May 7, 2016
Operator
Good day, ladies and gentlemen, and welcome to the Independence Realty Trust First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode.
Later, we'll conduct a question-and-answer session and instructions will follow at that time. [Operator instruction] As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Mr. Andres Viroslav.
Sir, you may begin.
Andres Viroslav
Thank you, Skyler, and good morning to everyone. Thank you for joining us today to review Independence Realty Trust first quarter 2016 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 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 12:00 PM Eastern Time today. The dial-in for the replay is 855-859-2056 with a confirmation code 91313256.
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, 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 in this call.
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 directly comparable GAAP financial measure is attached to IRT's most recent current report on Form 8-K 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 matter described herein except as maybe required by law. Now, I'd like to turn the call over to IRT's Chief Executive Officer, Scott Schaeffer.
Scott?
Scott Schaeffer
Thanks, Andres, and thank you all for joining our call today. Earnings for the first quarter came in as expected with $0.21 of core FFO as the portfolio continues to perform well.
The Trade Street properties, which are not included in IRT’s same-store calculation, exceeded our expectation and delivered 10% year-over-year average NOI growth. As previously discussed with you, we continue executing on our plan to maximize the operating performance of the portfolio while reducing leverage, particularly in regards to the interim loan we used to acquire the Trade Street portfolio this past September.
We've targeted the sale of properties that are outside our core footprint and those communities which we believe will have met their maximum level of operating performance. Since the fourth quarter last year, we've sold three communities and we'll be closing on our fourth property sale tomorrow.
Including tomorrow's sale, the combined net proceeds is approximately $56 million. The proceeds generated from these sales plus the proceeds from refinancing of our properties currently financed on our KeyBank facility is expected to pay down the interim loan by 75% to a very manageable level of approximately $30 million by mid-May.
We will continue analyzing our options of either refinancing the remaining balance or selling additional properties to retire the interim loan prior to its final maturity in March of 2017. At this point, I'd like to turn the call over to Jim to go through the numbers and then followed by Farrell to discuss IRT's portfolio and provide some color on our markets.
Jim Sebra
Thanks, Scott. Core FFO this quarter was $0.21 per share or $10.3 million, up 71% from $6 million in the same quarter of last year.
This quarter, we are reporting a GAAP net loss of $75,000. From an earnings point of view, all categories saw an increase in Q1 as compared to Q1 last year.
Obviously, our Trade Street merger in September last year is the primary driver of those changes. All of the properties we acquired have been successfully integrated and we are actively upgrading and renovating units where we see good returns.
With regard to the same-store portfolio, we are continuing to see positive performance in NOI growth, while the supplemental package contains further detail in the same-store portfolio, two items of note. First, the same-store portfolio for the first quarter is still relatively small at 28 properties or 8,277 units.
For the quarter, NOI growth in the same-store portfolio was driven by rental increases of 3.4%, leading to a 3.5% increase in total revenue and an increase in NOI of 3.7% over Q1 2015. Keep in mind that we bought eight properties in late 2014, and those are included in the same-store portfolio for the first time this quarter.
Usually, operating performance from the new property acquisitions can vary from normal operating trend in the first 30 days to 60 days of our ownership. In Q1 2015, we had lower-than-normal operating expenses at those eight properties we acquired in May 2014.
If we normalize those expenses, the same-store NOI increase would be 5% for Q1 2016. Secondly, for the Trade Street portfolio, we saw an NOI increase of 10% in Q1 2016 as compared to Q1 last year.
This was driven by an increase in revenue of 4% and a 3.3% decrease in operating expenses. If we were to blend the two same-store pools together, the NOI growth in Q1 2016 would be 6.3%.
We ended the quarter with $1.4 billion in gross assets representing 13,502 units and $940 million of debt. With respect to our debt, one item of note.
On April 1, we had $45 million of debt maturing associated with our Oklahoma City portfolio. That debt was repaid on March 30 and financed using the remaining availability of our line of credit.
We are evaluating permanent financing options while maintaining flexibility. As part of our year-end 2015 earnings release, we introduced core FFO guidance for 2016 between $0.82 and $0.88 per diluted share.
