Independence Realty Trust Inc

NYSE:IRT

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. And welcome to the Independence Realty Trust First Quarter 2021 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session [Operator Instructions]. Thank you.

[Lauren Torres, IR]

Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust first quarter 2021 financial results. On the call today with me are Scott Schaeffer, our Chief Executive Officer; Jim Sebra, our Chief Financial Officer; and Farrell Ender, President of IRT. Today's call is being webcast on our Web site at www.irtliving.com. There will be a replay of the call available via webcast on our Investor Relations Web site and telephonically beginning approximately 12:00 p.m. 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 on 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 Web site 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.

[Scott Schaeffer, Chief Executive Officer]

Thank you, Lauren, and thank you all for joining us today. This time last year, we were faced with unexpected challenges brought on by the pandemic and were uncertain about the magnitude and impact of this crisis on our lives and our businesses. Since then, we have come a long way and now have a clearer view of the future, making us more optimistic about realizing our growth potential for the balance of this year and beyond. At IRT, we are encouraged by the strength of our portfolio and the progress made during the past 12 months, all leading to favorable demand trends at our properties. This demand is led by an acceleration in vaccine distribution, a healthier economic outlook and favorable migration trends. We're clearly seeing the benefit of owning and operating properties in attractive non gateway markets where there are notable near and long term growth drivers. Our focus on the Sunbelt region has proven to be the right strategy as the pandemic has reset how and where people choose to live, work and play.

Given this improving outlook and our strong market presence, we're very excited for the year ahead and as a result are raising our 2021 guidance. Jim will address this later on today's call. But to give you a sense of our optimism, we are raising the midpoint of our full year NOI growth guidance from 2.5% to 4.1 to 5%, a 65% increase. This encouragement is exemplified by another quarter of strong results. Specifically, in the first quarter our same store NOI increased 5.3% and our core FFO improved to more than 23% compared to a year ago. Our same store average occupancy increased to 95.3%, a 260 basis point increase on a year-over-year basis. Our average effective monthly rent per unit grew 2.9% in the quarter and we collected over 98% of first quarter rents and now have collected over 99% of our fourth quarter 2020 rents. And with favorable demand trends continuing, we are seeing strong results so far in April. Our total portfolio average occupancy is 96%, a 330 basis point improvement compared to April of last year. We have now collected almost 97% of April rent, which is consistent with collections at this point in March. And given our low lease explorations and high occupancy in the first quarter, we continue to drive rent growth, averaging 4.6% so far in the second quarter.

Another key component of our strategy is the advancement of our value added program. Since the inception of our value add program in January 2018 through the end of the first quarter, we have completed renovations on 3,861 units, achieving a weighted average return on investment of 18.5% on interior renovation costs. I'm excited to tell you that we have started renovations at three additional communities this year and will begin renovations on a fourth in the near future. In addition to our value add program, IRT will continue to focus on acquiring and divesting properties under our capital recycling program and exploring the potential for joint venture relationships focused on new multifamily development.

As mentioned on our last earnings call, we are looking to provide capital through preferred equity investments in joint ventures with third party developers in core non-gateway markets. In particular, you're exploring developments in the southeast and broader Sunbelt region where we see opportunity for growth. Our expectation is that these investments will deliver unlevered IRRs of approximately 20%, while giving us the ability to purchase a newly developed community at attractive cap rates of between 5% and 5.5%. We are making progress on this front with three letters of intent signed, aggregating total investment for us of $56 million. The closing of these transactions is expected to occur in the second half of this year. We’re excited about our future, whether it's through the communities we own in highly attractive markets, our high ROI value add program or accretive investments that we intend to pursue from preferred equity and joint venture opportunities. What I can promise you is that we will remain committed to staying focused on what we do best and look to maintain our strong and simple balance sheet.

At this time, I want to turn the call over to Farrell for an operational update. Farrell.

[Farrell Ender, President]

Thanks, Scott and good morning everyone. To echo Scott's comments, this has been an extraordinary year that challenged our team with unexpected circumstances. But due to the dedicated efforts and focus on revenue retention continue to report solid results and now a strong start to 2021. In the first quarter, our occupancy grew 260 basis points to 95.3% from 92.7% a year ago. This has continued in April with total portfolio average occupancy at 96%, up 330 basis points year over year. We've been able to achieve these levels while increasing our average effective monthly rent by 2.9% in the quarter. On a lease over lease basis for the same store portfolio, new lease rates increased 6.8% and renewals were up 4.8% during the first quarter using a combined lease over lease rental rate increase of 5.9%. Strong trends continue in the second quarter to date with new leases having increased 9.6% led by our value add communities, while renewed leases are up 3.7% with a blended lease over lease rental rate increased of 4.6% for our same store portfolio.

