Oct 31, 2014
Executives
Andres Viroslav – Investor Relations Scott F. Schaeffer – Chairman of the Board & Chief Executive Officer James J.
Sebra – Chief Financial Officer & Treasurer Farrell M. Ender – President
Analyst
Wilkes Graham – Compass Point Brian Hogan – William Blair & Company, LLC [John Bender – National Securities Corporation]. Craig Kucera – Wunderlich Securities Vincent Chao – Deutsche Bank
Operator
Welcome to your Q3 2014 Independence Realty Trust, Inc. earnings conference call.
Today’s call is hosted by Andres Viroslav. For the conference your lines will be on listen-only.
(Operator Instructions) Now, I would like to hand the call over to Andres.
Andres Viroslav
Thank you for joining us today to review Independence Realty Trust’s third quarter 2014 financial results. On the call with me today are Scott Schaeffer, IRT’s Chief Executive Officer; Jim Sebra, IRT’s Chief Financial Officer; and Farrell Ender, President of Independence Realty Trust.
This morning’s call is being webcast on our website at www.IRTReit.com. There will be a replay of the call available via webcast on our website and telephonically beginning at approximately 1PM Eastern Time today.
The dial in for the replay is 888-286-8010 with a confirmation code of 56293476. Before I turn the call over to Scott I would 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 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 in this call. A copy of IRT’s press release contains financial information, other statistical information, and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure is attached to IRT’s most recent current report on Form 8K available at IRT’s website www.IRTReit.com 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.
Now, I’d like to turn the call over to IRT Chief Executive Officer Scott Schaeffer.
Scott F. Schaeffer
Independence Realty Trust continues to grow. Our real estate investments have increased 24% to $444 million since December 31, 2013 and the portfolio’s net operating income has increased 191% since September of 2013.
We continue to see solid opportunities to purchase stable apartment properties in submarkets with strong rental demand and limited additions to supply. During the third quarter we added 1,128 units by acquiring three properties for $82 million.
Though we are seeing modest cap rate compression in our markets this compression has been more than offset by lower financing costs. We are still targeting acquisitions requiring limited capital expenditures with going in cash-on-cash return of between 10% to 12% with room-to-grow rents and lower costs through operating efficiencies.
Our current pipeline is anchored by the recently announced $163 million five property portfolio we expect to acquire in Louisville Kentucky which Farrell will discuss shortly. Assuming we close on the Louisville portfolio in December, we will be fully deployed and levered on the proceeds from our July equity offering.
At this point I’d like to turn the call over to Jim Sebra to go through the financial numbers.
James J. Sebra
During the quarter core FFO was $0.17 per share or $4 million up just over 200% from $1.3 million for the third quarter of last year. This quarter we are reporting a GAAP net loss of $56,000.
Revenue was up $8.3 million this quarter as compared to the third quarter of last year. This increase is primarily from $8.1 million of revenue from the properties we acquired subsequent to the end of the quarter last year.
On a same store basis rental revenue was up 5% this quarter as compared to third quarter last year. Property operating expenses increased $3.7 million this quarter, almost entirely from the properties acquired from September 30th last year.
Operating expenses at the same store properties was largely unchanged from last year. [Inaudible] margin was 53% this quarter as compared to 50% during the third quarter of last year.
Regarding the portfolio, occupancy was 92.6% with a weighted average monthly rental rate of $791 per month. As discussed on previous calls, when we acquire a property some transition occurs resulting in tenant turnover which is anticipated in our underwriting.
Most of the properties acquired since Q3 last year have successfully transitioned whereas in some that transition is still in progress. The same store portfolio reported occupancy at 94.3% with a weighted average monthly rental rate of $814 per month, an increase of 4% over the third quarter of last year.
General and administrative expenses increased by $145,000 to $248,000 due to increased cost of being a public company. G&A expenses includes $31,000 of stock based compensation during the quarter.
Asset managed fees of $445,000 represents fees paid to our external advisor and only included the basis management fee this quarter. There was no incentive fees expensed this quarter.
