Independence Realty Trust, Inc. (NYSE:IRT) Q1 2020 Earnings Conference Call May 7, 2020 9:00 AM ET
Anna Pienkos - IR
Scott Schaeffer - Chairman & CEO
Farrell Ender - President
James Sebra - CFO & Treasurer
Conference Call Participants
Austin Wurschmidt - KeyBanc Capital Markets
Michael Griffin - Citigroup
John Guinee - Stifel, Nicolaus & Company
Neil Malkin - Capital One Securities
Good afternoon ladies and gentlemen, and welcome to the Q1 2020, Independence Reality Trust, Inc., Earnings Call. [Operator Instructions].
I would now like to turn the conference over to your host, Ms. Anna Pienkos. Thank you.
Thank you and good morning everyone. Thank you for joining us to review Independence Realty Trust's first quarter 2020 financial results. On the call with me today, are Scott Schaeffer, our CEO, Jim Sebra, our Chief Financial Officer and Farrell Ender, President of IRT.
Today's call is being Webcast on our Website at irtliving.com. There will be a replay of the call available via Webcast on our Investor Relations Website and telephonically, beginning at approximately 12:00 P.M. Eastern today.
Before I turn the call over to Scott, I'd 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, supplemental information and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations.
Participants may discuss non-GAAP financial measures during this call. A copy of IRT's press release and supplemental information containing financial information, other statistical information and a reconciliation of non-GAAP financial measures to the most direct comparable GAAP financial measure is attached to IRT's most recent current report on the Form 8-K available at IRT's Website 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.
With that, it's my pleasure to turn the call over to Scott Schaeffer.
Thank you, Anna, and thank you all for joining us this morning. I know this is a difficult time for many people so I hope you and your families are all staying safe and healthy. We at IRT have been focused on protecting the wellbeing of our employees and residents during these unprecedented times. I would like to thank our team who have led our efforts in keeping our communities safe and clean and maintaining full attention to our resident and property needs all while remaining committed to creating and delivering value to our stakeholders. We understand that this pandemic has had a significant impact on our residents and we remain committed to working with those that are directly impacted. We have provided flexibility to those residents demonstrating financial hardship with their near-term monthly rental requirements. This includes creating payment plans, waiving late fees and halting evictions.
The IR team is taking necessary steps to protect our business and maintain significant liquidity. This includes continuing to tightly manage our cost structure and pausing a portion of our value-add program for the time being. These decisions will enable us to be well positioned to manage the impact of this crisis and have the financial flexibility to act decisively as we've planned for an eventual market recovery. Touching briefly on our first quarter, we delivered favorable performance across the portfolio including the year-over-year same-store NOI growth of 7% with an NOI margin of 61.5%, 130 basis point improvement year-over-year. Core funds from operations per share was $0.19 and we, once again, covered our dividends on an AFFO basis.
In addition, our average occupancy at our 38 non-value add properties was a strong 94% and the same store portfolio overall was 92.7% when including the value add communities at quarter end; supporting our focus on retention and consistency during these uncertain times. As we look at the second quarter, there remains uncertainty regarding the short-term effects of our countries response to this pandemic.
In April, we collected 98% of rents billed when including the 139 payment plans we entered into with households in need of assistance. In addition, there were over 150 payment plan requests approved for May or in the process of approval. Through May 6, we have collected approximately 90% of May rent receipts which is consistent with our collections at this point in April. We will continue to support our residents as they seek measures to keep up with their payments and we will closely manage our operational costs in order to mitigate the impact on NOI in the coming months. While it's hard to predict the length and depth of this crisis, we have been monitoring discussions regarding the potential reopening of states in which we have properties and plan to reopen our community offices and amenities in line with those guidelines.
Based on current discussions, all of our states have, or are in the process of, easing restrictions in May. This should prove to be beneficial to our residents looking to resume activities and return to work but we are well aware that strict safety measures will need to be adhered to and we will remain diligent on protecting our employees and residents health and wellbeing.
