Q3 2019 Earnings Call
Thank you for standing by and welcome to the Q3 2019 Independence Realty Trust earnings Conference call.
At this time participants are in I listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time [laughter]. If anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would not.
I could turn the conference over to your host Ms. Lorne Scott It.
Investor Relations.
Representative please go ahead.
Good morning, everyone. Thank you for joining us to review Independence Realty Trust third quarter 2019 financial result.
Before I turn the call over to Scott I'd like to remind everyone that there maybe forward looking statements made in this call.
Forward looking statements reflect our teeth current views with respect to future events and financial performance actual results could differ substantially and materially from what I or T has predicted 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 Iraqis press release.
Participants may discuss non-GAAP financial measures.
Our chief other I see filings are also available through this like.
Iraqi does not undertake to update forward looking statements in this call or in respect to matters described herein, except as may be required by law.
Thank you learn and thank you all for joining us this morning.
Q3 marked another quarter of steady progress within our value add initiative, which helped fuel strong revenue and untoward growth consistent demand for housing in our core markets, coupled with our ability to lease up newly renovated units generated same store NOI growth of 8.1% for the quarter and 7% year to date.
We phases, one two and three underway, we have strong momentum and a sound process in place to execute our value add projects as of quarter end 2364 units have been completed and 93% of those units have been leased we are seeing an 18.2% average rental rate increase nearly 16% return on total investment.
We're very pleased with the progress to date, a current cap rates, we have created $3 a value for every dollar invested however, we have only just scratched the surface. We have just under 4000 units earmarked for renovations that have yet to be completed and six of the eight properties within our phase three have yet to commence meaning there was a substantial.
Amount of opportunity ahead within the current program.
In addition, we believe there are more opportunities in our portfolio beyond phase three.
Our decision to invest in this value add initiative with strategic and intended to create not only short term rental rate and I don't know why increases, but also to build a foundation for long term sustainable growth as we create communities that offer residents and upgraded living experience at a lower price point.
We also continue to recycle capital to both improve the quality of our assets and create operating efficiencies in our markets. We continue to review all communities in our portfolio with the goal of building scale and operating efficiencies and attractive growth markets, while reducing our exposure in markets with limited scale or lower growth as discussed with you on our Q2 call in mid July .
We closed on the sale of our two properties in little rock, Arkansas, completing our 2018 capital recycling plan.
Our community currently held for sale in Austin, Texas is under contract with settlement expected in mid December as far will discuss in more detail in July we acquired a community in Tampa, Florida and in October we acquired an additional community in Raleigh, North Carolina, increasing our exposure to these dynamic markets.
I guess got comments, we had a strong quarter from an execution and performance standpoint across the portfolio.
Those strong indicators of the continued demand for many rich middle market communities in our non gateway markets.
Looking at Hawaii growth by market, Myrtle Beach, Wilmington, Raleigh, Durham, Louisville, Charlotte and Tampa markets, all exceeded 11% growth for the quarter, leading the broader portfolio.
These markets have consistently been strong performers prior to as a combination of population and job growth along with a sense of livability are drawing an influx of people to these areas of the country.
Wilmington, Raleigh, and Lilly will also continue to benefit from our value at initiative.
In the Myrtle Beach, Wilmington market same store NOI increased 14.2% as compared to last year.
One of our three communities in this market is going through renovations and combined with limited supply has enabled us to increased rents by 18.4% as compared to last year.
The other two communities in this market are also benefiting experiencing rental rate increases of over 7%.
Myrtle Beach is among the fastest growing matters in the country, having grown four times as fast as a national average.
The market has posted 28% population growth from 2010 to 2018 and has seen significant employment growth in both the education and health service industries during the current cycle.
In Raleigh Durham average occupancy is up 2.7% from Q3, 2018% to 94.1%.
The village at all burn was one of our early and most significant value add project to date and as we near completion of the renovations on this community, we are seeing occupancy normalize and rental rates increasing 17% on average.
