Q2 2019 Earnings Call
Good morning, and welcome to the investors Real estate Trust conference call to discuss a three month quarter ended June Thirtyth 2019.
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I would now like to turn the conference over to John Bishop Vice President of Finance Mr. Bishop. Please go ahead.
Thank you and good morning.
Iraqis Form 10-Q for the second quarter 2019 was filed yesterday with the FCC. After the market close. In addition, our earnings release and supplemental disclosure package have been posted on our website at IR E. T apartments Dot com and filed yesterday on form 8-K.
Before we begin our remarks this morning, I need to remind you that during the call. We will discuss our business outlook and will be making certain forward looking statements about future events based on current expectations and assumptions.
These statements are subject to risks and uncertainties discussed in our release and Form 10-K T. And then other recent filings with the SEC.
With respect to non-GAAP measures, we use on this call, including pro forma measures. Please refer to our earnings supplement for a reconciliation to GAAP. The reasons management uses these non-GAAP measures and the assumptions used with respect to pro forma measures and their inherent limitations.
Any forward looking statements made on today's call represent management's current opinions and the company assumes no obligation to update or supplement. These statements that become untrue do is due to subsequent events.
With me. This morning. This is mark Decker <unk> on the call Bell and Olson, our lead cat harder and John <unk>, Our chief Bean counter at this time I would like to turn the call over to Mark. Thanks, John Indeed, we need more cowbell.
Welcome everyone to our second quarter call results for the second quarter exceeded our expectations with core FFO growing 9.9% compared to the second quarter of 2018.
I'm also pleased with our ability to raise guidance, reflecting our continued confidence in the business and outlook for the rest of 2019.
Our team many of whom are listening come in every day to take good care of our customers and improve our results. Thank you team for your continued smart and hard work.
As we've discussed in the past few calls this quarter was going to be a tough comparison for us on the NOI line and with respect to margin expansion, but we continue to make progress on both and we do expect to make progress this year in our campaign to rise by five.
To offer some greater transparency, you'll note added disclosure on our expenses on page S. Five of the supplemental.
On balance our business is thriving.
Turning to capital allocation portfolio in markets I'd like to start by highlighting two victories that demonstrate the positive outcomes that can be achieved when you act with urgency and strategic purpose.
First we settled our ongoing construction defect litigation, which resulted in a gain of over $6 million.
Resolution of this matter eliminates a costly distraction and gives us clear visibility on DNA, which we continue to manage vigorously.
We also traded or might not headquarters building, where we had too much space and a multi tenanted mixed use building.
We traded real estate with a larger using or user in town, who needed room to grow.
This was a great win win with a local business for our part.
Well get great space for our might not support team and that over $3 million.
We compounded the wins by redeploying these sales and settlement dollars into the purchase of shares in our company at a significant discount to net asset value.
Growing core FFO and then maybe.
Buying our shares at close to a seven cap is a really compelling use of funds, especially when it comes from sales of land or inefficient properties.
Year to date through July 31, we purchased over $26 million of shares in units at a significant discount to any abbey.
This saves over $1.3 million of dividends and further concentrates the remaining shareholders.
Into a business that is improving and growing.
Our capital allocation priorities remain assets in Denver in the twin cities.
Value add investment and buybacks.
Within the apartment portfolio and consistent with the last two years, we continue to look for opportunities to pair slower growing and or capital intensive assets in markets and redeploy where we see better long term growth.
Well conditions over the last two years have been good today is perhaps an optimal environment for us to continue our portfolio transition.
In particular, we're seeing buyers look to some of our secondary and tertiary markets for cost basis Unlevered current cash flow.
Our motivation is cash flow growth and liquidity, which we believe can be achieved through the redeployment of opportunistic sales.
Broadly speaking cap rates remain stable in our target markets, but continue to decrease in our tertiary markets.
With respect to redeployment, we remain highly focused on real estate that has defining characteristics.
Within the context of a portfolio construction that lends itself to durable pricing power.
Enhanced operating efficiencies and complimentary towards our disciplined balance sheet strategy.
As we've said we believe markets are key to our success and we're encouraged that our anti white today is more concentrated in Minnesota, and Colorado, where we are seeing higher growth.