Despite initial signs that a number of our markets are beginning to open, we must balance our cautious optimism with the reality that the trajectory of the economic recovery may be muted for a period of time. We will manage the portfolio balancing appropriate rent-growth strategies with the need to preserve occupancy.
Further, our board has evaluated our dividend policy to ensure that we are well positioned to navigate near-term uncertainty and have the financial flexibility to fund our long-term growth strategy. Given our track record of delivering organic rent growth and execution of our value-add initiative; both of which supported outside NOI growth, we were well positioned to achieve a normalized dividend payout of 70% to 75% over time. With current market uncertainty, along with our decision to pause a portion of our value-add program, we believe it is prudent at this time to adjust our quarterly dividend from $0.18 to $0.12 per share beginning in the second quarter of 2020. This equates to a payout ratio that is now more in line with our peers; the right sized dividend increases our financial flexibility and will allow us to accelerate our deleveraging efforts as we will be retaining approximately $23 million annually. This decision will provide IRT with an even stronger foundation for continued growth and expansion when normal market conditions return.
We remain confident in our resilient portfolio with sustainable business model; simply stated, our confidence stems from four factors. First, IRT has built the right team and portfolio of assets across strong non-gateway markets to navigate this unprecedented challenge. Prior to the COVID-19 outbreak, these markets demonstrated strong employment trends and favorable apartment demand as well as limited new construction and attractive demographics. We expected benefit from these factors again and believe these markets should be generally less impacted in the major cities in the near-term and recover sooner than most.
Second, we have a clear investment strategy focused on middle market, multifamily communities which offer affordable high quality product. This segment attracts and retains a wide range of residents who recognize good value with attractive amenities and we continue to see strong apartment demand in this highly defensive market segment that tends to benefit when homeownership rates decline. Third, we have a flexible investment opportunities. As we have discussed last quarter, 2019 was a year of acceleration for IRT with respect to our growth initiatives, in particular, our value-add and capital recycling programs.
We have decided to slow these efforts until we have greater visibility on market conditions. We have reduced activity behind our value-add program but still realized an 18.6% weighted average return on investment with interior renovations in the first quarter. Similarly, with our capital recycling program, we have put our efforts on hold while we'll continue to evaluate markets where we see long-term growth and reevaluate those that may not be attractive long-term investments. And fourth, IRT has a strong balance sheet. We have ample liquidity and no significant debt maturities until 2023. our total liquidity position is approximately $258 million which includes unrestricted cash as well as additional capacity through our unsecured line of credit and proceeds from our forward equity offering earlier this year which raised about $152 million in net proceeds.
We will be prudent with the proceeds using the funds to strengthen our balance sheet in the near-term while remaining flexible until there is a clear path towards an economic recovery. As we look towards return to normalcy and for our economy to fully recovery, we are well positioned to manage through these challenging conditions [indiscernible] by our prudent strategy and strong track record. We continue to believe that IRT has the right assets in the right markets and effective initiatives like our value-add and capital recycling programs are ready to be fully reenacted at the appropriate time.
Today, now more than ever, our IRT team remains focused on delivering our commitments and responsibilities to our colleagues, our residents, communities and our shareholders. With that, I'd like to turn the call over to Farrell for an operational update. Farrell?
Thanks, Scott, and good morning everyone. I want to echo Scotts comments and thank our entire operations team for the tireless efforts to protect the safety and wellbeing of our residents including practicing social distancing, closing common areas, repetitive deep cleaning of commonly used surfaces and working with those residents impacted by this crisis. The team has remained available and responsive to perspective and current residents to ensure the continuity of our business through this challenging time. I also want to take time to thank all of our teams that support our operations such a marketing, IT, asset management and accounting who have all seamlessly worked together throughout this pandemic.