And Charlotte, we continue to see the benefit from being located on the link slight really up light rail line in the South and Submarket, which provides quick and easy access to Uptown Charlotte at a reduced cost.
Given the submarkets favorable location to both high paying jobs in Uptown and suburban Charlotte has seen significant supply over the past couple of years and our occupancy has risen fallen with those deliveries.
Over 50% of this pockets inventory has been built in the past four years and with less development opportunity supply has waned, we've been able to gain occupancy while pushing rents.
We increased occupancy to 96.2% while at the same time, increasing the average rental rate by 5.2%.
Tampa is a market that we've discussed consistently over the past several quarters as a supply demand demand dynamics directly aligned with our investment criteria.
While we currently own several communities in this market only one community is in our same store portfolio.
It is located in a mature infill suburban with very limited supply greet schools and across the street from a whole foods anchored shopping center.
We have increased both occupancy and rental rates by 300 basis points generating revenue growth of 9.3%.
On the whole portfolio average occupancy was 93.5% in Q3 down slightly quarter over quarter and flat versus Q3 2018.
The short term effect on occupancy during the renovation process at our value that communities is more than offset by the powerful long term rental rate growth.
Total portfolio average rental rates increased 5.9% year over year, driven by our value at properties.
On a lease over lease basis during Q3, new lease rates increased 5.4% and renewals were up 4.9% using a combined lease over lease rental rate increase of 5.1%.
Through the first month of Q4 lease over lease rental rates for new leases are up 3.4%, while renewed leases are up 4.3% with a blended lease over lease rental rate increase of 3.9%.
Deceleration into the fourth quarter is expected and is typical of the cyclical nature of our business and we'll begin to accelerate again in March as we enter the spring leasing season.
Turning our attention to our capital recycling on July 11th we purchased our fourth community in the Tampa market, bringing our total unit count to 1140 units and nearly 8% of our total NOI.
The property was built in 1999 contains 264 units and will be added to our renovation program.
We acquired the property based on year, one economic cap rate of 5.1% and a 6.2% cap rate stabilization.
The property benefits from its proximity to the research triangle and the highly rated Wake County School District.
Property will also be added to our renovation pipeline and was purchased based on a year, one capri of 5% and a stabilized cap rate of 6.2% I'll now turn the call over to Jim to discuss our financial results. Thanks, Daryl and good morning, everyone for the third quarter of 2019 net income allocable to common shareholders was $4.9 million.
Up from $4.8 million in a third quarter of 2018 core AFFO grew to $70 million up from $16.5 million in 2018 core AFFO per share remained stable at 19 cents per share.
Occupancy in our same store communities averaged 93.4% during Q3 flat year over year rental rates for the same store communities increased year over year with an average effective monthly rent of $1071 this quarter.
On operating expenses are non controllable expenses increased 7.9% year to date, primarily driven by real estate taxes controllable operating expenses increased 1.1% in Q3 over the same period last year and 0.6% year to date.
We are Gina expenses increase over 2018, as we continue to invest in the platform and our management team.
We invent these investments have already enabled us to deliver outsized growth for the portfolio year to date and represent a critical foundation to support further scaling other platform without incremental junior anchor.
Turning towards the balance sheet, we close Q3 with 57 properties and total gross assets of approximately $1.8 billion.
Our debt level came down slightly with a normalized net debt to adjusted EBITDA at 9.0 times at quarter end, our debt is 94% fixed rate, we're hedged with no significant maturities until 2023.
We expect it to be in the market later, this year and reprice, our existing seven year term loan saving us approximately 40 basis points of interest annually with no change to the maturity date.
During the quarter, we were active selling shares on or ATM. We issued 973000 shares at a weighted average price of $13 and 40 545 cents per share generating net proceeds of approximately 12.8 million.
As highlighted in our earnings release today, we updated our 2019 full year guidance, our EPS and gain on sale guidance have been reduced to reflected lower number of property dispositions in 2019 than what was assumed in our previous guidance. However, our guidance range for core FFO per share remains unchanged at 75 to 70 cents per share.
Okay.