To give you an update on our value add program, we completed renovations on 142 units in the first quarter. We are currently performing renovations at 20 of our communities, having added Rocky Creek in Tampa to our ongoing renovation program in the first quarter and our Thorne Health Community in Raleigh in the second quarter. We also recently kicked off renovations at Walnut Hill in Memphis, and we'll commence value add upgrades at Meadows and Louisville this summer. We continue to make progress during completion at five communities and believe there are additional communities within the remaining portfolio that will offer value add opportunities. Regarding this year, we continue to expect to renovate approximately 1,300 units with the bulk of these occurring in the second and third quarters when we experience the majority of our lease expirations.

With regard to our capital recycling, we currently have two communities under contract to purchase. The two communities that we intend to acquire are both new construction and lease up and in markets that we currently operate. One is in Dallas and the other is in Charlotte, those markets where we've been actively looking to grow. The combined purchase price is approximately $140 million and represent the blended stabilized economic cap rate of 4.5% with both closing in the next 30 days. We believe that in the current environment, these assets provide a better risk adjusted return than the alternative of buying sub 4% cap rate value add communities. I'd now like to turn the call over to Jim.

[Jim Sebra, Chief Financial Officer]

Thanks, Farrell and good morning, everyone. Beginning with our first quarter performance update net income available to common shareholders was $1.1 million, up from a net loss of $372,000 in the first quarter of 2020. During the first quarter, core FFO grew to $18 million, up 23.5% from $14.6 million in Q1 2020. Core FFO per share during Q1 was $0.18, 12.5% higher than Q1 last year at $0.15 per share. As we highlighted earlier this year, we changed our definition of core FFO during the first quarter so that our definition is more consistent with industry norms. Our definition of core FFO now includes the impact of stock compensation expense and the amortization of deferred financing costs. To help with this transition, we've updated all of the historical periods in our financial statements and supplements to follow this new definition.

Turning to our same store property operating results. NOI growth in the first quarter was 5.3%, driven by revenue growth of 5.6%. This growth was driven by 250 basis points of higher average occupancy and 2.9% increase in average rental rates. While this NOI growth includes value added communities, we did see NOI growth of 2.5% at our same store non value add communities. Again, this growth is driven by 170 basis points of incremental occupancy and a 1.7% increase in our average rental rates for the first quarter as compared to last year. With regard to rent collections, they have continued to be strong despite the persistence of the COVID-19 pandemic and extended eviction moratoriums. Today, we have collected 98.4% of our first quarter billings. Consistent with last year, we evaluated uncollected amounts for collectability and recorded a reserve for bad debt for those amounts we deem as uncollectible. As of today, we maintain a dead debt reserve of $1 million associated with $1.5 million of gross receivables outstanding at quarter end. As a result, we have a net receivable balance of $500,000 and believe that they will be collected in the near term.

From an earnings perspective, our bad debt expense, which is the [diff] when arriving at revenue was 80 basis points in Q1. This is consistent with fiscal year 2020 and better than our original guidance. Therefore, we have reduced bed debt expense in our updated full year 2021 guidance from 1.25%, down to 1% of revenue. On the property operating expense side, same store operating expenses for 6.2% in the first quarter, primarily due to higher insurance and real estate taxes, a trend that has continued since last year. Excluding these non controllable expenses, controllable operating expenses increased 3.8% due to higher utilities contract services and repairs and maintenance costs. High utility rates usage and snow removal costs are the primary drivers of these incremental increases. Before moving on to our balance sheet, I’d like to cover the increase in G&A expenses. In Q1 2021, G&A expenses included a one-time stock compensation expense for retirement eligible employees. This is consistent with Q1 last year. This one time expense caused an increase when looking at the quarterly run rate of G&A expenses. If you remove these one time expenses, the increase in G&A from Q1 2020 to Q1 2021 is 4.5%. As we highlighted previously, we are making investments in our operating and technology platforms.