This full year 2016 guidance assumes same-store NOI growth of 4.5% to 5.5% and NOI growth of the Trade Street portfolio between 6% and 7%. We are reaffirming our full year 2016 guidance, and for Q2, we expect core FFO to be between $0.21 and $0.22 per share.
This guidance does reflect the impact of the sales of the previously discussed properties. Farrell?
Farrell Ender
Thanks, Jim. As Scott mentioned, we've completed the three property sales and we'll be closing on the fourth sale tomorrow.
The combined four properties were sold for a blended nominal cap rate of 5.44%. And to the refinancing activity, we have rate locked three loans totaling $100 million on properties currently financed on our key line of credit.
These financings will all close during the month of May. Two of the properties will be financed with seven-year fixed rate loans totaling $50 million at a blended rate of 3.23% with interest-only payments for 3.5 years.
The remaining loan of $50 million is a 10-year fixed rate loan with an interest rate of 3.7% and five years of interest-only payments. These financings will provide $27 million in excess proceeds and will be utilized to further reduce our interim facility.
These loan terms reinforce that the secured debt markets continue to be an efficient and attractive source of financing. Overall apartment fundamentals remain strong.
Homeownership dropped again by 30 basis points to 63.5% at the end of the first quarter when compared to the fourth quarter of 2015 and from a high of 69.5% in 2005. Every percentage point drop in homeownership equals 1 million households adding 6 million additional households to the rental pool since 2005.
70% of our renters are between the ages of 18 and 39. The path to ownership remains longer for them for many reasons such as challenges in getting mortgages, student debt and the desire to remain mobile.
The combination of more renters, people renting for longer and job growth remain the drivers fueling the demand for apartments. Cities with high job growth such as Austin, Atlanta, Orlando, Charlotte, all had the highest rent growth.
For example, our property Copper Mill in North Austin generated 11% rent growth year-over-year with 2% expense growth resulting in an NOI increase of 25%. There were four markets that each account for approximately 10% of our NOI.
Our Louisville portfolio, which we purchased in December 2014, had 4.7% NOI growth year-over-year. The overall market is healthy with job growth achieving 3% and year-over-year rent growth of 3.6%.
The market absorbed all 1,100 units delivered in 2015, pushing the vacancy rate to 5.5%. The city is experiencing positive news, and the most notable is Ford's recent announcement of investing over $1 billion in its truck factory and creating an additional 2,000 jobs.
Our Memphis community contributes 9.2% towards our NOI. A market we have always viewed as slow and steady and which is lagging the national recovery started to show some consistent improvement in 2015 and continued into 2016.
The unemployment rate in March fell to 4.7% from 6.4% a year ago and Moody's is forecasting almost 3% job growth in 2016. Our communities in the Cordova and Germantown are the best submarkets of Memphis and they experienced average revenue growth of 4.3% and NOI growth of 3.6%, which includes a one-time tax reassessment on one of the Trade Street properties.
Our Raleigh communities contribute 9.6% to our NOI. The city has historically been one of the fastest growing population centers in the country with a highly educated workforce and a low cost of living making it attractive to both employers and employees.
In 2015, the market added 3,800 units to its 120,000 unit supply or a 3.2% increase. Yet, the market was able to absorb almost 5,000 units or 112%, pushing vacancy down to 4% by the end of 2015.
The two best performing communities in the Trade Street portfolio are located in this market and experienced year-over-year revenue growth of 14.7% and 9.8%. Lenoxplace, which is in our same-store portfolio, generated 6.2% NOI growth over the same period.
We expect an additional 4,000 units to be delivered in the market in 2016 and anticipate similar absorption given the forecasted job growth of 3% and 2.5% respectively. We also have three communities in Atlanta that contribute 9.2% to our NOI.
The city has been in the news for several corporate relocations and job growth has consistently been 3%. Our community, the Pointe at Canyon Ridge in Sandy Springs is in close proximity to the Perimeter Center, a 29 million square foot office park where Mercedes-Benz will be relocating their US headquarters from New Jersey.
The Pointe at Canyon Ridge is one of the communities we had identified as a candidate for unit upgrades. We recently delivered 20 renovated units, achieved rent premiums of $150 per month.
Based on the renovation cost of $5,000 per unit, we will achieve a 36% annual return on our investment. The market delivered only 6,400 units to its almost 400,000 unit inventory with a good portion in the urban areas of Midtown and Buckhead.