Despite these circumstances, in the first quarter of 2020 our portfolio continued to see strong NOI growth driven by increases in rental rates. In the first quarter, same-store NOI grew 7% increasing in all but two of our 18 markets. Eight markets saw NOI growth of over 10% which four markets, including Indianapolis, Charlotte, Chattanooga and Baton Rouge all seeing NOI growth of 15% or higher.
Occupancy remained a key focus through this period and the resilience of our affordable and well maintained middle-market communities is demonstrated by our stable average occupancy through the quarter. Overall, same store portfolio average occupancy was 92.7% in Q1, ten basis points lower compared to Q1 2019. Excluding the value-add, same store average occupancy increased 30 basis points to 94% for the quarter. As of the end of April, our total portfolio occupancy rate was 92.7%. On a lease-over-lease basis for the same store portfolios during Q1, new lease rates increased 4.6% and renewals were up 3.7% doing a combined lease over lease rental rate increase at 4.1%.
Through the first month of Q2 2020, lease-over-lease rental rates for our same store portfolio, new leases are up 2.6% while renewed leases are up 2.4% with a blended lease over lease rental rate increase of 2.5%. We anticipate Q2 rent growth to be lower as we reduced increases on proposed renewals for expiring leases throughout the quarter. This is in an effort to maintain occupancy during a period we knew would experience less traffic and leasing volume than normal.
Given the restrictions in place, we have seen a decline in leasing traffic in April which is typically the starting point of our leasing season. The pandemic accelerated our implementation of virtual tours as we rapidly uploaded videos of different unit types on our community Website and trained our staff on best practices for using Zoom and FaceTime to give live virtual tours.
Since April 3, when we close our offices to the public, we provided 2087 tours versus 3410 a year ago but converted at a much higher rate; 42% versus 30% yielding 867 applications versus 1011 applications last year. Our overall traffic began declining during the second half of March, hitting a low point in the first two weeks of April. Traffic in the last two weeks of April has rebounded by 34% and we expect leasing traffic to improve as restrictions are lifted. Turning our attention to our value-add program where our cost phases 1, 2 and 3 we're completed 3025 units as of the end of the first quarter.
In the second quarter, we've taken a more selective approach to our value-add program as we've balance supply and demand for renovated units. As detailed in our supplement, we have placed on-hold or delayed the start of renovations at 11 of our value-add communities, as we evaluate the market conditions amid the COVID-19 pandemic. We are achieving a 19.7% ROI across the remaining 12 properties and are still seeing solid demand for the upgraded units. Based on what we know today, we anticipate completing 1100 units in 2020 or about 50% of what we had previously estimated.
We are now focused on preserving capital but when appropriate, we will direct additional efforts towards the value-added -- of opportunities where there's resident demand. Our recycling activities remain on hold until the recovery is underway. Consistent with our value-add strategy, we will continue to assess the market and be increasingly selective in opportunities we pursue. I'd now like to turn the call over to Jim.
Thanks, Farrell and good morning everyone. Today I'd like to review our earnings and operating performance for the first quarter of 2020 and provide additional detail on our balance sheet and capital structure as well as our liquidity. Beginning with our Q1 2020 performance update, IRT recorded a net loss [indiscernible] to common shareholders of $372,000, down from net income of $2.5 million in the first quarter of 2019. During Q1, core [indiscernible] grew to $17.6 million up 10% from $16 million in Q1 2019. Core FFO per share during Q1 was $0.19; up from $0.18 in Q1 2019.
Turning to our same-store property operating results, NOI growth was 7% in the quarter, driven primarily by revenue growth of 4.7%. Occupancy in our same-store communities averaged 92.7% during Q1 just ten basis points lower than a year ago. Rental rates for these properties increased year-over-year with an average effective monthly rent of $1089 this quarter, up 4.9% since Q1 last year.