Turning to our balance sheet as of March 31st, our liquidity position was $206 million. We had approximately $8.7 million of unrestricted cash, $155.7 million of additional capacity through our unsecured credit facilities and $41.2 million of proceeds that we will receive upon settlement of forward sale agreement, covering 2.9 million shares of our common stock. In the first quarter, we issued 2 million shares of our common stock under our aftermarket sales program at a weighted average price per share of $14.50 and then entered into a forward sale agreement associated with these shares. On the dividend IRT's Board of Directors declared a quarterly cash dividend of $0.12 per share, which was paid on April 23rd. This represents a payout ratio of 71% on $0.17 of AFFO during Q1 of 2021. With respect to our outlook, we are increasing our 2021 guidance based on our first quarter results and increasing visibility on business, industry and economic conditions for the remainder of this year. Our revised guidance for 2021 EPS is a range of $0.05 to $0.08 per diluted share and for core FFO is a range of $0.72 to $0.75 per share, which I will remind you now includes stock compensation expense and the amortization of deferred financing costs.

For 2021, we now expect NOI at our same store communities to increase between 3.25% and 5%, up from our previously guided range of 1.5% to 3.5%. This updated guidance reflects expected same store revenue growth of between 3.75% and 5%, as our average rental rates have been increasing higher than expected and our bad debt expense has been trending lower than expected. Moving on to expenses. Our new projected growth in total same store relative operating expenses of 4.25% and 5.5% is a result of our expectation that controllable operating expenses should increase between 3% and 4% and our non controlled expenses, including taxes and insurance should increase between 7% and 8%. Lastly, we are now providing guidance around transaction volume expectations. We are projecting a disposition volume of up to $100 million, as well as an acquisition volume between 100 million and 200 million for the full year of 2021. To follow up on the comment made earlier by Farrell, we have ample liquidity to fund the pending acquisitions that we mentioned. It is also important to note that our core FFO guidance does not assume that these transactions occur. The ranges are meant to be indicative of the potential magnitude as we currently see it.

I’d like to turn the call back to Scott. Scott?

[Scott Schaeffer, Chief Executive Officer]

Thanks, Jim. In closing, I want to highlight how encouraged I am by our strong start to the year. This reflects our team's continued efforts to provide well managed quality homes to our residents, while continuing to strengthen our balance sheet. We want again to thank our team for their hard work and dedication and thank you for joining us today. We hope you all stay well and look forward to speaking with many of you at Nareit’s virtual weekly conference at the beginning of June.

Operator, we would now like to open the call for questions.

[Operator]

[Operator instructions] And your first question comes from the line of Neil Malkin with Capital One Securities.

[Neil Malkin, Capital One Securities]

First, you mentioned the progress on the JV side or press side, three letters of intent, three deals. Can you just maybe talk about that, how that progressed? Maybe appetite for total size and what the breakdown is between, I guess, JV developments versus preferred or mez opportunities?

[Scott Schaeffer, Chief Executive Officer]

So our appetite hadn't changed. We're still looking to limit the investment in this type of programs to $100 million. And we've entered into, as I said, three LOIs for new construction communities in our target markets where we have management capability. And we think at returns and with ultimately purchase options that are going to be very attractive. So again, this program is meant to use a limited amount of our capital today to build a pipeline of future acquisitions in the markets where we want to grow.

[Neil Malkin, Capital One Securities]

You're doing preferred lending on those development deals, is that what you're saying or am I not…

[Scott Schaeffer, Chief Executive Officer]

These are joint venture relationships but there will be preferred investments in this program as well.

[Neil Malkin, Capital One Securities]

But these three are basically just JV equity essentially for the development, correct?

[Scott Schaeffer, Chief Executive Officer]

Yes, correct.

[Neil Malkin, Capital One Securities]

And the other one maybe on the operations side, I have been hearing a lot about out migration from the coast and your market being the clear beneficiary or beneficiaries. Can you talk about what you're kind of seeing on the ground or from your property managers in terms of in migration? Have you seen consistent and steady increase since, call it, earlier middle of last year from a percentage of people from out of state who have signed these new leases, kind of how to think about what that looks like on the ground?

[Farrell Ender, President]

Anecdotally, I mean, when you're in the market, everybody's talking about it, it point to seeing Northeastern license plates more so in the market. When we look at the data, it's been fairly consistent over the past year. So our Carolina properties are really seeing the majority of it. It's about 6% to 8% depending on the community of inflow from the New York, New Jersey, PA markets, but we're watching it very carefully.

[Neil Malkin, Capital One Securities]

And then just to be clear the deals you have on the contracts, the acquisitions, the two deals, that’s separate and apart from the three LOIs, so that's incremental?

