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. And please be advised that today's conference is being recorded. Thank you.
Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust's Q1 2021 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 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 Such statements are made in good faith pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1990 5. 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 ks available at IRT's website 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.
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 we're 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 clear 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 health 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. To give you a sense of our optimism, we are raising the midpoint of our full year NOI growth guidance from 2.5% to 4.125%, a 65% increase.
This encouragement is exemplified by another quarter of strong results. Specifically, in the Q1, our Same store NOI increased 5.3 percent 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 1st quarter rents and now have collected over 99% of Q4 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 rents, is consistent with collections at this point in March. And given our low lease expirations and high occupancy in the Q1, we continue to drive rent growth, averaging 4.6% so far in the Q2. Another key component of our strategy is the advancement of our value add program. Since the inception of our value add program in January of 2018 through the end of the Q1, we have completed renovations on 3,861 units, Achieving a weighted average return on investment of 18.5 percent on interior renovation costs.
I am excited to tell you that we have started renovations at 3 additional communities this year and will begin renovations on a 4th 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 and joint ventures with 3rd party developers in core non gateway markets. In particular, we are 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 the newly developed community at attractive cap rates of between 5% 5.5%.
We are making progress on this front with 3 letters of intent signed aggregating total investment for us of $56,000,000 The closing of these transactions is expected to occur in the second half of this year. We are 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 through 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?
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 their dedicated efforts and focus on resident retention continue to report solid results and now a strong start to 2021. In the Q1, 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 3 30 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 Q1, yielding a combined lease over lease rental rate increase of 5.9%. Strong trends continue in the Q2 to date with new leases having increased 9.6% led by our value add communities, while renewed leases are up 3.7 percent with a blended lease over lease rental rate increase of 4.6% for our same store portfolio. To give you an update on our value add program, we completed renovations of 142 units in the Q1. We are currently performing renovations at 20 of our communities, having added Rocky Creek in Tampa to our ongoing renovation program in the Q1 and our Thornhill community in Raleigh in the Q2.
We also recently kicked off renovations at Walnut Hill in Memphis and will commence value add upgrades at Meadows and will offer value add opportunities. Regarding this year, we continue to expect to renovate approximately 1300 units with the bulk of these occurring in the 2nd and third quarters when we experienced the majority of our lease expirations. With regard to our capital recycling, We currently have 2 communities under contract to purchase. The 2 communities that we intend to acquire are both new construction in lease up and in markets that we currently operate. One is in Dallas and the other is in Charlotte, both markets where we've been actively looking to grow.
The combined purchase price is approximately $140,000,000 and represents a 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.
Thanks, Sal, and good morning, everyone. Beginning with our Q1 performance update, Net income available to common shareholders was $1,100,000 up from a net loss of $372,000 in the Q1 of 2020. During the Q1, core FFO grew to $18,000,000 up 23.5 percent from $14,600,000 in Q1 2020. Core FFO per share during Q1 was $0.18 12.5% higher than Q1 last year at $0.16 per share. As we highlighted earlier this year, we changed our definition of core during the Q1, so that our definition is more consistent with the 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 And supplement to follow this new definition. Turning to our same store property operating results. NOI growth in the Q1 was 5 And a 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 activities.
Again, this growth was driven by 170 basis points of incremental occupancy and a 1.7% increase in our average rental rate for the Q1 as compared to last year. With regard to rent collections, they have continued to be strong despite the persistence of the COVID-nineteen pandemic and extended eviction moratoriums. To date, we have collected 98.4 percent of our 1st quarter billings. Consistent with last year, we evaluated uncollected amounts for And recorded a reserve for bad debt for those amounts we deem as uncollectible. As of today, we maintain a bad debt reserve of $1,000,000 associated with the $1,500,000 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 Effective, our bad debt expense, which is a de decept 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 bad debt expense in our updated full year On the property operating expense side, same store operating expenses grew 6.2% in the Q1, primarily due 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.
Higher utility rates usage and snow removal costs are the In Q1 2021, G and A expenses included a one time stock compensation expense for retirement eligible employees. This is consistent with Q1 last year. This one time expenses caused an increase when looking at the quarterly run rate of G and A expenses. If you remove these one time expenses, the increase in G and A from Q1 2020 to Q1 2021 is 4.5%. As we've highlighted previously, we are making investments in our operating and technology platforms.