While this includes the value-add to communities, we did see solid rental rate growth as a non-value add same-store communities but rental rates in Q1 increasing 3.6% over the prior year. On the property operating expense side, same-store operating expenses increased just 1.3% in Q1 2020. While our aspects of the future are still unknown, we are continuing to actively manage expenses and expect that our total operating expenses for 2020 will be below our previous guidance as we expect to see lower payroll costs because of less overtime as well as the ability to use our onsite teams to perform property maintenance rather than hiring outside contractors.
Our general and administrative expenses increased $2.3 million in the quarter, primarily due to 1.7 million in stock-based compensation expenses associated with stock awards granted to retirement eligible employees. Under GAAP we're required to record the full expense at the time of the grant rather than over the associated investing period and this will not be a return expense for the remainder of 2020. According to our balance sheet, we have a strong liquidity position as of March 31 we had $57 million of unrestricted cash, approximately $100 million of additional capacity through our unsecured credit facility and $102 million of remaining proceeds from our forward equity rates.
As you may recall on February 24, we closed a forward equity offering of 10.35 million shares of common stock at a public offering price of $15.30 per share. At the end of the first quarter, we settled $15 million of our forward sale agreement by issuing 3.4 million shares. After the settlement, we had approximately 6.9 million shares remaining to be issued under the forward sale agreement for gross proceeds of $102 million.
Undoubtedly, many are interested to know about our plans for the capital raise under this forward equity offering. The original intent was to fund the acquisition of a three-property portfolio in Atlanta but given the COVID pandemic and intervening market stress, we let the letter of intent expire without penalty to us. At this point, we are maintaining flexibility with respect to the remaining proceeds as we manage through the current impact while preparing for the recovery.
We closed the quarter carrying just over $1 billion of debt with no significant debt maturities until 2023. We do have 76 million of debt maturities in 2021 but have enough liquidity to repay or refinance that debt should the capital markets continue to be restrained. Our normalized net debt to adjusted EBITDA was nine times at the end of the quarter. With regards to our debt covenants, we are in compliance to a debt covenant that have added an additional page to our supplement detailing our financial covenants. Regarding the capital allocation program, we have suspended all non-essential capital improvement projects and remained focused on properly serving our existing community.
In the first quarter, our returning capital expenditures for the total portfolio was $10.3 million or $84.00 per unit. With regards to our value-add program, at Farrell mentioned previously, we've pushed the pause button on several value-add projects at this time. At the beginning of 2020, we had budgeted $21.2 million towards are full value-add initiative this year. We now expect to invest $11 million this year at a savings of $10.2 million in 2020.
We will continue to monitor traffic and leasing flow with these on-hold value-add projects and may restart them later this year if traffic and leasing flows return. Given the uncertainty around the length and depth of the coronavirus and its impact on the economy and our residents, we continue to take the prudent step of suspending guidance while monitoring the situation closely. With that said, let me summarize the few key assumptions that have implications for Q2 and for the full year.
First, a moderate -- a moderating of rent growth in Q2, as we work to preserve near-time occupancy and provide payment flexibility to our residents experiencing financial hardship. Continued cost migration efforts including lower property operating expenses such as on-site payroll as well as a reduction in G&A expenses as we adapt to the new operating environment. Pausing a portion of our value-add initiatives, no assumed capital recycling activity for the second quarter, a lower interest rate environment and therefore lower interest expense and finally, the retention of capital from the $0.12 quarterly dividend will result in accelerated deleveraging of roughly one-quarter turn annually.
Looking ahead, the IRT team will remain focused on carefully managing our business through these turbulent times. Our financial flexibility will allow us to withstand this crisis as we plan to emerge as a stronger and more efficient operator in the multifamily real estate sector in the better days ahead. Our strategy will include first actively engaging with our residents to meet their housing and payment needs while providing a safe place to live. Second, currently managing our costs and reducing expenses that are not required in the current operating environment and third, carefully reevaluating our strategic initiatives during these uncertain times and as we prepare for the gradual market and economic recovery.