2015 absorption was 140% with effective rent growth of 5.4%. Finally, although not in our Top 4 markets considering the concerns about energy, we wanted to touch on Oklahoma City.
Our Oklahoma City portfolio contributed 7.4% to our total NOI. To date, job losses in the energy sector have been offset by job creation in other sectors, but job growth overall has remained flat.
As mentioned, strength in the current multi-family fundamentals is most closely tied to job growth and it's important to put this in perspective when looking at this market. For a long time, Oklahoma City significantly outperformed the national averages.
With the decline in energy offset by the city's continued efforts to diversify, it's forecasted that Oklahoma City will fall more in line with the national average. Reese is projecting 1.7% job growth, less than 1% new inventory growth, a vacancy rate of 5.5% and potential rent growth of 3.9% for 2016.
In regards to our portfolio, the Oklahoma City portfolio produced a 2.5% increase in revenue and a 3.1% NOI growth. We anticipate 3% revenue growth for the balance of the year and expenses to stay relatively flat, resulting in NOI growth of 6% for the full year of 2016.
Job growth and population growth across our 19 markets on a consolidated basis continued to be above the national average. Also important to note is that the absorption in our markets averaged 96% in 2015 versus national average of 88% and we believe that our portfolio's average rent of $0.98 per square foot is comfortably below the minimum average rent per square foot needed to support new construction within our markets.
These factors further validate our strategy of acquiring, managing and providing our residents with well-located, highly-amenitized communities in non-gateway markets that have less exposure to new construction. And I'll turn it back to Scott.
Scott Schaeffer
Thank you, Farrell. At this point, operator, I think we should open the call up for questions.
Operator
[Operator Instructions] And our first question comes from the line of Brian Hogan from William Blair. Your line is now open.
Brian Hogan
Good morning. I guess first question will be the progress on paying down the bridge loan.
Obviously, you’re making pretty good progress already, I think it's all in the press release down to $78 million currently and you're targeting down to $30 million by the end of May, if I heard you right. And I guess what is the strategy post that?
Is it just drawn more credit facility, get a new one, the additional property sales, can you elaborate on that please?
Scott Schaeffer
Well, at this point, we haven't concluded that answer. When we refinanced the Oklahoma City property, we put it on our line, because we have previously said and believed that there may be a property too within that portfolio that we want to sell.
So, we wanted to remain flexible and that's why we didn't put permanent financing on it. It's interesting because as we paid down the interim loan, the banks that provide that financing have all expressed an interest now of keeping that money out at work and have offered us a more permanent facility to retire the last $30 million.
So, we're analyzing that as well. I think the main point is that the second half of May will have it down to $30 million and we'll have a number of options available to us in order to retire the balance whether it is to sell a property or two primarily within the Oklahoma City portfolio or to term it out with the existing lending group.
Brian Hogan
Would the rate in that new facility be in line with your current funding cost?
Scott Schaeffer
It would be lower by about 150 basis points.
Brian Hogan
Above?
Scott Schaeffer
Lower.
Brian Hogan
Lower. And then if you would sell two additional properties or whatever it maybe just hypothetically, would your full year guidance be sustained?
Scott Schaeffer
Yes. What we found is because we're using the proceeds to retire debt, obviously which saves the interest cost, and because the remaining portfolio is seeing good stable rent increases and NOI increases that those rent and NOI increases are more than offset the loss of income from the sales.
And then when you can factor in the use of proceeds from the sales to retire the debt, we really find ourselves in a very stable situation where our income or our NOI, core FFO, if you will, even with the sales is not impacted.
Brian Hogan
That’s helpful. Thanks.
The trends in cap rates broadly, what are you seeing? Obviously, you reported 5.44 blended cap rate on the properties that you sold, what are you seeing there?
And then on kind of a follow-up with that, you sold them for a blended 5.44, what did you acquire them obviously at some decent gains on those properties?
Farrell Ender
Yes, so, Brian, this is Farrell. The properties that we're looking at, I think cap rates have stayed pretty consistent over the past quarter to two quarters.
The capital markets have stabilized, everybody kind of knows what their debt is going to be, and most of the pricing is based off of your leverage and debt levels. The properties we sold were all part of the original portfolio.
