Q2 2020 Independence Realty Trust Inc Earnings Call
Ladies and gentlemen, thank you for setting by and welcome.
Did a Q2 2020 independence Realty Trust earnings Conference call.
This time, all participants are in a listen only mode.
Sorry, the speakers Christian teaching there will be a question answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised to these funds range is being recorded if you require any further ashish Vince Mish branch sorry here.
Thank you now I would like to hide the conference over to me Snoring Tories Ma'am. Please go ahead.
Thank you and good morning, everyone. Thank you for joining US to review Independence Realty Trust second quarter 2020 financial result.
On the call with me today, our Scotch cheaper arch.
Sure, Jim Sebra, our Chief Financial Officer, and Farrell Ender President of <unk>.
Today's call is being webcast on our website at www Dot I Archie living Dot com.
There will be a replay of the call available via webcast on our Investor Relations website and Telephonically beginning at approximately 12 PM Eastern time 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 IR cheese current views with respect to future events and financial performance.
Actual results could differ substantially and materially from what I or T has projected.
Such statements are meeting good to see pursuant to the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Please refer to Iraqis press release supplemental information and filings with the FCC for factors that could affect the accuracy of our expectation or caused our future results to differ materially from those expectations.
Participants may discuss non-GAAP financial measures during this call.
The.
Reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure is attached to IR team. Most current report on the form 8-K available at Iraqis website under Investor.
Relation.
Your teeth. Other FCC filings are also available through this link.
He 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 cheaper.
Thank you learn and thank you all for joining us this morning.
Second quarter was our first full quarter impacted by the cobot 19 pandemic.
Dudley pose challenges to all of our stakeholders well the path forward remains uncertain. We are encouraged by gradual road to recovery supported by the dedication and perseverance of our employees.
Over the past quarter, we focused on the following key priority.
First and foremost we directed our efforts towards protecting the health and wellbeing of our employees and residents and keeping our community safe and clean.
Second we provided flexibility to those residents demonstrating financial hardship with their near term monthly run a requirement by creating payment plans waving late fees and halting the victory.
Third we focused on driving leasing traffic in maintaining occupancy to support the overall health of our portfolio at the position us to capitalize on the eventual economic recovery. For example, leasing traffic was up 27% in the second quarter of 2020 versus a year ago.
And fourth we took the necessary steps to maintain significant liquidity, including continuing to tightly manage our property operating and capital expenditures as well as managing the timing of investments as it relates to our value add program.
Staying on the topic of or value I program demand for renovated units has rebounded in remain strong, prompting us to restart this initiative that all five communities, we had pause during the first quarter.
Value add initiative has been and we'll continue to be foundational to our strategy since its inception to win a half years ago. We've completed renovations at 3252 units generating a total return on investment up 16%.
Our value I program also provides us with tremendous flexibility to just timing and investment in order to best navigate near term market conditions. Nevertheless, with 3884 units remaining to be renovated over the coming years, we see an attractive runway for future growth embedded within our existing portfolio.
As we looked at the second half of 2020, we remain cautiously optimistic and confident in our ability to manage through the current environment, but we are well aware that the situation remains fluid and plan to the state local level could be alternate any given time.
As of today total portfolio occupancy stands at 94.1% a 160 basis point improvement since the end of last year, we've collected approximately 97.2% of joy rent, which is consistent with collections in June.
I would also like to highlight that IR team continues to maintain strong balance sheet, we have ample liquidity with no significant debt maturities until 2023 or total liquidity position, it's approximately $248 million at quarter end, which includes unrestricted cash as well as additional capacity for our unsecured line of credit and future proceeds from the remaining portion of our forward equity.
I think from February of this year. This reflects our efforts to be financially flexible to not only whether near term uncertainty, but also moved quickly to enhance our portfolio and create long term value.