Turning to our balance sheet. As of March 31, our liquidity position was $206,000,000 We had approximately $8,700,000 of unrestricted cash, one $155,700,000 of additional capacity through our unsecured credit facility and $41,200,000 of proceeds that we will receive upon settlement of forward sale agreements covering 2,900,000 shares of our common stock. In the Q1, we issued 2,000,000 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 full retail 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 23. 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 Q1 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% 5%, up from a previously guided range of 1.5% to 3.5%. This updated guidance reflects 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 trending lower than expected. Moving on to expenses, our new projected growth in total same store real estate operating expenses of 4.25% 5.5 percent is a result of our expectation that controllable operating expenses should increase between 3% 4% And our non controlled expenses, including taxes and insurance should increase between 7% 8%.
Lastly, we are now providing guidance around transaction volume expectations. We are projecting a disposition volume of up to 100,000,000 hours as well as an acquisition volume between $100,000,000 $200,000,000 for the full year of 2021. To follow-up on the comments 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?
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 REIT conference at the beginning of June.
Operator, we would now like to open the call for questions.
And your first question comes from the line of Neil Machen of Capital One Securities.
Thank you. Good morning. Good morning,
guys. Good morning, Dan.
Real nice quarter. First, you mentioned some progress on the JV side or prep side, 3 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 the preferred or mezz opportunities.
Sure. Thanks, Neil. So our appetite hasn't changed. We're still looking to limit the investment in this type of And we've entered into, as I said, 3 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.
Got you. So you're doing preferred lending then on those Is that what you're saying or am I not?
These are our joint venture relationships, but There will be preferred investments in this program as well.
Okay. But these 3 are basically just JV equity Essentially, what you're using for the development, correct? Yes. Correct. Okay, great.
Thanks. And the other one, can you say maybe on the operations side, Obviously, hearing a lot about out migration from the coast and your market being the clear beneficiary Our beneficiary, 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 like early or middle of last year from a percentage of people from out of state who are filling these new leases, kind of how to Anecdotally, I mean, when you're in the markets, everybody's talking about it and you Over the past year, so our Carolina properties are really seeing the majority of it. It's about 6% 8% depending on the community of inflow from the New York, New Jersey PA markets, but we're watching it very carefully. Okay. And then just to be clear, the deals you have under contract, the acquisitions, the 2 deals, that's Separate in the part in the 3 LOIs, right?
So that's incremental. Yes. Okay. Yes. All right.
Thank you, guys.
The next question comes from the line of Ashkin Wurschmidt of KeyBanc.
Hey, everybody. Good morning. Wanted to jump back to the preferred equity or the development joint ventures you mentioned again on the $56,000,000 Can you provide some additional detail on the markets That these deals are located in and what is the structure of the joint ventures? Are the developers contributing the land or Will they have additional equity in the deals?
Hey, Austin. The 3 deals breakdown, one is just
Got it. That's helpful. 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 that 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?
Yes, Austin, that's correct. These are Markets that we've 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, have jumped in, but through this program we think it will give us a foothold and allow us to build out in the future.
And what was the structure again In terms of the joint ventures, I mean, are they fifty-fifty joint ventures initially or And something else, can you provide any detail along those lines?
Sure. There are again joint venture Common Equity, 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 the developers is contributing additional equity as well. So I don't have the exact percentages right off hand.
I think it's 80 to 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're almost shuttle ready. So as soon as we close, Construction will begin.
Got it. That's helpful.
And then just last one for me. On the new acquisitions you mentioned in Dallas and Charlotte, I think you said these were lease up deals. Is the 4.5% the initial cap rate? And if so, what do you expect Upon stabilization and the timing of stabilization?
So they are lease up deals. The Dallas Property is in an area where we already have 3 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 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 Charlotte is a little bit different.
We've been looking to grow in Charlotte. It's an infill location, very, 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 of being the B class investor is that we were insulated from new deliveries. And I look at this acquisition almost a little bit as a contrarian view where everyone else is running now To buy the bees 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 we're getting it at a much better
And in regard to the cap rate, that's a year to stabilized tax adjusted cap rate.
Got it. And so what's sort of on a going in basis, where are you stepping in?
Right around 4. Great.
Thank you. It What we
get means about 70% occupancy, taking about 4 to 6 months to stabilize it. Great. Thanks, Farrell.
Your next question comes from
the line of Nick Joseph of Citi.
Hey there. This is Michael Griffin on for Just curious, your occupancy this quarter remains above the historical 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?
Well, we're definitely seeing better price on the new side because we have the value 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 Q3 of last year. And we will push rents where we can. We do have More lease expirations in the 2nd 3rd quarters by design.
So we're 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 occupancy in that 95% to 96% range.
Are you seeing any markets where you're able to push rents
more so than others? Yes, Atlanta has been a really strong market for us over the past couple of quarters and Memphis as you can see in the results.
Just one more for me. Obviously, you announced the ATM program last fall. Wondering what There was if any for deleveraging through a larger equity raise.
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 9.2x, so we're a 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.
Okay. That's it for me. Thanks for the time. Thank you.