Interest expense increase by $1.4 million quarter-to-quarter due to new financing obtained or assumed to finance a purchase of 14 properties that we acquired since the end of third quarter last year. On to the balance sheet.
In July we accessed the capital markets for the second time this year and issued $8 million common shares and raised $72 million of proceeds. We deployed these proceeds into three properties during the quarter for an aggregate value of $82 million.
We are permanently financing these properties in the fourth quarter using agency mortgages at 65% LTV with coupons of 3.5% for seven years. We ended the quarter with $444 million of gross investments in real estate representing 6,470 units and $254 million of debt.
At September 30, 2014 we had $35 million of cash on hand resulting from the financing of properties we acquired in Q2 of this year. At quarter end our leverage was 52% on a debt to gross assets basis.
Scott, this concludes the financial review.
Scott F. Schaeffer
At this time I’d like to turn the call over to Farrell Ender to discuss IRT’s acquisition strategy and pipeline.
Farrell M. Ender
As Jim and Scott mentioned, during the quarter we purchased three communities, increasing the portfolio to 22 properties and 6,470 units. We acquired two properties in Cordova Tennessee totaling 860 units.
These acquisitions provided us with immediate scale in a strong submarket within Southwest Tennessee. Cordova is a suburb directly north of Germantown, the area’s most exclusive neighborhood and home to FedEx’s worldwide headquarters employing 30,000 people.
It offers residents affordable rent in a strong location with close proximity to Germantown’s amenities to the south and the area’s main commercial corridor to the north, both of which provide good stable economic drivers for the properties. The Cordova submarket contains 11,000 units with no new deliveries forecasted for the next several years and has consistently outperformed the market.
The current vacancy rate in the submarket is 4.9% compared to the overall market rate of 8.5%. We purchased the first property, Walnut Hill, for $27.9 million.
It contains 360 units and is our second acquisition from a tenancy in common or TIC ownership structure. IRT was able to acquire the property by providing the individual TIC owners the ability to receive either cash or operating units if desired for tax purposes.
Because the property was managed by a company not affiliated with the owner, there will be immediate operating efficiencies gained with our hands on active management provided by RAIT Residential. We purchased the second property Stonebridge Crossings for $29.8 million which added another 500 units to the portfolio.
The combined properties give us scale and efficiency within this submarket. Both assets were purchased at a 6.2% cap rate.
We have secured a seven year loan on Walnut Hill from Freddie Mac in the amount of $18,650,000. The fixed rate loan bears interest at 3.42% and payments are interest only for the term of the loan providing an immediate return on equity of 11%.
We are currently under application with Freddie Mac for the Stonebridge property and expect to close that loan in mid-November. The loan is priced at 3.42% also with interest only payments for the seven year term.
The third property we purchased in the quarter was Lenoxplace Apartments located in Raleigh North Carolina. This is a market in which we were actively looking to invest in given it’s strong fundamentals.
The property is situated at converges of Highways 401 and 70, providing access to downtown Raleigh in less than 10 minutes and connected two miles north to I40 taking you to Durham and the research triangle. We purchased the community for $24,250,000 at a 6.2% cap rate and closed a seven year interest only loan at 3.72% providing an immediate return on investment of 10.5%.
IRT’s pipeline currently stands at $315 million, representing another 3,000 units in various stages of due diligence. The pipeline includes the previously announced Louisville portfolio comprised of 1,549 units with a total purchase price of $162.5 million.
This portfolio will give us critical mass in a market we currently are not in, similar to what we did in Oklahoma City. These properties are well located in the affluent east end neighborhood of Louisville, a dense infill mature area containing the most desired suburban living in the city with average incomes of $75,000 and average home prices of over $200,000.
Several of the properties benefit from their proximity to the city’s medical center which includes Baptist Hospital East, Norton Suburban Hospital, The Brook Hospital at Dupont, the Jewish Hospital Medical Center, as well as the ancillary medical offices that feed off the hospitals. Louisville has taken a proactive position to diversify from its historical reliance on manufacturing.
