Independence Realty Trust Inc

NYSE:IRT

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Q3 2020 Independence Realty Trust, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] Please be reminded, that this call is being recorded.

I would now like to turn the conference over to your host, Ms. Lauren Torres. Please go ahead.

[Lauren Torres, IR]

Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust third quarter 2020 financial results.

On the call with me today 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 website at www.irtliving.com. There will be a replay of the call available via webcast on our Investor Relations website and telephonically beginning at approximately 12:00 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 IRT's current views with respect to future events and financial performance. Actual results could differ substantially and materially from what IRT has projected. Such statements are made in good faith pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to IRT's press release supplemental information and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations.

Participants may discuss non-GAAP financial measures during this call. A copy of IRT's press release and supplemental information containing financial information, other statistical information and a reconciliation of non-GAAP financial measures to the most direct comparable GAAP financial measure is attached to IRT's most recent current report on the Form 8-K available at IRT's website under Investor Relations. IRT's other SEC filings are also 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, CEO]

Thank you, Lauren. And thank you all for joining us this morning.

I'd like to start off today's call by thanking our team for their dedication and diligence during a year which we could never have anticipated. IRT's execution of its strategy has been steadfast, enabling us to continue to deliver value to all of our stakeholders.

We focused on protecting the health and well-being of our employees and residents providing flexibility to those residents demonstrating financial hardship, driving leasing traffic and growing occupancy, all while sustaining our financial flexibility and strengthening our balance sheet.

Our successful execution against these key priorities is evidenced in our third quarter performance. Our total portfolio average occupancy increased 60 basis points from a year ago to 94.1% and we collected 98.9% of third quarter rent. Our same-store NOI grew 1.5% on a year-over-year basis. Our core FFO improved more than 14% to $19.4 million with a core FFO per share of $0.20. And we ended the quarter with $217 million of total liquidity.

We continue to see strong results through October 27. Our current occupancy now stands at 95% a 250 basis point improvement compared to the end of October last year. We have collected approximately 96.5% of October rents, which is consistent with collections in September and given our low lease expirations and high occupancy in the fourth quarter, we've been able to drive rent growth.

We are also encouraged by the pickup in activity in our value-adding capital recycling programs. While Farrell and Jim will speak about them in greater detail, I'm pleased to note that we are taking a thoughtful approach to reallocating our capital into markets with strong demographics that offer healthy rent growth and steady or increasing occupancy levels, while exiting or reducing our presence in less viable markets.

As it relates to our investment strategy, we are proud to highlight that IRT has a strong presence in a number of cities that were named in a recent ranking of the top 100 best places to live in 2020 conducted by Livability.com, which explores why small to medium sized cities are great places to live. Some of these higher-ranked cities include Asheville, Durham and Charlotte, North Carolina, as well as Columbus, Ohio, and Orlando, Florida.

In closing, IRT's quarterly and year-to-date results reflect our ability to manage near-term volatility, while planning for the long-term success of our business. We will close out 2020 focused on resident retention resulting in stable high occupancy levels as we always strive toward providing our residence with communities of the highest quality. And while there are concerns over resurgence of the virus, we will be mindful of any changes in restrictions on a state-by-state basis and as always, adhere to strict safety measures and protect the well-being of our employees and residents. Our flexible operating and investment model supported by our strong capital position will enable us to continue to successfully navigate the current environment.

With that, I'd like to turn the call over to Farrell for an operational update. Farrell?

[Farrell Ender, President]

Thanks Scott and good morning, everyone.

With no doubt, 2020 words fair share of challenges and our team reacted with resiliency and determination. Our on-site team led the effort to improve total portfolio average occupancy in the third quarter to 94.1% from 92.9% in the second quarter and 93.5% a year ago.

Currently, our occupancy rate is 95%, up 90 basis points from third quarter levels and 250 basis points from the end of October last year. The average occupancy across our same-store portfolio not including our value-add communities in the third quarter was 94.6% and as of today is 95.3%. This increase is due to a coordinated effort to drive resident retention higher and bill occupancy during the pandemic.

On a lease-over-lease basis for the same-store portfolio during the third quarter, new lease rates increased 1.8% and renewals were up 0.5% during a combined lease-over-lease rental rate increase of 1.1%. As of today, as Scott mentioned, we've been able to drive rent growth in the fourth quarter. Our new leases have increased 7.4%, while renewed leases are up 1.3% with a blended lease-over-lease rental rate increase of 3.9% for our same-store portfolio.