So, you're looking at cap rates between 7% and 7.5%, but that was four years ago, 3.5 years ago, so we're in a little bit of a different market now.
Brian Hogan
Great. You do have obviously a much larger and very diversified portfolio now and changes at one property aren't hugely impactful.
But I'm just going to point out to maybe one property and this question on that, Arbors at the Reservoir in Ridgeland, Mississippi, obviously had some outsized pressure from a rent and occupancy perspective, can you elaborate?
Farrell Ender
It was really quite obviously a staffing issue and we worked it and turned it around and we should see some progress over the next couple months. Typically what we see at a property that is not performing, it's usually driven by something at the property level.
Overall market conditions set aside, and it's our experience, it's usually an employee staffing issue, and that's what we experienced at Arbors, which is in a very deep market, Jackson, Mississippi for getting quality managers and lead tax.
Brian Hogan
All right. Thanks for your time.
Farrell Ender
Thank you.
Operator
And our next question comes from the line of Dan Donlan from Ladenburg. Your line is open.
Dan Donlan
Thank you, and good morning. Just wanted to go over kind of your top 5, 6 markets and kind of what you're seeing from a rent concession standpoint, how is that progressing this year or you're really not seeing much at all, just any commentary there would be helpful.
Farrell Ender
Yes, in the top market, Dan, this is Farrell, like I said in the call, we haven't seen any effect on our properties. I mean quite honestly, when I was looking at Charlotte and Raleigh six months ago and saw the amount of new inventory that was coming, I thought you might see some softness, but they really held pretty strong.
Really the only market we're seeing concessions in is Charleston, which we has a lot less exposure to. I think that's just a product of again some inventory coming online.
And I actually talked to our Head of Property Management yesterday and it appeared we had to offer some but they burned off in past couple of weeks, we expect that property to 95%, the Daniel Island property. So, at the top, we really haven't seen any.
Dan Donlan
Okay. And then as it pertains to kind of your portfolio and how it may transition over time, I'm just looking at page 19 in the supplemental, you are in 23 different markets and you look like you have probably 10 or 11 markets where you might only have one property, maybe two.
Are these potential dispositions down the line? How much does this kind of stretch your property management team to some degree if you only have one or two small assets in a market and do you think you could see some cost savings by refocusing some of these – refocusing out of some of these one-off markets into the kind of your more core markets?
Farrell Ender
It's a very good point, and we look at it on a quarterly basis and yes, there are some legacy assets and some assets that we inherited in the Trade Street portfolio and markets that we'd probably exit and there are some that we acquired such as Orlando and the Trade Street asset we'll look to expand in. There are also markets at St.
Louis, Columbus that we are looking to add to for your exact reason to get some scale, so that we can share across more than one property.
Dan Donlan
Okay. And then just longer term, maybe Scott, how does -- what does IRT kind of look like a year from now.
I mean your multiple is rather depressed, you're selling assets incredibly strong cap rates, but kind of what's the thought process on how this portfolio looks a year or two from now, what's kind of the general corporate strategy to get to a higher multiple here?
Scott Schaeffer
Well, the corporate strategy post the acquisition of Trade Street was to retire that interim loan and then presumably get back on to albeit slow in the beginning in the acquisition mode. Obviously, we're not interested in, we won't issue common equity at these current prices, but we still believe that the company as you've stated is significantly undervalued.
So, we're going to retire that loan by the end of – we'll have it down to $30 million by the end of May and then we will either retire it or term out the balance, so that we're not facing that balloon and then we're going to get out and start talking, tell the story and make sure everybody knows what we have and what the opportunity is within this company at the current share price. And our plan is to get back into the acquisition mode and take advantage of some of these markets that Farrell has identified where we still think there is good opportunities and we have the footprint, but we would like to expand on it.
And we'll reassess that six months out.
Dan Donlan
And you think that the bulk of potential acquisitions will be financed with some of your non-core dispositions would you expect?
Farrell Ender
Yes, and cash flow, and of course we'll continue to monitor the capital markets. They can't stay depressed forever and it's not just us.
I mean if you look at what's going on generally, smaller companies have been trading at a discount and everything is cyclical and I would hate to be a seller on the grand scale at a time when the markets are depressed. You want to be a seller when the markets are strong.