In summary, and on behalf of the whole IR team I'd like to reiterate that we remain committed to our residents communities and shareholders. Our long term aspiration of being the leading middle market multifamily owner and operator across non gateway markets remains clearly intact. We've set a strategy that over time, we'll continue to yield strong business performance throughout various cycles.
On top of that you must maintain the highest commitment to our most important stakeholders in particular, we have an obligation to protect our employees to encourage diversity and inclusion and create a culture that drive long term value creation.
We are committed to providing our residents with a high quality and say community regardless of the environment outside their door that they are they have places they are proud to call home.
With that I'll turn the call over deferral for an operational update feral thanks, Scott and good morning, everyone.
I would first like that guard tire operations team for their continuous efforts by protecting and supporting our residents properties and communities.
They've done an incredible job ensuring that we comply with the highest safety standards and often environment that is welcome to our existing and prospective residents.
In particular, our on site teams led the effort to improve total portfolio average occupancy in Q2 to 92.9% from 92.5% of Q1.
And for July our average occupancy rate increased another 90 basis points from Q2 level to 93.8%.
The average occupancy across our same store portfolio, not including our value that community second quarter was 94.3% and as of today, it's 94.8%.
This increase is due to a coordinated effort to offer flatten minimal renewal rates, resulting higher resident retention with a goal to maintain occupancy.
On a lease over lease basis for the same for portfolio. During Q2, new lease rates increased 1.4% and renewals were up 2.4% you wouldn't a combined lease over lease rental rate increase of 1.9%.
For July new leases it increased 1.1%.
While renewed leases are up <unk>, 0.7% with a blended lease over lease rental rate increase <unk>, 0.9% for same store portfolio.
As expected and as we highlighted on our last earnings call Q2 rent growth moderated as compared to previous quarters.
This reflects our focus and supporting occupancy during the pandemic well leasing traffic slowed in the first half of Q2 trends began to improve in the second half of May and into June resulting in quarterly traffic exceeding a year ago continued into the month of July.
This encouraging trend reflects our efforts target prospects more efficiently moving away from traditional Internet listing service to more paid search social media and display ads.
Additionally, we have our campaigns designated by unit types that we can easily adjust availability and optimize our spend accordingly.
Our property management team remains focused on strict adherence the CDC guidelines and safety measures with persistent de cleaning of our facility common areas and have created an online reservation system for many of our amenities such as our fitness centers pest boss to limit the number of residents and support a social distancing.
Our leasing teams has enacted a hybrid model and person and virtual tours are converting tourist applications at a much higher rate this year as compared to last year.
For example, during Q2, we converted 37% of our tours generated 3237 applications versus converting 29% or 2841 applications in the second quarter last year.
The location of our properties in cities and counties less impacted by coded as well as a tremendous effort from our entre teams are the key drivers behind our ability to increase traffic convert more tours to leases and drive occupancy during these turbulent times.
While we are optimistic this pandemic is not over yet we will continue to carefully manage our communities to support occupancy while reducing cost whenever possible.
Turning our attention to our value add program. We completed 227 units in Q2, while continuing to see solid rent premiums.
Last quarter, we announced that we have taken a more selective approach to our value.
Oh supply and demand for renovated units.
This involves pod pausing five project and progress and delaying the start of six renovations and renovation to six out of communities.
In the second half of Q2, we began to see pent up demand for our renovated units and then the month of July have averaged 18 more applications per week, a 33% increase as compared to July 2019.
Therefore, we reinstated renovations at all the five Pos project.
Value add properties due to more favorable market conditions and a clearer view on return on investment opportunities.
The remaining six communities have not started yet, but we're carefully monitoring each individual project in order to determine when best to begin renovations.
Looking ahead through the remainder of this year and based on what we know today, we anticipate completing approximately 500 units in the second half of 2020 bring our total renovations for the full year 2022, approximately 1050 units I'll now turn the call over to Jim.
Thanks, Alan Good morning, everyone, beginning with our Q2 2020 performance update Archie recorded net income available to common shareholders of $789000 down from net income of $14.7 million in the second quarter of 29 team the latter which benefited from a $12.1 million net gain on the sale bass.