Now I'd like to provide an update on our value-add and capital recycling programs, where we have resumed activity. First on our value-add program. We completed renovations on 237 units in the third quarter and 774 units year-to-date, realizing average rent premiums of more than 18% as compared to unrenovated units. We performed renovations at 17 of our communities and as of today, we've classified four as complete having renovated 85% or more of these units at each property.

Prior to the pandemic, we had identified an additional six communities to enter our value-added program. We will commence four of the communities in the first half of 2021 and we'll continue to evaluate the opportunity of the remaining two.

We anticipate completing approximately 275 units in the fourth quarter, bringing our total renovations for full year 2020 to approximately 1,050 units. Beyond the identified communities, we believe there are additional value-add opportunities within the remaining portfolio.

In the third quarter, we reengaged our capital recycling program, which is focused on reallocating capital from markets where we have a small presence and do not plan to grow and invest those dollars into markets with better long-term fundamentals, where we have a larger presence and are looking to expand.

With that said, we made the decision to exit the Chattanooga and Baton Rouge markets. We sold one of our Chattanooga assets Trails of Signal Mountain and expect to close on the sale of our remaining asset in this market Lakeshore on the Hill in November. Also in November, we expect to sell our single asset in Baton Rouge, Louisiana Live Oak Trace. The gross sales and the adjusted blended economic cap rate for these three assets are $59 million and 5% respectively.

On the acquisition front, we've placed 421-unit property in Huntsville, Alabama under contract for a gross price of $95 million, which represents a 5% cap rate on our year one underwriting. This acquisition will expand our footprint in Huntsville from 178 units to 599 units.

The two-phase property was completed in 2014 and 2019 and is located in the South Madison submarket, which has seen no new supply in the past 5 years, other than this properties Phase II rollout. Properties of 99% occupied and we are well positioned to unlock value through a combination of organic market rent growth, which is averaged 6.6% for the past three years, as well as growth from the implementation of our revenue management and institutional ownership.

We note that Huntsville is an attractive market for expansion due to its highly educated and compensated workforce, coupled with population growth and job opportunities. The city benefits from the Redstone Arsenal, which employs 40,000 high-tech military personnel, NASA's Marshall Space Flight Center and Cummings Research Park, the second largest research park in the country.

In addition, Toyota and Mazda are completing a $1.6 billion assembly plant in 2021 that will employ 4,000 people and the FBI announced that it will be building a $1 billion second headquarters in the Redstone Arsenal that will bring a 1,000 jobs next year and 4,000 over the next 10 years.

Lastly, we acquired a parcel of land, adjacent to our Vantage on Hillsborough property in Tampa, Florida, which improves our street frontage and visibility and our existing property - of our existing property and allows us to add up to 51 units subject to zoning approvals.

Now I'd like to turn the call over to Jim.

[James Sebra, CFO]

Thanks, Farrell and good morning, everyone.

I'd like to begin with an overview of our third quarter results. IRT recorded net income available to common shareholders of $1.1 million, down from a net income of $4.9 million in the third quarter of 2019.

It is important to note that net income this quarter was impacted by a $1.8 million asset impairment associated with the property held for sale, while a year ago net income benefited from a $2.4 million net gain on the sale of assets.

During the third quarter, core FFO grew to $19.4 million, up 14.3% from $17 million in Q3 2019. Core FFO per share during Q3 was $0.20, 5.2% higher than Q3 of last year at $0.19 per share.

Turning to our same-store property operating results. NOI growth was 50 basis points in the quarter driven by revenue growth of 3%. Rental rates increased year-over-year with an average monthly rent of $1,106 this quarter, up 2.2% since the third quarter of last year. While this includes the value-add communities, we did see rental rate growth at our non-value-added same-store communities with rental rate in Q3 increasing 80 basis points over the prior year.

We continue to closely evaluate the impact of the pandemic on our collections. In the third quarter, we collected 98.9% of our billings. As a result, we evaluated our outstanding receivables for our collectability and increased our reserve for bad debt by $80,000 during the third quarter to a total reserve of $803,000 as of September 30.

The $803,000 reserve for bad debt recorded as of September 30, reduces the future risk of any build revenue that we have not collected. To put it in context, we ended the quarter with $1.4 million of gross receivables, including those that were part of our deferred payment plans.