So, we'll continue to look at the portfolio and make sure that we're disposing off assets opportunistically, but we also think that things will normalize and we'll be able to be back in a growth mode. We think we have a very compelling model here and a compelling story as well and we're going to get out and tell it, and as I said make sure everybody knows it.
Operator
And our next question comes from the line of Patrick Healy from FBR. Your line is now open.
Unidentified Analyst
This is actually Matt on for Pat. Looking at rental growth, did you have any markets that you saw that were either outperforming or underperforming your expectations specifically?
Farrell Ender
I mentioned, Austin, which just continues to have double-digit rent growth. Our Property Copper Mill has had an 11% rent growth which we do not budget for.
A lot of our properties that we acquired in the year and a half ago that are now you are now seeing in the same-store. The Benington, the Bayviews are really now starting to performing benefit from us being in there for an extended period of time and our standard ops, people getting familiar with our processes, but we're seeing pretty solid rent growth across the whole portfolio.
The only market like I said slowed down was Oklahoma City and then Charleston to a certain extent, but I think that's just really focused on our smaller submarket.
Operator
Our next question from the line of Craig Kucera from Wunderlich. Your line is now open.
Craig Kucera
Wanted to go through the properties that you've sold and just make sure I am getting everything kind of lined up. The one you sold in February that was Cumberland Glen.
And then did you close on Bell Creek earlier this quarter and then Arrowhead at Tresa, is that closing tomorrow?
Farrell Ender
That's correct, exactly how you laid it out.
Craig Kucera
And then you mentioned there were four properties, what's the other one that I'm missing or did that already closed?
Scott Schaeffer
We sold Centrepoint in fourth quarter of last year, at the end of the fourth quarter.
Craig Kucera
So then just so I understand from a use of proceeds from the new debt that you mentioned, you rate locked $100 million. You're anticipating paying down the bridge loan to about $30 million, is the remainder of that debt then going to be used to pay down the line of credit?
Jim Sebra
I'm not, the proceeds from the refinancings will be all used, the $27 million to reduce the interim facility we had down to $30 million. There will be no additional --
Farrell Ender
To be clear, the proceeds of $100 million will be used to retire financings from the warehouse line, which actually is fully drawn at the moment, but that will free up a little bit of capacity on the warehouse line, which we will use to retire then $27 million of the interim loan. I know it's a little roundabout.
What it does is, it just -- the net effect is $27 million of the interim loan, which is the one with a short-term maturity and we feel has been viewed negatively by the marketplace. That $27 million will be used to pay that down and the balance there will then be $39 million.
Craig Kucera
Okay. So, you will have $30 million of the bridge loan, but your line of credit will still be effectively fully maxed out.
Jim Sebra
The line of credits will be -- the balance on the line of credit will be around $250 million.
Craig Kucera
How is that being paid down from $325 million? I guess I'm not following that.
Jim Sebra
In round numbers, the $100 million in permanent financing we will place, $75 million of it will go to release the three assets from the line of credit, the $27 million roughly balance will go to pay down the interim loan. Right now, there is -- to say in another way, those three assets are pledged on the line account for roughly $75 million.
Operator
Our next question from the line of Vlad Rudnytsky from Deutsche Bank. Your line is now open.
Vlad Rudnytsky
I just have a quick question on Westmont. It looks like it maybe is also experiencing some pressure.
I'm Just wondering if it's something property specific or something about the Georgia market?
Jim Sebra
No, it's actually historically a good performer for us. We experienced a kitchen fire there that took out some properties.
At the same time, we had a renovation program going on. So, the combination, there's about 25 units offline there.
Vlad Rudnytsky
And then one more quick one, I think I may have missed this one. Did you guys talk about the Trade Street performance and maybe some of the non-same-store pool assets during the quarter?
Jim Sebra
Yes, we did. We talked about the historical Trade Street properties performed revenue growth for the Q1 this year versus Q1 last year, 4% revenue growth and about 3.3% expense savings.
So, NOI just for the Trade Street portfolio is about 10% growth.
Operator
At this time, I am showing no further questions. I would like to turn the call back over to Scott Schaeffer for closing remarks.
Scott Schaeffer
Thank you for joining us today and we look forward to speaking with you next quarter.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program.
You may now disconnect. Everyone, have a great day.