[Scott Schaeffer, Chief Executive Officer]

Yes.

[Operator]

Your next question comes from the line of Austin Wurschmidt of KeyBanc.

[Austin Wurschmidt, KeyBanc]

I wanted to ask Jim on the preferred equity development joint ventures, you mentioned, again, on the $56 million. Can you provide some additional detail on the markets, the details are located there? And what is the structure of the joint ventures, are the developers contributing the land or will they have additional equity in the deals?

[Scott Schaeffer, Chief Executive Officer]

The three deals break down; one is just outside of Richmond; one is in Austin, Texas; and one is in Nashville, Tennessee.

[Austin Wurschmidt, KeyBanc]

So should we view these as sort of new markets that you'd be interested in entering and gaining scale, given sort of the -- my understanding of the thought process with this would be that this program could provide sort of that future pipeline of acquisitions. So what are the thoughts on sort of adding additional markets?

[Scott Schaeffer, Chief Executive Officer]

Yes, Austin, that's correct. These are markets that we targeted. These are markets where we've looked at a number of opportunities and just have not for a number of reasons, and the main one being pricing, has jumped in. But through this program, we think it will give us the foothold and allow us to build out in the future.

[Austin Wurschmidt, KeyBanc]

And what was the structure, again, in terms of the joint ventures? I mean, are they 50-50 joint ventures initially or in something else? Can you provide any detail along those lines?

[Scott Schaeffer, Chief Executive Officer]

Again, joint venture common activity where the developer is contributing the land, it's already been approved. It already has all of the zoning and other regulations work through. And as these developers -- it’s contributing digital equity as well. So I don't have the exact percentages right offhand. I think it's 80-20. But clearly, the developer is aligned and has capital at risk. And what we like about this program is that the timing is, they are almost shovel ready. So as soon as we close, construction will begin.

[Austin Wurschmidt, KeyBanc]

And then just last one from me, on the new acquisitions you mentioned in Dallas in Charlotte, I think you said these were lease up deals. Is the 4.5% in the initial tap rate? And if so, what do you expect upon stabilization and the timing of stabilization?

[Scott Schaeffer, Chief Executive Officer]

So they are lease up deals. The Dallas property is in an area where we already have three other assets very, very close by. And again, I look at this as defensive as much as offensive in that I wanted to control this new construction, this new delivery, rather than having somebody else come in. And it's also a market that's been very strong and seeing tremendous growth, so we're excited about that. The other property in Charlotte is a little bit different. We've been looking to grow in Charlotte. It's an infill location, very, very well located and we got comfortable with the new construction investment here. Because we think in this area, even though this one is new construction, it will not have a lot of competition from additional deliveries in the future. So one of the benefits, obviously, is being the B Class investor, is that we were insulated from deliveries. And I look at this acquisition almost a little bit as a contrary view where everyone else is running now to buy the Bs and driving down cap rates. We were able to find a brand new delivery in a very well located area that should be insulated from new competition, because of where it is, and [selling] it at a much better price than these…

[Farrell Ender, President]

And in regard to the cap rate, that's a year two stabilize tax adjusted cap rate.

[Austin Wurschmidt, KeyBanc]

And so what sort of on going in basis, were you stepping in?

[Farrell Ender, President]

It's right around four. It will be taking about 70% occupancy, taking about four to six months to stabilize.

[Operator]

Next question comes from Nick Joseph with Citi.

[Michael Griffin, Citi]

This is Michael Griffin on for Nick. Just curious, your occupancy this quarter remains above the total average. Are you seeing a better ability to push rents as a result of this and are you seeing better pricing on the new or renewal side?

[Scott Schaeffer, Chief Executive Officer]

Well, we're definitely seeing better price on the new side, because we have the value add program, which is generating very healthy returns. And on the renewal side, there has been very good demand. We're seeing our renewal rate continually increase since the third quarter of last year and we will push rents where we can. We do have more lease expirations in the second and third quarters by design. So we were taking that into consideration with renewal rates. But we expect to continue to drive rates and drive them in a very healthy way as long as we can do that while still keeping occupancy in that 95% to 96% range.

[Michael Griffin, Citi]

Are you seeing any markets where you're able to push rents more so than others?

[Scott Schaeffer, Chief Executive Officer]

Atlanta has been a really strong market for us over the past couple quarters, and that this as you can see on the results.

[Michael Griffin, Citi]

Just one more for me. Obviously, you announced the ATM program last fall. Wondering what appetite there was, if any, for deleveraging through a larger equity base?