Yes.
During Q2 core FFO grew to $80 million up 6.8% from $16.9 million in Q2 2019.
Core FFO per share during Q2 was 19 cents in line with Q2 29 team.
Turning to our same store property operating results and why growth was 1.2% in the quarter driven by revenue growth of 1.7%.
Rental rates for these properties increased year over year, but could average monthly rent of $1090. This quarter up 4% since Q2 last year.
While this includes value add communities, we did see rental rate growth it or non value added teamster communities with rental rates in Q2, increasing 2.8% over the prior year.
During the second quarter of 2020, and as a result of the cobot 19th pandemic, we recorded a provision for bad debt aggregating $723000.
This amount $690000 related to that 50 for same store portfolio.
This provision represented 1.4% of total second quarter revenue.
Net debt totaled $751000 in the second quarter of 2020 compared to $337000 in Q1, 2020 and $236000 in Q2 2019.
Excluding this bad debt reserve, we would have delivered rental and other property revenue growth of 3.1% to the second quarter versus 1.7% has reported.
Furthermore, the bad debt provision, we recorded reduces the future risk of any billed revenue that we have not yet collected for Q2.
To put it in contact we ended the quarter with $1.4 million of gross receivables, including those receivables that were part of our deferred payment plans offered to residents.
Subsequent to June Thirtyth, we've collected $333000 of these gross receivables in July and after considering that bad debt provision. Our net accounts receivable left over from Q2 is $355000 about of about a third of a penny per share. We believe that we are adequate.
Reserve to feel good about collecting those remaining net receivables.
On the property operating expense side same store operating expenses increased 2.3% in Q2 2020 with higher property taxes in property insurance expense offset by lower maintenance costs and other expenses are non controllable cost consisting of property taxes and property insurance, which was renewed during Q2 increased six.
0.7%, while our controllable cost consisting of all other categories of operating expenses decreased 20 basis points. This reflects our ongoing initiatives to tightly manage our cost structure, when and where appropriate particularly during these uncertain times.
Turning to our balance sheet as of June Thirtyth, our liquidity position was $248 million, we had $11.7 million of unrestricted cash approximately $137 million of additional capacity through our unsecured credit facility and $99 million that remaining proceeds from our forward equity raise.
Subsequent to quarter end, we use our unsecured line of credit to prepay without penalty $32.1 million of property level debt with a weighted average interest costs of 3.9%. This saves us close to $700000 of interest costs.
A year when compared to the interest rate on our line of credit which is 1.6% today.
We closed the second quarter its carrying just over $1 billion is that.
With no significant debt maturities until 2023, our normalized net debt to adjusted EBITDA was 9.2 times at the end of the quarter clearly the increased bad debt expense was the main driver of the increase from nine to 9.2 times this quarter.
If we use the remaining proceeds from our forward equity raise to de lever our net debt to adjusted EBITDA would decrease to 8.2 types.
Regarding our dividend program Iraqis Board of directors declared a quarterly cash dividend of 12 cents per share, which equates to a 71% payout ratio on 17 cents of an AFFO for Q2.
As mentioned last quarter, the retention of capital from the revised dividend now puts us more in line with a peer group on a dividend payout ratio basis, and gives us more financial flexibility with the potential to allow for accelerated de leveraging.
With respect to guidance, we believe it it's prudent to keep is suspended at this time and anticipate resuming the practice of providing full year guidance when they're sufficient clarity on economic conditions.
With that said, let me summarize a few key assumptions that have implications for the second half of this year first we will continue to prioritize resident retention and occupancy while driving rent growth where appropriate.
Two we plan to continue our cost mitigation efforts, which will include lower controllable operating expenses than we initially guided earlier this year.
Three we will assess any future cap rousseff activity with the intent to redeploy cash works for asset sales as opportunities arise and four.
We expect a lower interest rate environment, and therefore lower interest expense in the second half of this year.