Your next question comes from the line of John Kim of BMO Capital Markets.
Thank you. 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 relative to your initial projections just a couple of months ago?
Well, I mean, I don't know if it was a surprise when we crafted 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 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.
But there are still some unknowns. 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.
I know the data is less
than a month, but you had new leases accelerating growth and renewals sort of Slow down. How should we read into this? Are the new leases driven by market strength or renovation programs, there were a disproportionate amount of both leases coming that were signed or what should we take out of that?
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 expiration Schedule, again, it is skewed towards the 2nd Q3 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 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, I should say, or the tenant's 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, that's very powerful from a rent growth perspective.
And in regards to what I mentioned in terms of lease expirations, if you put it in perspective, we probably saw close to as many leases in April as we did in the Q1. So given the pandemic, we want to be very and the driver occupancy, we wanted to be very cognizant of the amount of leases that are rolling in this quarter.
On the JVs, I know you probably don't want to go too much into detail, but you quoted Unlevered IRRs of 20%. And I'm wondering if you could break that down between the current income component versus Fees or promotes and capital appreciation?
John, I don't have that in front of me, but I'll grab that and give you a call back with it.
Okay. But do you expect the yield or the income to be paid in cash or in equity?
Yes. And we think it's we'll be paying cash certainly. Obviously, the details, I'll come back to you with the specifics.
Okay. Appreciate it. Thank you.
Your next question comes from the line of Amanda Fleitz of Baird.
Thanks. Good morning, guys. Following up on your capital allocation and kind of the nice improvement in cost of equity you've seen, can you just provide an update on how you're Ranking your sources of capital today between disposition, incremental leverage and then additional equity issuances?
Yes, I mean, I think it's a good question. We continue
to look at our kind
of capital. We obviously we have retained earnings 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 environment, the high pricing As another good source with kind of equity costs being the lower ranking one.
Okay, that's helpful. 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 you're for disposition or at least what spread could you achieve on capital recycling between the buy and the sell?
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 markets that we're in.
Okay. And then last one for me. You focused recently on some of the newer construction acquisitions today, which I get given value add cap rates, but what levers are you looking to pull to drive value Underwriting those deals are 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?
Yes. I mean, I think it's a combination to what Scott said and that the Dallas deal, I think we can definitely leverage the communities that we have in that Submarket, same thing in Charlotte. It's within a 7 minute drive of our 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 is minimal lease up risk. So that's where we think most of it's going to be driven from.
Great. Thanks for the time.
And your next question comes from the line of John Massocca of Ladenburg Thalmann.
So given the kind of investments that are under contract are obviously kind of Class A new developments and New build is where the JV and kind of preferred investment program is going to focus. I mean, what is the runway you think left for kind of Value add projects within the portfolio today and maybe within the platform at least over kind of the intermediate term?
Again, we have markets that we haven't even started value add in, I'd point out Indianapolis and Oklahoma City. So I think there's still A decent amount of opportunity within the portfolio. We are still looking to acquire for that purpose. I mean, we've built 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 in the markets that we have these build out these teams and to try to add to that in addition to what we have in the existing portfolio. Okay.
And then specifically on the 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 cost of lumber appliances, etcetera, I guess how successful have you been in maybe offsetting that with kind of rental rate increases?
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 countertops are the main components of our renovation. I mean labor is the biggest thing right now. If you were going to ask me what's the challenge in
And I guess has that impacted kind of expected ROIs on But you need new redevelopments?
No, I mean we've created a pretty good machine. So we're actually seeing Your cost comes 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 renovated product. Okay.
That's it for me. Thank you very much.
Thanks.
And your next question comes from the line of Neil Marcon of
with Warren Securities.
Hey guys, thanks for taking a follow-up.
So just a question on,
I guess, valuation maybe for your stock and I guess the space Broadly, thinking about where cap rates are, thinking about where investor demand is, investor appetite, potentially hurdle rates or internal IRRs 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 market and your, I guess, sort of untapped Potential or that built in value from your still remaining value add opportunity or NOI creation?
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, has built an operating platform here that is very strong and is scalable. So when you put all that together, one wonders why there is a public company discount rather than private sector. But with cap rates where they are, our implied share price should be higher.
Yes, okay. The last one is just kind of going back to the JV, is that Something where you're going to call it, you're 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?
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 their CEOs.
Okay. Yes. All right. So it's I get you. All right.
I appreciate that. Thank you, guys.
Thank you.
There are no further questions at this time. And I'll turn the call back over to management.
Well, thank you all for joining us today. And we will speak to you again, Some of you at NAREIT, REIT Week and the rest in 3 months. Have a good day.
And this concludes today's conference. Thank you for participating. You may now disconnect at this time.