Turning to same store guidance, we are updating our property rental revenue growth outlook to be at the top end of our previous guidance range, while lowering total operating expenses to be below our previous guidance range. This increase in a expected property revenue growth to a range of 5.5% to 6% is due to the strong results. We are realized year to year to date.
Okay, which would help drive revenue into the fourth quarter.
The decrease in expected property operating expenses to a range of 3% to three and half percent reflects additional favorable real estate tax assessments and appeal results.
Overall, we now expect same store NOI growth within a range of 7% to 7.5% for 2019.
Looking forward to 2020, we believe the value add written renovation program will continue to provide strong in Hawaii growth. We will provide guidance for 2020 on our yearend earnings call in February 2020.
With that I'll turn the call back over to Scott.
Thank you Jim.
As we move into the final months of 2019, I want to take a moment to recognize our team both in the field and in our corporate offices for their dedication and strong execution over the past 10 months, we have generated the strongest at Hawaii growth since our inception.
Looking out into 2020, we're very excited about the state of our business and the tremendous opportunities that lie ahead first as it relates to the value add initiative. We have an additional 4000 units to be renovated under the first three phases of the program and expect to complete between 500 to 700 units per quarter next year. Secondly, we continue to see strong real estate fun.
The metals across our core markets and we'll execute a capital recycling strategy to align our portfolio to best capitalize on these positive trends.
And lastly, our ability to continue to drive outsize outsized growth provides a line of sight to improve our leverage profile overtime and deliver long term shareholder value.
And now I'd like to.
Operator open the call for questions.
Your first question comes from the line of drew Babin from Baird.
Hey, good morning.
Thank you Andrew.
One or two a culture on Charleston, that's going to market were hampered occupancy and rigorous kind of been under some pressure.
Presuming that supply is sort of working into that equation. There could you maybe give a little more color on that market and when you expect could occur more towards positive.
Sure drew we have to community. There one is a class a and one is a class b class b, the northern suburbs and is doing okay. We're seeing.
On average to 2%, 3% rent growth.
The class a assets on Daniel Island, and as someone that's facing a lot of supply pressure, we don't see that going away at least for another year or two as they continue to build in that market.
So we're just going to have to manage through it.
Sort of might want to so longer term.
Do you envision independent living in net acquirer next year based on everything we know today.
Yes, I do.
Okay, and I guess just building on that.
Hey can you talk it all down maybe the number of properties or some sort of the portfolio that you prefer to sell our cone point.
Correct.
Yes.
Actually noncore noncore assets, how large is that portfolio.
And how aggressively might you'd be willing to approve.
Well, we're consistently as we've stated looking at the portfolio.
Relative to recycling of capital.
We've we've stated that we're looking to exit markets, where we have limited exposure and.
Either the inability were the desire not to to grow.
So at this point, we really haven't concluded on any specific assets.
We're going to recycle out of.
In the near term, but but just please recognize that it is an important part of our business strategy and we do expect to be again, focusing the portfolio in growth markets and expanding it.
Okay appreciate the color Goldman.
Next question comes from the line of Austin Wurschmidt from Keybanc.
Hi, Good morning, everyone. Scott I think towards the end of your remarks I believe you said, you're targeting 500 to 700, a value add turns per quarter next year.
If I am not mistaken that that's a pickup from sort of the 350 to 400, you've been you've been achieving per quarter. This year.
Just curious if you think you have the personnel in place today to handle that heightened level of.
Renovations and really what's driving that decision.
Thanks, Austin and we do have.
The the personnel in place.
We think we have.
Very good team we've been been working on the processing since since we've started this program and really the increase is more due to the fact that we are starting phase three while winding down phase one and then continuing with phase two so it's still having some units in phase one being completed phase.
To continuing through.
All of next year, and then adding phase three and just gives us more units.
Understood I appreciate the thoughts there and then feral is the diesel that you referenced in new lease rates in October is that strictly within non value add assets. That's driving that are or do you also expect a little bit of moderation in the increases you're achieving on value add units as well.