While manufacturing is still important with two Ford plants and GE’s billion dollar appliance park, healthcare and hospitality now employee as many people as the manufacturing industry. Humana, Norton, KentuckyOne Health, and Kindred are all either headquartered or have a large presence in the city and UPS’ World Port, the largest package handling facility in the world employees 20,000 people in the city.
Louisville has added back all the jobs it lost during the recession and the region will continue to experience population and job growth with a low cost of living, affordable housing, and a business friendly political environment. Back to you Scott.
Scott F. Schaeffer
Operator, at this time I’d like to open up the call for questions.
Operator
(Operator Instructions) Your first question comes from Wilkes Graham – Compass Point.
Wilkes Graham – Compass Point
Just a question on the pipeline given all the success you’ve had in acquisition year-to-date and quarter-to-date, can you just talk about maybe what the environment looks like for portfolio deals like Louisville versus individual assets, and whether the returns are that much different between the two?
Farrell M. Ender
Louisville is the only portfolio we have on the pipeline currently. As we’ve seen with Louisville and Oklahoma the opportunities do come up on a regular basis.
They are a little bit more competitive and we’ve been more successful in finding one off transactions through our network. But again, we’re trying to grow the company and when we see good opportunities we’ll pursue them.
Wilkes Graham – Compass Point
I might have missed something, did you disclose what the size of the pipeline is now?
Farrell M. Ender
$315 million including Louisville.
Wilkes Graham – Compass Point
So about $150 million after Louisville?
Farrell M. Ender
Right, in various stages of underwriting and price negotiations.
Wilkes Graham – Compass Point
You mentioned the mortgage rate you got on the Fannie debt, but can you talk about where you’re seeing that market today?
Farrell M. Ender
It’s getting even better for us. We’re getting quotes on Louisville at 125 and less over the corresponding treasury so it’s tightening up and we expect it to get even better the early part of next year as pipelines get reset for lenders.
Operator
Your next question comes from Brian Hogan – William Blair & Company, LLC.
Brian Hogan – William Blair & Company, LLC
I think you said it and went through it pretty quick and I was trying to jot things down, but the operating expense same store sales you said was unchanged?
Farrell M. Ender
Yes.
Brian Hogan – William Blair & Company, LLC
Then the NOI?
Farrell M. Ender
NOI grew on a same store basis from third quarter of last year to third quarter of this year about 9%.
Brian Hogan – William Blair & Company, LLC
On the same note there, what was the same store occupancy rate?
Farrell M. Ender
Same story occupancy at the end of the quarter of 94.3%.
Brian Hogan – William Blair & Company, LLC
It goes with the previous caller’s question, but competition on all your deals, have you seen it increase? Obviously, you’ve said cap rates have come down, can you describe the level of competition?
Is it more intense?
Farrell M. Ender
No, we’re not seeing an increase in competition. As you can see from our execution in the pipeline, we’re being able to source deals pretty consistently.
Brian Hogan – William Blair & Company, LLC
The cap rates coming down, you’re just willing to do that because of the lower cost of funds?
Farrell M. Ender
As Scott mentioned, our cost of funds have come down more than cap rates have come down, at least in our experience.
Farrell M. Ender
There’s clearly competition. There has always been competition.
We don’t think it has increased over what we were seeing a year ago, but we still have to be competitive. Most of these deals are sourced off market, but the way you get them off market is still by paying what the seller believes they’re worth.
Since there is competition out there, we have to be willing to pay a market rate which we do. We do think we get some benefit because of the fact that these are off market and they’re not widely distributed for sale, but at the same time we’re paying reasonable amounts for these properties and the cap rate decline is just the factor of interest rates.
As we’ve always said, cap rates move with interest rates. We think they move – there’s a slight delay.
Interest rates have come down, spreads have come down from where they were six months ago.
Brian Hogan – William Blair & Company, LLC
My last question is the dividend, you just declared the dividend for the fourth quarter here, $0.18 where it’s been for this year, but obviously you’re adding the Louisville portfolio and it generates a lot more income. What are your thoughts on the dividend?