Taking a closer look at our markets Minneapolis continues to be driven by broad corporate growth and reasonable supply.
Denver, which has stronger job and population growth continues to see supply on the high side, but our assets. There are stable in great Submarkets and are performing in line with underwriting.
The balance of our markets are in equilibrium in terms of supply and remain driven by health care education and government.
Looking through to the end of the year, we're going to continue investing in technology and processes that improve our customers experience and enable our team to be more outward facing.
We're also working hard to build a culture and a total rewards package that makes diary T. A destination employer and certainly we will grow the quality of cash flow for ownership, while adhering to our goals to achieve per share growth, while improving balance sheet quality and flexibility.
Now, let's turn to some detail on how we're operating and.
Thanks, Mark and good morning, everyone. We continue to execute on our ability to drive organic growth through operational improvements and we're pleased to have reported 2.6% same store NOI growth in the second quarter as compared to second quarter 2018, with our comparable year to date same store NOI growth, reaching 3.6%.
Our NOI gains are being driven by increases in revenue, particularly in our strategic market of Minneapolis and across our Minnesota portfolio.
Minneapolis, let our same store portfolio with a 7.7% revenue increase in the second quarter compared to second quarter of 2018, primarily attributable to a 5.8% quarter over quarter increase in rental revenue.
When looking at our Minnesota same store portfolio in the aggregate, we achieved an increase of 7.1% NOI growth in the second quarter compared to second quarter 2018, and we are seeing strong rent growth with average rental increases of seven and a half for sun on new leases and 6.6% on renewal leases in the second quarter across the Minnesota market.
Our non same store portfolio, consisting a fully stabilized assets in Minneapolis, and Denver also saw significant growth with Denver, achieving rental increases on new leases of 4.7% and 4% going to present on renewal leases during the second quarter.
On the other end of the spectrum, we are experiencing continued weakness in our north Dakota markets, resulting in negative or flat growth in weighted average monthly rental rate year to date as compared to the same period in 2018.
We do continue to see increases in other revenue across the portfolio and as I mentioned on our last call are optimistic that our revenue generating margin expansion. This initiative will continue to enhance our result.
Our initiatives focused on controllable expense containment are clearly proving out as in the second quarter, we reduced same store controllable expenses by 2.1% over the same period in 2018, and we have held our year to date controllable expense expense growth to 1.2% compared to 2018.
We are confident that our initiatives to improve our margin are working and we're happy with the result.
But increases in non controllable expenses have master progress we were expecting that the good news is we're seeing improvement in our controllable expense management and are expecting margin expansion for the full year.
Our value add pipeline continues to be one of many opportunities that we are strategically mining in our portfolio to enhance our rental revenue and in turn our merger.
As of today, we have 271 units in Minneapolis that have completed renovation with another 81 units underway for the remainder of 2019.
Leasing of our renovated units had been strong today and we are achieving our under written premiums as well as capturing market rent growth.
We also continue our non unit value add in our Minneapolis portfolio and are undertaking major property enhancements at two of our suburban assets that will open our marketing windows and allow us to execute on further unit renovation.
Additionally, we're well underway with design and planning for our value add renovations and the Omaha and Lincoln, Nebraska markets.
Consisting over a thousand unit renovations over the next three years, we anticipate these will start in earnest in the fourth quarter.
Our team has demonstrated their commitment to continuous improvement and I'm grateful for their ideas effort flexibility and positive attitude as we have and continue to navigate the demands of providing a great home for our residents and returns for our investors.
Now for the really exciting news, which I'll ask John to share in his summary of overall financial results and balance sheet.
Thank you and last night, we reported core FFO for the quarter ending June 32019, a one dollar per share an increase of nine cents or 9.9% over the same quarter in 2018.
Year to date core AFFO is $1.77 cents per share compared to $1.62 cents for the six months of 2018.
An increase of 15 cents or 9.3%.
The increase in core FFO was primarily due to multifamily and NOI growth and reductions in interest and machinery expenses.
Partially offset by a decrease in Hawaii from sold properties.
Looking at our general and administrative expenses total GMH decreased by 7.7%.
To 7.4 million for the six months ended June 32019.
From $8 million in the same period of the prior year.
This decrease is primarily to due to decreases of $550000 and severance related costs.