Subsequent to September 30, we've collected $267,000 of those gross receivables and after considering the reserve for bad debt, our net accounts receivable leftover as of September 30 is $327,000, about a third of a penny per share. As a result, we believe that we are adequately reserved and feel good about collecting those remaining net receivables.

In the third quarter, same-store property operating expenses increased 6.8% primarily due to the timing of controllable expenses hitting in Q3 rather than Q2. As you'd expect there were delayed and interruptions during the height of the pandemic in the second quarter as businesses returned those delayed services were completed in the third quarter.

On a year-to-date basis, total operating expenses grew a more modest 3.6% with that increase, primarily driven by higher real estate taxes and property insurance, which we will continue to monitor going into next year.

I just want to reiterate, that the increase in expenses this quarter was heavily impacted by the timing of expenses rather than the start of a trend and we still expect that our total operating expenses for 2020 will be less than our original guidance that we gave at the beginning of this year.

Turning to our balance sheet. As of September 30, our liquidity position was $217 million. We have approximately $10 million of unrestricted cash, $108 million of additional capacity through our unsecured credit facility and $99 million of remaining proceeds from our forward equity raise.

We closed the third quarter carrying just over $1 billion of debt with no significant debt maturities until 2023. Our normalized net debt to adjusted EBITDA was 9.1x at the end of Q3, down from 9.2x in Q2 2020.

With respect to our capital recycling program, we have three assets identified as held for sale in the third quarter and as a result, we excluded the results from our same-store metrics. If we had included them, same-store NOI growth would have been 90 basis points for Q3 and 3% on a year-to-date basis, an improvement of 40 basis points for both periods over what we've already reported.

As Farrell mentioned, we recently sold our Trails at Signal Mountain property in Chattanooga at a price of $20 million and expect to recognize a $6.3 million gain on the sale in the fourth quarter. Other planned sales include Live Oak Trace in Baton Rouge, which we plan to close in November at a sale price of $25.4 million and we have already recorded a $1.8 million impairment on this transaction in accordance with GAAP during the third quarter.

Lastly, we're scheduled to sell our Lakeshore on the Hill property in Chattanooga for $14.3 million in the fourth quarter and expect to recognize a $3.6 million gain on sale. In total, we're expecting to generate $59 million in proceeds from these three sales and a total net gain on sale of $8.1 million.

On the acquisition front, we are under contract to purchase the property in Huntsville, Alabama for $95 million. This transaction is scheduled to close in late November and we'll be funded by $59 million in proceeds from the aforementioned sales, availability under our unsecured line of credit and a portion of the remaining availability from our February 2020 equity raise.

After all said and done, our capital recycling program will result in a $36 million net increase in real estate investments. We're expecting to use about $25 million of our equity floor to close the transaction, which means we will have approximately $75 million remaining after those transactions are complete.

If we were to use that $75 million to delever, our normalized net debt to adjusted EBITDA would drop to about 8.4x. Regarding our dividend, IRT's Board of Directors declared a quarterly cash dividend of $0.12 per share paid on October 23, which equates to a 63% payout ratio on $0.19 of AFFO for the third quarter.

With respect to guidance, we continue to believe it's prudent to keep it suspended at this time and anticipate resuming the practice of providing guidance when there is sufficient clarity on economic conditions.

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

[Scott Schaeffer, CEO]

Thanks, Jim.

I'd like to close out by saying that the IRT team has stepped up to the challenge and produced favorable year-to-date results during these uncertain times. We've rightly focused on supporting our employees and residents, while safeguarding our properties and communities.

I'd also like to congratulate the IRT team for being named Shelters to Shutters industry partner of the year. Shelters to Shutters is a great organization, which helps local communities with employment and housing opportunities in effort to reduce situational homelessness, which has become a national growing concern. I'm proud of the team's efforts and look forward to our continued success as we look to strengthen and grow our business, while learning from our experiences.

Operator, at this time, I would like to open the call for questions.

[Operator]

[Operator Instructions] I am showing no questions at this time. I would now like to turn the conference back to Scott Schaeffer.

[Scott Schaeffer, CEO]

Well, thank you for joining us today and we look forward to speaking with you again at Nareit's Virtual conference later in November. Everyone have a good day. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.