I'd now like turn the call back that Scott Scott. Thank you Jim in closing I'd like to thank our team for their dedication and hard work. Our success has and will continue to be a reflection of our strong team portfolio and simple capital structure.
We're well positioned to not only withstand near term volatile market conditions, but also to be ready to move quickly to capitalize on future growth opportunities and at this time, operator I'd like to open the call for questions.
Sure I should remind me to ask a question you will need to press star one on your telephone and if you need to be draw. Your question. This press the pound King please standby well be compiled acuity Lester.
Our first question comes from the line of Austin Wurschmidt Some keybanc.
Sure. Please go ahead.
Hi, good morning, everybody on the value add renovations.
So you guys have made some stride building occupancy and I'm just curious with the plans to recommence. These renovations. If you think you can still hold or or improve occupancy from these levels and and it sounds like you know correct me if I'm wrong, you are pushing I guess opportunistically, a little bit harder on on renewal rates.
Where appropriate can can you give us a sense of where those are going out at today.
So on the value add Austin, I mean, similar to what we managed through the past couple of months will you know monitored it on a on a weekly basis, if we see rent drop yeah, we'll make decisions based on real time in for information.
There are a select few properties on the renewal rates that have really good occupancy and really low exposure I'm, we're going out 2% to 4% on this.
And where is that across the entire portfolio.
No no no just just properties, where we all are 94, plus with with minimal exposure in the next 60 days so that we maintain at 94 plus occupancy.
Understood.
And then you mentioned is one of the priorities in the back half the year.
Being opportunistic and I'm just curious if you can give us a sense of what you're seeing across the transaction market for assets that are consistent with your strategy.
Both to buy and sell side.
Yeah, I mean, I think it's still a little too early to tell we're just seeing deals come to market I think that yeah. There's still a lot of capital out there and I think that in itself in the markets where in the good Submarket, you're gonna stay still see a lot of competition, but we're analyzing markets where in the markets. We're looking at the deals.
You know as we see something that may fit our portfolio. We'll go after it but I think it's still a little too early to tell.
Understood Oh, you had poor thank you.
Thank you. The next question comes from the line of Nick Joseph from Citi.
Your your line is open.
Thank you maybe just following up on out if you think about 100 million of the unsettled forward equity.
What's kind of the current order of what you would use those proceeds for between opportunistic external growth redevelopment or just de leveraging.
Hey, Nick It's Scott I think it's really a little too early to tell and you know as Carl said.
You know, there's there's some deals coming to market, but there's been as far as I know one can see there's been no real price discovery, yet and there seems to be a little bit of a disconnect between what.
Sellers willing to sell out and what you know the moment with buyers want to pay.
You know real we'll do whatever is the generates the best return for the company. Obviously, we have a focus on de leveraging and that's an important aspect of our of our of our future.
But if we see really opportunistic ways to put this money to work.
An accretive Lee I think we will consider that.
Thanks for that and I appreciate the comments on the operating strategy, which markets can you currently drive lundquist today, where your where your favorite recruits over occupancy.
Yes, Huntsville has been performing for the past several quarters the market, we'd like to expand and because of their significantly significant job growth in its high wage job growth Atlanta is still a market while seeing supply pressure. The assets. We have in that market are doing very well. So that's another market that we're looking to.
To expand into in the right situation.
I think I would add to that that could it's that it's more of the property focus than a market focus.
We've we've worked over the last couple of years as Weve acquired properties to.
Modify the expiration schedule of leases to be more in or during what is.
The leasing season now they sure obviously leasing season was a little blade.
But what it means is the now coming into.
The full remains due to winter our exposure to lease expirations declined dramatically. So if we have a property with a high occupancy and very few lease expirations. It gives us the chance to actually push rents.
On those renewals and on any new new lease you know that were that we're quoting.
Thank you.
Thank you then next question comes from the line of Neil Malkin from capital one Sir your line is open.