$265000 and legal costs and $200000 in real estate taxes on land sales.
These decreases were partially offset by increases in compensation costs. As a result of a decrease in open positions and higher incentive compensation related to expanding the participant pool and our long term incentive plan.
For the remainder of 2019, we expect our quarterly gene a run rate.
To continue to be in the 3.6 to 3.8 million dollar range.
Property management expense was $3 million for the first six months in 2009 compared to $2.8 million in the same period of the prior year.
For the remainder of 2019, we expect quarterly property management expenses to increase to approximately $1.7 million to $1.8 million per quarter, as we implement new technology solutions related to improving the resident experience and empowering our community team members.
Moving to capital expenditures as presented on page 14 of the supplemental for the second quarter of 2019 same store Capex was $2.5 million, which was in line with the prior year period.
Through the first six months of 2019 same store Capex was $3.5 million a decrease of $500000 compared to the same period in 2018 for the full year same store Capex spend is expected to be in line with calendar year 2018 at $11 million.
Turning to the balance sheet as of.
June 32019, we had $90 million in total liquidity, including $72 million available on our corporate revolver.
During the quarter, we repaid $59 million of amortizing individually secured mortgages with a weighted average interest rate of 5.5%.
Subsequent to quarter end, we refinanced this debt with a new 60 million dollar interest only mortgage that is priced at 3.8% for the full 12 year term of the loan.
This loan also have collateral substitution rights, which maintain portfolio flexibility.
This refinancing effectively increases our line of credit liquidity by $75 million.
Separately Iraqi entered into a swap agreement to fix a 50 million dollar portion of variable rate debt on our corporate revolver further remainder of its term as we opportunistically took advantage of a forward LIBOR swap rate dropping below the current LIBOR rates.
Our operating platform anchored by our dedicated team members has produced strong results through the first half of 2019, we continue to see solid multifamily fundamentals across most of our markets and benefit from operational and balance sheet improvements as a result as laid out on page S. 15 of our supplemental we are raising our guidance. We are increasing the midpoint of 2019 full year core FFO per share guidance by five cents from $3.62 to $3.67.
We are also increasing the midpoint of 2019 full year same store NOI and revenue guidance by 25 basis points from 3.25% 3.5%.
And finally, while we are maintaining the mid point of same store expenses.
At 3.25%, we are narrowing the guidance range to 2.75% to 3.75%.
With that I will turn the call over to the operator for your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question will come from Rob Stevenson of Janney.
Hi, good morning, guys.
Mark are you guys currently marketing or have anything under contract for sale.
Good morning, Rob a we don't comment on things until they're done, but a I mean I think you should look at what we've done over the last two years as the medically what we'll be doing.
So if it's a if it's getting us more efficient like for example, the way we did in my not when we sold the.
13 assets it had 327 units or if it's opportunistic like when we sold Wellington.
I'd say, that's the framework for where employing.
Well, we certainly think it's a good time.
Okay, because I I was just curious as to how you were thinking about that given you know the economy the market the fact that.
Other than the North Dakota stuff everything seems to be doing well in the portfolio and so.
It seems like an opportunistic time, especially the compression in cap rates in some of these tertiary markets.
To to be selling so we agree on the land parcel that you guys have sold in the second and third quarters further gains on any of that and is there any impact to AFFO from that.
On the parcels.
Yeah on the land parcel.
Yes.
We had some a small gain come there that they are.
A small loss in one and a small gain on on the other than that they were pretty much sold at book value. We did we did pick up as you pointed out John some some taxes, we won't have to pay anymore that was in our DNA line. So that's a modest step AFFO benefit going forward. Okay, I didn't know whether or not that would have contributed to the increase in guidance, whether or not there was any impact on the third or the one that you've done thus far in the third quarter that we needed to be thinking about in terms of Epo.
No the land parcel sales did not impact the guidance.
Okay, and then the big increase in insurance when did you guys renew and is anything going on there are different and given the increases there you get another bump next year, but you guys exploring self insurance or increasing deductibles et cetera, as a means of lowering these costs that are non controllable.