It's across the board has just again the cyclical nature, where were we have less leases expiring and less traffic and we see it every year.
We go back to Q3, and Q4 last year as a similar trend.
Got it and then.
Jim maybe one for you you highlighted you are a bit more aggressive under the ATM this quarter.
Just curious should we continue to expect you to utilize the ATM moving forward Opportunistically.
Yes, he that Boston, that's right opportunistic issuances on the ATM that would be appropriate for accretion does any of you Thats accretive day Navy and earnings per share.
Great. Thanks, guys.
Thank you.
Your next question comes from the line of Nick Joseph from Citi.
In a lycra went up second thought that's at the midpoint again.
Additional acquisition growth, but the core FFO guidance was maintained at the midpoint so wonderfully goal.
Yes sure.
As we kind of mentioned in the call you know the the timing around capital recycling certainly happening over later the acquisitions happening a little bit later than we expected originally as well as just some of the cap rates. We the cap rates are requiring out in the last last half of your has found mentioned EUR 5.1 in five we had assumed a slightly higher cap rate.
And then also just to the effects of the deleveraging from the ATM issuances in the last part of the year.
So given those in but some are still exist in the fourth quarter I think implied guidance is a little over 21 cents for Fourq is that a fair run rate going forward or how do you think about the run rate going into 2020.
Obviously, we'll give guidance in the early part of next year, but I think 2020 to 21 cents per site exciting.
When the capital recycling sales occur will offset that but I think you know in that kind of 20 to 21 cents a quarter is certainly a fair run rate.
Following up on.
You guys had impressive.
Share price appreciation this year and I just wonder.
Or are you seeing more opportunities to take down deals like Raleigh.
Accretive acquisitions day, one which.
Kill two birds with one stone in terms of deleveraging and.
Funding the.
Well as we've always stated we're looking to do transactions that are accretive.
And we are laser focused to be covering this dividend in this fourth quarter and keeping it covered and growing into a more normalized.
Dividend ratio payout ratio in the future. So we will continue to look at opportunities.
And we will use the ATM.
When opportunistic and again always focused on on transactions that will be accretive to both any JV and.
Earnings per share.
But is your pipeline kind of more robust and it was a year ago.
No.
The market is continues to be very aggressive and and.
There's a lot of money chasing multifamily assets.
No. We've always had a very fulsome pipeline and we're looking again to do deals Opportunistically, where we can grow in the markets that we've identified and have current exposure.
Alright, Thanks, a question how about your.
Gene General what would you say.
The push back to the following the.
The kind of sunbelt non coastal markets are expected to have really strong population growth and that the great thing, but at the same time those markets are.
In two areas for being able to bring supply on a lot more easily than in the sort of.
Blue State coastal markets I.
I Wonder if you obviously know subscribe to that in the current Dan AIDS and then also how do you sort of maybe.
Competitive moat around yourself or the assets that you.
Invest in.
When thinking about that.
Well sure in its.
It's really the basis of our investment thesis, we are looking and non gateway non coastal markets, where there is good population growth.
And job creation, and you're right Thats, where people who are developing or want to build new.
New communities as well however that goes to the other part of our strategy, which is the class B assets noted that are typical typically 10 to 15 years old new supply is not being built as class b. So we have a very attractive.
Price point advantage and with the value add program, we can deliver product and are delivering a product that competes effectively with the newer class a supply, but still at much lower price point. So I agree with you that there is more development in the sunbelt markets.
But that goes to our class B strategy and how we compete effectively.
Sure and then last thing for me could you just.
Give us an example of what sort of spread.
His normal for a post renovated.
Asset rent per unit compared to a.
Class a assets in the same market.
So when we're analyzing to do a renovation we want to post renovation, we still want to be three to $500 below a new class a constructive deal.
Alright, thank you.
And I show no further questions at this time I will now turn the call back to Mr., Scott Schafer for any closing remarks.
Thank you all for joining US today, we look forward to seeing many of you. It may read in couple of weeks and if we don't see you in May we will speak with you again next quarter. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all now disconnect.