[Scott Schaeffer, Chief Executive Officer]

We look at that constantly but we have no plans at this point to raise equity to delever.If you look at where we were a year ago, leverage was 9.2 times, so we're full turn below that even through the pandemic while still driving the best portfolio returns in the industry. So just through organic growth without new acquisitions or other equity, through organic growth, we expect the leverage to be in the 7s by year end. So we have no appetite at this moment to raise equity to delever.

[Operator]

Your next question comes from the line of John Kim of BMO Capital Markets.

[John Kim, BMO Capital Markets]

You increased your guidance pretty sizably ahead of the peak leasing season? I was wondering what surprised you the most so far in this year relatively to your initial projections just a couple months ago?

[Scott Schaeffer, Chief Executive Officer]

Well, I mean, I don't know if it was a surprise. When we corrected our initial guidance, it was before the vaccine was being distributed. There was still a lot of unknowns with where the economy was going to be in 2021. So as we look at it today, we felt it’s prudent to rethink what the balance of 2021 will look like. We did it still with erring on the side of caution or conservatism. But as we look through the balance of the year, we feel that the guidance that we put out is reasonable and again, with an eye on or erring on the side of conservatism. So there are still some unknowns. I mean, the eviction moratorium is still out there. And we don't know if that will be extended beyond June and we don't know how many residents may want to take advantage of that. Right now, we have about 100 residents who are deferring their rent because of the moratorium. We don't expect that to grow but that's something that we don't control.

[John Kim, BMO Capital Markets]

I know the data is less than a month but you had new leases, accelerating growth and renewals slowdown. How should we read into this? Are the new leases driven by market strength or your renovation programs, and where disproportion amount of both leases coming that were signed? Or what should we take out of that?

[Scott Schaeffer, Chief Executive Officer]

So we feel that until this pandemic and this crisis is over for good that the strong occupancy is the best way to protect the portfolio and continue to deliver results like we have. So as we look forward at our lease exploration schedule, again, it is skewed towards the second and third quarter during leasing season. We're adjusting our renewal rates in order to make sure that we're maintaining occupancy in that 95%, 96% range. On new leases, once the unit is vacant, we're out there and you want to drive as much rent as you possibly can, or once you know it's going to be vacant, actually, say, or the tenant is going to leave. And it’s also helped dramatically by the value add program. I mean, the value add program, we're getting 18% to 20% premiums over expiring lease, you know that's very powerful from a rent growth perspective.

[Farrell Ender, President]

And in regard to what Scott mentioned in terms of lease expiration, current perspective we probably saw close to as many leases in April as we did in the first quarter. So given the pandemic we want to be very -- and you know the drive for occupancy is going to be very cognizant of the amount of leases that are rolling this quarter.

[John Kim, BMO Capital Markets]

On the JVs, I know you probably don't want to go too much into detail. But you quoted the unlevered IRRs at 20%. And I'm wondering if you could break that down between the current income component versus fees or promotes and cap appreciation?

[Farrell Ender, President]

John, I don't have that in front of me, but I'll grab that and give you call back with it.

[John Kim, BMO Capital Markets]

But do you expect the yields are then completely paid in cash or in equity?

[Farrell Ender, President]

We think it’s -- we paid in cash, certainly. Obviously, the details, I'll come back to you with the specifics.

[Operator]

Your next question comes from the line of Amanda Sweitzer of Baird.

[Amanda Sweitzer, Baird]

Following up on your capital allocation kind of nice improvement in cost of equity seen. Can you just provide an update on how you’re [stack] ranking your sources of capital today between disposition, incremental leverage and then additional equity issuances.

[Scott Schaeffer, Chief Executive Officer]

I mean, we continue to stack our kind of capital, obviously, we have retained revenues that we are funding back into the business through the value add. And then we kind of look at dispositions given the high cap rate or the low cap rate with the high pricing as another good source with kind of equity costs being the lower ranking one.

[Amanda Sweitzer, Baird]

And then as a follow up to that, what kind of cap rates do you think you could achieve today for some of the assets that you're targeting for disposition or at least what spread could you achieve on capital recycling between the buy and the sale?

[Scott Schaeffer, Chief Executive Officer]

I mean, we're seeing in the market, like I mentioned in the call, sub 4% cap rates on some of the value add deals. So I would think 4% right now is the market across the other markets that we’re in.