Yeah, Great question I think across the industry, we saw a pretty good increases last year and we were pleased with where we were able to hold our increase wasnt increase we renew our our entire insurance program renews on January 1st and so we're just about to kick off that process and we do undertake a pretty thorough analysis of what the levers are that we can pull whether it be increasing deductibles or changes in coverage. Some self insurance things like that every year and so we'll be starting that process. In September we did make some changes last year that did keep our increase down although you know I've known and it wasn't increase.
Okay, and then <unk>, Rob launching the renters insurance as a modest positive I mean, when we're out talking to potential.
Ensures they like where our portfolio as we offer some real diversity relative to.
A lot of their other customers. So I mean, it's something we work very hard at but how did they stay in the insurance business has been a hardening market over the last couple of years.
Okay, I mean to that point I mean, if I take a look at your weighted average monthly rental rate versus your weighted average monthly revenue per occupied home.
Call it $75 or so you know you know I assume that all of that is basically sort of fee income that you're getting per unit are you pushing some of that more aggressively in your stronger markets and should we expect to see the gap between rental rate and revenue per occupied home increase over time as some of your peers have.
Yeah, absolutely I mean that is one of our biggest rise by five we have undertaken.
Look at all of our market fees and now we're doing that on an annual and and in our very strong markets on a semi annual basis. So that includes everything from what we're charging to for application fees to Pat rents a garage is and parking.
And then this year you know as we indicated on our last call. We did roll out renters insurance program. So that is starting to roll through that will now as the leases roll people are required to have the renters insurance or to pay us a noncompliance fee. So that will boost at some because some people just won't we'll pay the fee rather than actually obtain reinsurance and we also increased our utility bill back across the portfolio and so that's rolling through two we do expect to keep a close pulse on what the market fees are and really push the envelope there as far as we can to maximize you know our total revenue line as our call.
Okay, and then what markets are you seeing the biggest increases in property taxes, I mean, which markets are the biggest issues that are driving the the the growth for you guys.
Yeah, Rob I would say, it's really been.
Across all the markets.
And what we're seeing is in that.
In this environment the devaluation that they're placing on their properties are really driving the increases.
Okay, and then last one from me, what's your year to date unit turnover rate, how does that compare to previous years.
As you're going through all of the technology changes pushing rent et cetera is unit turnover up you know relative to previous years down sort of flat how should we be thinking about that.
We generally on a month to month basis are staying in the same range. It is up I would say on average about 2%, probably where we're running closer between 46 and 50, whereas I think last year. At this time, we are running between 48 and 52. So we are seeing a little bit more turnover.
But we are getting the increases on the rental side. So you know, we're happy with that and we don't feel any pressure or that it's going to impact occupancy overall going forward.
Okay. Thanks, guys.
Thanks, Rob.
The next question will be from drew Babin of Baird.
Good morning, now does that whats on for drew Mark kind of a follow up to your cap rate compression comments I'm curious if you are seeing specific markets you don't see a higher magnitude of compression and just could you give us a ballpark estimate of what the spread looks like on the ground today between say you know Minneapolis and Euro Dakota markets, just to give us kind of an understanding of kind of what that looks like.
Yeah.
I mean I to answer the first part of your question I think its really as I alluded to in my comments, it's really about what is the buyer after and.
There are a lot of pools of capital were.
Someone's aggregating individual capital putting leverage on it and paying.
Kind of let's get your principal back higher yield with probably some tax advantaged.
Elements to it.
Which is a different game that I think folks are playing in and the larger metro's but to answer your second question I mean.
Yeah.
Many in Denver, and the twin cities and Denver are really kind of four and a half to five cap rate markets speaking generally and when we look at the Dakotas for our own.
And I'd, there really kind of sticks and they have a 6.5% to 7% markets.
Got it that's great color and then kind of turning to the value add program.
What is timing look like for delivery of the units that are currently slated to be renovated and can you remind us what markets. Those are and specifically and then kind of just as a third party curious if you could comment on how much additional downtime you guys underwrote just compared to your normal turn as you guys are renovating those when they when they come available.
Yeah sure. So right now the market that we're focused on and actually have a construction work units under renovation is in our Minneapolis portfolio. We have two assets that are getting unit renovations right now and one of those is also getting pretty.
Significant common area improvements and then we have another suburban asset that's also getting kind of ex your common area improvements. So we have.
