or retire that interim debt because it has a maturity that’s now about a year out and that’s the most important thing is to retire that and then continue to work to reduce the leverage overtime. Once we are done with the property sales, we should have a leverage of about 11 times EBITDA. We want to get that down into the single-digit.
Alright, what are you seeing with cap-rate trends today, and obviously you discussed your property sales look pretty attractive, but given the widening of credit spreads and macro concerns what are you seeing on evaluations today?
Yes, I would tell you in the fourth quarter it felt like they were starting to widen out a little bit and we had some calls from brokers where deals fell apart and I think that was primarily due to what you said the widening spreads and Freddie & Fannie really being at the cap. Coming into January in the first quarter, there is a lot more fresh equity and lender allocations are fresh.
So the debt is very attractive and as you said based on where we are seeing our sales going, I think cap-rates have been pretty stable and pulled back in a little bit in the first quarter compared to the fourth quarter.
If I may interrupt, two phenomenon in the fourth quarter, relating to fourth quarter not only did you have spreads widening, but you also had the treasury increasing. If you think back to even early December the treasury was at 220 even I think it was 230 and today it's 170. So you had both not only the treasury moving but spreads widening which of course does impact what people will pay for real estate.
We all know that real estate values are tied to interest rates and people desire for their return on equity. And as those interest rates way up in December that was impacting what people would and could pay, but now with the treasury back down and as Farrell says with new allocations with the lenders we’re seeing that transactions are happening at cap-rate close to where they were throughout last year.
Okay. And then rental rate growth, what do you think you can continue to go - I know you highlighted revenue growth of 4% to 5%, is that what you’re seeing in the rental rate increases unless the characteristics of the properties and the cities you’re in are pretty strong, I mean is that what you can drive?
We think that’s what we’re currently forecasting, we think that’s very achievable. But keep in mind, we do have a range to our guidance and maybe we will be able to produce a little more of that depending on macroeconomic conditions in 2016.
And then one last question from me is that you do have relatively high dividend payout ratio, you are covering your dividend with your earnings comfortably. But what are your thoughts on that? Do you need to reduce the dividend at any point, or?
No, we don’t. It is covered, the portfolio was very stable, we are reasonably projecting increases in NOI going forward. So there is no need to look at the dividends or to look at cutting the dividend. Remember that this is a relatively small company and any savings that would be or capital retention that would be achieved through a dividend reduction is nominal.
So it's not on the table, we are comfortable with the dividend where it is, it is covered. We have again a stable portfolio with our development portfolio, or a land portfolio. This is a stale portfolio of cash flowing properties with increasing NOI. So the dividend is fine.
All right. Thank you.
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Mr. Scott Schaeffer, Chief Executive Officer for closing remarks.
Thank you for joining the call today and your interest in Independent Realty Trust. We look forward to speaking with you next quarter. Thanks.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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