Scott F. Schaeffer
Our thoughts are that the third quarter there was a little bit of a drag on earnings per share because of the equity offering that we did in the beginning of July and in the fourth quarter we will have all of the money that we raised in July invested and levered during the fourth quarter so we expect the number to be a little better going forward, but because we’re still paying out such a high ratio of our earnings we thought it was prudent to just keep the dividend static.
Operator
Your next question comes from [John Bender – National Securities Corporation].
[John Bender – National Securities Corporation].
On the Louisville portfolio is that comparable to what you guys picked up in Oklahoma City where it was kind of low occupancy, low rent, and that’s all coming to a stabilized rate or is that kind of stabilized today?
Farrell M. Ender
I would say it’s a higher class asset and it’s stabilized today in a more affluent suburban area of Louisville as compared to Oklahoma City. If you just look at a price per unit and rent per unit.
[John Bender – National Securities Corporation].
Just real quickly on the loan on Walnut Hill, could you go over that one more time? I think I might have missed that.
Farrell M. Ender
3.42%, seven years, full term IO, interest only.
[John Bender – National Securities Corporation].
On the Oklahoma portfolio where are you guys seeing a timeframe for stabilized occupancy and is it in the underwriting?
Farrell M. Ender
Oklahoma is a good representation of what Jim mentioned in terms of transition so we’ve got them all at 90% or higher currently. We inherited them anywhere from mid-80s to mid-90s [inaudible] dropped when we took over and we transitioned to new management [inaudible] and all our standard operating procedures.
Now that we’ve been in there for six months they’ve all turned to the positive.
Operator
Your next question comes from Craig Kucera – Wunderlich Securities.
Craig Kucera – Wunderlich Securities
I wanted to go over your pipeline and from a big picture level how to think about some of the numbers. Based on what you’re saying if you close this last quarter with a 6.2 cap, we’ve seen some downward pressure on financing cost, is sort of a going in six and financing at 3.25 kind of the at least spread, maybe not the actual numbers but at least the spread we should be thinking about on these assets?
Farrell M. Ender
That’s correct.
Scott F. Schaeffer
Six to 6.5 cap rates. Six is the low end of what we’re seeing.
Craig Kucera – Wunderlich Securities
I know you don’t disclose your monthly effective rents for the Raleigh and Cordova assets that closed this month, but can you give us a ballpark estimate of what the monthly rents are for those just from a modeling perspective?
Farrell M. Ender
Raleigh is about $800 a month.
Craig Kucera – Wunderlich Securities
There were two deals where you didn’t disclose the rent because it wasn’t a full month of operations, so just a ballpark number?
Farrell M. Ender
The Stonebridge asset is about $690 a month and Walnut Hill is $920.
Craig Kucera – Wunderlich Securities
Lenoxplace is $800?
Farrell M. Ender
$785 to be exact.
Operator
Your next question comes from Vincent Chao – Deutsche Bank.
Vincent Chao – Deutsche Bank
I just want to go back to Oklahoma City real quick, it sounded like occupancy has picked up there. I’m just curious, are you done with that churning out process in terms of when you originally took over you talked about some churn and getting rid of some student mentors.
Is that process now done?
Farrell M. Ender
Four of the five assets I would tell you are completely stabilized in the low to mid 90s. There’s one that’s taking a little bit longer but should be there, I would tell you, in the next month or two.
Vincent Chao – Deutsche Bank
Then just more broadly speaking, you have some markets that are tied to sort of the energy and that kind of thing in terms of Denver and maybe even Oklahoma City to some degree. But I’m just curious, with oil prices where they are, do you think that’s going to have much of an impact in some of those markets that have been stronger again with some of the energy demand?
Scott F. Schaeffer
No. There has been tremendous, as we know, economic activity because of the energy situation but it’s long term and until we start seeing the energy companies, the drillers pull back, which there’s no sign of that, there will be no impact on these properties.
They’re diversified economies so they’re not all relying on the energy industry or sector.
Operator
No further questions, I’ll hand it back to Scott for any closing remarks.
Scott F. Schaeffer
Thank you for joining the call today and your interest in Independence Realty Trust. We look forward to taking with you next quarter.
Have a good day.
Operator
Ladies and gentlemen that concludes your call for today. You may now disconnect.