With that said, I'll turn the call back over to Scott. Scott?
Thank you, Jim. In closing, I'd like to thank, again, our team for their dedication and hard work. During times like this we are incredibly grateful for your support as we look to care for our residents and communities as well as strengthen our company. We thank you for joining us today, we hope that you all stay well and look forward to speaking with you again at Nareit's Virtual REITweek at the beginning of June. Operator, at this time, I'd like to open the call for questions.
[Operator Instructions]. Your first question comes from the line of Austin Wurschmidt with KeyBanc.
Hi, good morning everyone. You guys mentioned, you know, holding occupancy has been a focus for you and you certainly managed to hold it, you know, from the first quarter into April. Not getting that seasonal lift that you've historically achieved but with the pace of value-add renovations, you know, slowing, you mentioned a pickup in leasing demand in late April, you know, perhaps you've seen some higher retention. Do you think occupancy could increase a bit into May and June or has demand fallen off that you think more stable is a more likely outcome?
Austin, we believe it's going to improve. You know, based on just the retention and the leasing traffic it's really starting to pick up. You know, assuming that everything starts opening up, we really expect to see a lot more traffic.
Thanks, appreciate the though there. And then you talked a little bit about the balance sheet, curious how you're thinking about settling the remaining forward equity, you know, over time and using it to decrease leverage or revisiting either the Atlanta portfolio that you previously had T'd up or some other acquisition down the line?
Good question, I tried to kind of head that off in my prepared remarks. Right now the remaining flexibility, we're not necessarily giving guidance on one way or the other it just depends on how the economic recovery comes back. I think if you were to kind of look at what the impact would be if we were to use it to deleverage, it would be roughly a full quarter term improvement in our leverage but if you were to kind of fast-forward to the end of 2020, we should be sub eight times net debt to EBITDA. The full turn lower, so sub-eight times. So probably in that 7.8%, 7.9 net debt to EBITDA but, again, we're just -- just want to echo we're continuing to maintain flexibility during this period of time.
Yeah, and with that sort of quarter turn that you referenced, what type of operating assumptions did you assume as it relates to NOI to get to that type of -- that type of assumption?
I mean, I think what -- for the rest of the year we haven't necessarily given guidance on kind of NOI and I think if you were to look at kind of just retaining that capital and reducing leverage, it's roughly a one-quarter turn kind of reduction in the overall leverage.
To be clear, Austin, Jim is speaking about the $23 million of -- from the reduced dividend payout ratio.
Understood, understood. But I guess I'm just curious if that factors in any type of rollover in NOI to the extent that we do see things continuing to soften into the latter part of the year.
No, I think that's just commenting on just turn base case today where we are. Not -- no future assumption around where--
Got it. That's fair. All right, thanks for the time.
Your next question comes from the line of Nick Joseph with Citi.
Hey, this is Michael Griffin on for Nick. I'm curious, are you seeing any difference in collections across your markets or across [indiscernible] in the portfolio?
We are seeing the markets that have the highest exposure to travel and leisure so Wilmington, Myrtle Beach, Orlando where we have a community there that's across the street from Universal and next to Millenia Mall which is our newly divest mall. So you have exposure to both, you know, tourism and retail sales. So that's what we're currently seeing. We're also seeing some pressure from some of our Class A communities where there's new supply and that new supply doesn't have the luxury of an existing tenant base so we're seeing some concessions increase. So that's where the strain is across the portfolio.
Got you. And then just want one -- revenues. You mentioned valet trash in the past, sort of how do you see the impact of those revenue streams going forward?
Listen, the residents -- you know, it's competitive across the market. So, what we're offering is services that are similar to what other properties are offering that we compete with. If they start reducing those costs for pet rent or valet trash or other amenities then we have to look carefully and see how we compete directly with them. But, so far, we're not really deep enough into that to have any -- we haven't had any pushback. This has only been, you know, a six-week process. We think it's coming back relatively quickly based on, again, the renewal rates we see and the traffic that we're starting to see over the past couple of weeks. So we're not seeing really any pushback on this.