Good mix of things going on here in Minneapolis, We do have one asset that had 130 units have been completely finished already so we are delivering the units right. Now you know for example, we had a suburban asset where we have 35 units completed and renovation. Another 28 in progress you have 37 of those units leased. So you know as I said on the call we have a pretty strong demand there. The next market. We're looking at is Omaha, and Lincoln. So we'll be undertaking renovations on about a thousand units down there, which is the almost the entire portfolio and we think that'll take we'll start that construction work in the fourth quarter, which means they'll start delivering units in the first quarter.
And that'll take about three years to kind of run through the whole role we are looking at 30.
To 45 days 45 days at the longest and we really try to calibrate the amount of units that we take by taking ones that we have long notice that when people give us a 60 day notice that unit will go into our renovation Beacon Hill, because we'll be able to have good lead time on you know the materials orderings and the and the things that are the prep work. So the when the unit becomes vacant we can really get in and out of there in 30 days.
That's really helpful. And then kind of lastly, looking at expenses you know first thanks for adding color on the same property expense breakdown to the supplemental looks like control expenses <unk> expense growth has been really came here to date, but since you're tracking towards the higher end of the range curious where specifically you guys are anticipating some moderation to come in the second half and kind of what the timing look like on on that part.
Oh so.
Hey, Alex this is John .
It's not really that we're expecting moderation is that you know.
Playing out where we're looking the budget to go.
If you recall in.
Q1, we had quite a bit of an increase in our snow removal costs.
So that.
Maybe making the run rate look higher than it really is but as you kind of play that for the rest of the year in the same run rate, you'll come to right to where in our guidance.
So really we're not looking to do anything.
Different or dramatic in the next six months to.
Stay within our range.
Got it that's real helpful. Thanks, John .
The next question will come from John Kim of BMO capital markets.
Thank you.
Mark on the experts expedited dispositions that you discussed given the demand.
I think you talked about pricing a little bit, but can you give some more color on the volume and timing.
And whether or not this would impact your 2919 guidance.
Yeah, I mean, the truth is we're kind of early stages working through details on it all right now, but it won't affect our guidance.
So were.
Our guidance is what we expect to happen for the full year sort of no matter what.
Would you characterize the potential sales volume to be higher than it was perhaps three months ago.
Three months ago It was zero.
Oh, sorry, I'm not trying to be.
Oh Boy I'd.
Why don't we sold the Doctor are you are you contemplating selling more.
Sooner Oh, given the demand than than you would have last quarter, yes, yes, I'm, sorry, John Yes.
I think I heard this in a couple of your markets but.
Can you provide the blended lease growth rates for your overall portfolio in the second quarter.
And how that's trended in July .
Yes, hang on and scrap in that right now.
Yeah, Let me, let me address why well, we just oh, well, we checked the second quarter numbers to make sure. We give we give you the right information, but you know in July we had on new leases. Our average replacement rent was about one person that is you know again just like we saw in the second quarter, that's pretty high average replacement rents you know running from six and a half first and then kind of you know the Lincoln and Billings Minneapolis has had really strong 6.7% in Minneapolis offset by some of the markets, where we where we have seen continued weakening Bismarck and Grand Forks.
The most of those and the weighted average monthly rental rate across our same store portfolio for the second quarter, we were at 1.9%.
And for overall, that's about what we expect you know we've had more more expirations in July .
In June in July than we did in the second quarter and so that's what we would expect to see a little bit of softening in that rate as we hold occupancy up.
Yeah.
Minneapolis had a strong.
Quarter on seemed to revenue <unk> percent is there anything one time in the second quarter's results are expected to continue.
For the rest of the year.
Yeah. There is no one at one time or anything that stands out from Minneapolis. So the market has been very strong here and we do expect that to continue.
Okay, great. Thank you.
Thanks, John .
Once again, if you would like to ask a question. Please press Star then one at this time.
Seeing no further questions. This concludes our question and answer session I would now like to turn the conference back over to Mark Decker for any closing remarks.
Super Thanks, Kerry well, we certainly appreciate everyone's interest in the company and we're going to.
Continue to work the plan I know before we got on the call the stock at move, but its still trading around a six and a half cap. So.
There's still lots of opportunity for us as a business and for a potential investors. So.
I will talk to you everyone. After the next quarter.
Thanks.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines have a great day.
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