[Amanda Sweitzer, Baird]

And then last one from me, you focused recently in some of the newer construction acquisition today, which I got given value add cap rates. But what levers are you looking to pull to drive value as you're underwriting those deals, or where do you see your competitive advantage with some of those newer [vintage] deals? Is it some of the clustering benefits that you talked about or is there any other areas that you think you can drive value?

[Farrell Ender, President]

I mean, I think it's a combination to what Scott said and that the Dallas deal, I think you can definitely leverage the communities that we have in that sub market. Same thing in Charlotte, it's within a seven minute drive of a community that we already have in that market. But we really feel like these are typically direct relationships and we're getting a slight discount to market to take up what we feel as a minimum lease up risk. So that's where we think most of it's going to be driven from.

[Operator]

And your next question comes from the line of John Massocca of Ladenburg Thalmann.

[John Massocca, Ladenburg Thalmann]

So given the kind of investments that are under contract are obviously kind of Class A new developments, and your new build is where the JV and kind of preferred investment program is going to focus. I mean, what is the runway you think less for value add projects within the portfolio today and maybe within the platform at least over kind of intermediate term?

[Farrell Ender, President]

Again, we have markets that we haven't even started value add in, I’ll point out Indianapolis and Oklahoma City. So I think there's still a decent amount of opportunities within the lease portfolio. We are still looking to acquire for that purpose. I mean, we build out an incredible platform. I think our cost to renovate is probably the lowest amongst our competitors. It’s just challenging in this market to find ones that fit but we're still looking into the markets that we have build out these teams and to try to add to that in addition to what we have in the existing portfolio.

[John Massocca, Ladenburg Thalmann]

And then specifically on redevelopments but also maybe on kind of maintenance CapEx as well. I mean, are you seeing any pricing pressures given some of the movements in your cost of lumber appliances, et cetera. And how successful have you been in maybe offsetting that with kind of rental rate increases?

[Farrell Ender, President]

We have not seen cost increases, I mean, we're not really exposed to lumber with the renovations we're doing. I mean it’s really flooring and, to your point, appliances, we haven't seen that much pressure on appliances to date. And granite or quartz counter tops are the main components of our renovations. I mean, labor is the biggest thing right now. If you were going to ask me what the challenge in doing renovations is finding quality labor.

[John Massocca, Ladenburg Thalmann]

And I guess is that impacted kind of expected ROIs on budget and new redevelopment?

[Farrell Ender, President]

No, I mean, we've created a pretty good machine. So we're actually seeing costs come in a little bit, because we're getting more efficient. And we'll continue to see, over the next couple of quarters, I think you'll see an increase in the returns on the renovation costs.

[Operator]

And your next question comes from the line of Neil Malkin with Capital One Securities.

[Neil Malkin, Capital One Securities]

So just a question on, I guess, valuation maybe for your staff and I guess with space even broadly. You know, thinking about where cap rates are, thinking about where the investor demand is, investor appetite, potentially hurdle rates or internal IRR is across the board from all stakeholders within the space. Do you think that it's fair to say that your stock should be rerated even higher, or you can call it, cap rate compression multiple expansion? Just given what's going on in the space, your markets and your, I guess, sort of untapped potential or that both in value from your -- so still remaining value adds opportunity or NOI creation?

[Scott Schaeffer, Chief Executive Officer]

Well, I think if you look at cap rates in the market, clearly, one could conclude that our share price is undervalued. There's always this talk of the public company discount. But we have a very compelling story and lots of opportunity for growth. And to Farrell's point, have built an operating platform here, it is very strong and is scalable. So when you put all that together, one wonders why there is a public company discount rather some private sector. But with cap rates where they are our implied share price should be higher.

[Neil Malkin, Capital One Securities]

The last one is, just kind of going back to the JV. Is that something where you're going to -- call the 20% equity, are you getting fees for asset property management? And then are you -- would that be something where you take it out upon stabilization, or would you plan to operate that in a JV structure, for X amount of years and then take it out down the road?

[Scott Schaeffer, Chief Executive Officer]

Our program is where we have the right to purchase on each transaction, and our plan would be to purchase it at completion and of course, manage it from that point. There won't be any management until there's deals.

[Operator]

And there are no further questions at this time. And I'll turn the call back over to management.

[Scott Schaeffer, Chief Executive Officer]

Well, thank you all for joining us today and we will speak to you again. Some of you at Nareit’s REITweek and the rest in three months. Have a good day.

[Operator]

And this concludes today's conference. Thank you for participating. You may now disconnect at this time.