Okay, that's it for me. Thanks for your time.
Your next question comes from the line of John Guinee from Stifel.
Well great, thank you guys. Nice quarter. Question, probably Scott, you know, if you were at the NMHC Conference back in January, which seems now like just light years ago, most participants thought that you were going to see some downward pressure on cap rates given the strength of the multifamily market. Now you've had, you know, the long-end of the interest rate curve drop at least a hundred basis points. Any thoughts for how cap rates will settle out when the investment sale market opens up assuming cap rates stay, or interest rates, stay where they are now?
You know, John, I think if you polled those people, the same people today, they would tell you that clearly there have not been a lot of transactions so there's not many data points to look to, to see what's happening at the moment regarding cap rates. But, you know, over the foreseeable -- you know, the near-term after the recovery, the cap rates will be either the same or lower than where they were ahead of the crisis. And I think that is largely attributed to the fact, to your point, that interest rates are lower. So, you know, it still is -- it is the -- one of the most resilient property types, again, the most predictable type of property to invest in. It hedges against inflation, it's where people are going to want to put their money. So, when you put that together with lower interest rates, you know, I think the conventional wisdom is the cap rates will be where they are or lower, where they were ahead of the crisis or lower when this is all over.
And then the second question is, let's assume that 2020 property level NOI is flat to down from 2019, is that going to have a material effect on property taxes in various municipalities?
I would hope it does. However, as we all know, these municipalities are all going to be hungry for cash. So, you know, I don't -- I don't know. It certainly should but I wouldn't bank on it.
Great, thank you. Nice job.
Your next question comes from the line of Neil Malkin from Capital One Securities.
Hey guys, good morning. I was wondering if you guys could give some color on what the new leases, you know, the rent change like for like have been in April and then what they are, kind of early in May, and the difference between the renovated and non-renovated?
Yes, Neil, so I don't have the April and May, just for purposes of Q2, for the whole same store. You know, Farrell kind of went through that. When you look at the non-value-add same-store properties, new leases are up 1%, renewal leases are up 2% lending to an increase of about 1.9%. For the value add properties in Q2, new leases are up 8.1%, renewal leases are up 3.6% lending to an increase of 4.8%.
Okay, thus far you're saying?
That's just -- thus far, thus far for [indiscernible].
Okay, thanks. And then just, I guess, more of an accounting or modeling question, the way that you are -- how are you going to account for the delinquencies, are you going to basically assume you're going to get paid and straight line that and then have some sort of offset for AFFO. How is that going to work in terms of, you know, what to expect for the impact of FFO this year?
It's a good question. We'll continue to -- there's no decision yet. You know, thankfully we have some time to evaluate that and talk with our auditors and accountants around the proper accounting for that going forward. You know, we do have obviously a fair amount of payment plans where folks have associated themselves to pay it back over a period of time and then you have the remaining delinquency. So I think the bigger question will be, you know, around that remaining delinquency but certainly more color on that when we get to the second quarter earnings call.
All right, great. And then last one for me on -- I know it may be early but any sense for the possibility or opportunities seen in some of your markets, particularly your less institutional markets; maybe some value-add players, that's been a very hot topic over the last maybe, you know, 12 to 24 months. We may have got in at high leverage and this environment doesn't really allow you to get those bonds. Do you think you will see opportunities to consolidate some of those players in your market?
We think there will be. It's still pretty early in the process. There's very little, as Scott mentioned, there's very little transactions out there. What's closing right now are generally 10/31 is changes that need to close and there's very little new product coming out. There -- we think there will be some distress and that's why we're being opportunistic with our liquidity.
I am showing no further questions at this time. I would now like to turn the conference back to Scott Schaeffer.
Thank you again for joining us and please, everyone, stay safe and healthy as we move through this crisis.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.