Thank you guys good morning, cornering the right.
First question.
Can you maybe talk about the difference in dynamics or or strains on the ground at the five properties you restarted versus six that you you know Didnt you had better so pushed out.
And what you need to see to get that going again.
Yes. It a five that we pause is really you know a supply issue, where we were building up inventory heading into leasing season, and as we know leasing season got pushed out when we still feel we saw in March and April that we had again decent inventory without a lot of traffic, we paused them until that until we.
Saw that demand, which started to pick up in that enabled us to restart the is the other sticks. We we are ready to go just deal with all the uncertainty and market. We think it's prudent to just wait and see how the next couple of months look and then we'll be ready to go.
Oh sure I, just I think some of that market do you still delayed I think there in market. You're currently active in in terms of renovations I guess you know do you just have less competence in your ability to get those those rent bumps in the six.
The five that are restarted is that fair fair assumption.
No you know <unk>.
This is Scott I I don't I don't think Thats really the main the main issue for us it's that theres still seems to be someone certainty in the market appropriately so and to two to start renovating the property or the units in the properties will put pressure on occupancy.
So all things being equal today, we're in a good place. However, if we start seeing the economy shut down again and traffic starts to slow we don't want to have built off the inventory of renovated units and then just sit on them because we don't have the new lease opportunities coming in so as we see how how things progress over the next 90 days.
Will be better able to make a decision on traffic going forward and demand and it'll.
Give us a clear picture of whether or not we should start. These renovations are harder to demolish the renovation theres no question. It puts a puts downward pressure on occupancy.
So we want to make sure there is there.
Traffic in demand before we do that.
Okay, Okay, Great and then I was wondering.
In in your in your markets as as we've seen the sunbelt see arise and Cobra cases and earlier this month, if you're seeing any notable impact.
In terms of traffic.
Cetera, and then also for existing tenants are residents have you seen more people come to you requesting a vendor for all just as a 600 dollar a week.
Federal supplement is set to expire in the month.
We haven't although you know.
Well just rent aren't due April Saturday.
So.
Well, we'll have a more clear picture that in the first couple of weeks of August I do expect the government to get something done however, it might give little delayed, but I can't imagine that they won't get some sort of stimulus done.
And as far as the hotspot I will tell you that we've had we only have one employee today out of 500.
That is quarantining.
So even though our properties or some of our properties in Florida, and Texas, which are two of the hot spots and you've heard about North Carolina.
We are not seeing it within our staff, we are not seeing it within our residents.
And.
So we're hopeful that that that will continue.
We've known we hear that in Florida, which is now the number one Stacy infections, it's really more mostly on the east coast, we're on the West Coast and.
And in Texas, it's been a lot of Houston and we're not in Houston were in Dallas, So even though things are reported that you know as the state as a whole.
We're confident that we're not in the specific area, where where most of these hotspot is happening.
[noise], Okay, Great and then the last one for me the I think something that Knicker. Austin mentioned you do have that remaining forward you know in your in your pocket I guess, you could say I think the value add market has been impacted more than the you know maybe stabilized or core.
Hey.
Market.
Are you seeing that kind of like play out or or maybe as a source of opportunity in terms of lower buyer pool or pricing and maybe if you could come in at all on on you know.
Would that would that be a trade you're willing to make issuing that that later in the year and potentially getting some.
Valued at community.
Well, we I do agree with you we think there will be some opportunity with everything in the past three years has been marketed as a value add even if it's Jim two year old product. So I do think there'll be some opportunity there were people haven't been.
Effective on their value add or having achieved the rents that they thought they were going to it hasn't presented itself yet, but I do think over the course of the second half a year, we'll see some of those opportunities.
Thank you.
Ratio there is there more questions at all.
Well if there are no more questions. We thank you for joining us today I hope everyone is able to stay safe and we look forward to speaking with you at the end of next quarter.
Thanks, everyone.
Okay.
[noise].
Go from here I am just game.