Good afternoon, ladies and gentlemen, and welcome to the Q1 2020 Independence Realty Trust, Inc. earnings 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. If you should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Anna Pienkos. Thank you.
Thank you. Good morning, everyone. Thank you for joining us to review Independence Realty Trust first quarter 2020 financial results. On the call with me today is Scott Schaeffer, our CEO, Jim Sebra, our Chief Financial Officer, and Farrell Ender, President of IRT. Today's call is being webcast on our website at 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 P.M. eastern 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 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, Anna, and thank you all for joining us this morning. I know this is a difficult time for many people, so I hope you and your families are all staying safe and healthy. We at IRT have been focused on protecting the well-being of our employees and residents during these unprecedented times. I would like to thank our team who have led our efforts in keeping our communities safe and clean and maintaining full attention to our resident and property needs, all while remaining committed to creating and delivering value to our stakeholders. We understand that this pandemic has had a significant impact on our residents, and we remain committed to working with those that are directly impacted. We have provided flexibility to those residents demonstrating financial hardship with their near-term monthly rental requirements. This includes creating payment plans, waiving late fees, and halting evictions.
The IR team is taking necessary steps to protect our business and maintain significant liquidity. This includes continuing to tightly manage our cost structure and pausing a portion of our value add program for the time being. These decisions will enable us to be well-positioned to manage the impact of this crisis and have the financial flexibility to act decisively as we plan for an eventual market recovery. Touching briefly on our first quarter, we delivered favorable performance across the portfolio, including a year-over-year same-store NOI growth of 7%, with an NOI margin of 61.5%, 130 basis point improvement year-over-year. Core funds from operations per share was $0.19, we once again covered our dividends on an AFFO basis.
In addition, our average occupancy at our 38 non-value add properties was a strong 94%, and the same store portfolio overall was 92.7% when including the value add communities at quarter end, supporting our focus on retention and consistency during these uncertain times. As we look at the second quarter, there remains uncertainty regarding the short-term effects of our country's response to this pandemic. In April, we collected 98% of rents billed when including the 139 payment plans we entered into with households in need of assistance. In addition, there are over 150 payment plan requests approved for May or in the process of approval. Through May 6th, we have collected approximately 90% of May rent receipts, which is consistent with our collections at this point in April.
We will continue to support our residents as they seek measures to keep up with their payments, and we will closely manage our operational costs in order to mitigate the impact on NOI in the coming months. While it's hard to predict the length and depth of this crisis, we have been monitoring discussions regarding the potential reopening of states in which we have properties and plan to reopen our community offices and amenities in line with those guidelines. Based on current discussions, all of our states have or are in the process of easing restrictions in May. This should prove to be beneficial to our residents looking to resume activities and return to work, but we are well aware that strict safety measures will need to be adhered to, and we will remain vigilant on protecting our employees' and residents' health and well-being.
Despite initial signs that a number of our markets are beginning to open, we must balance our cautious optimism with the reality that the trajectory of the economic recovery may be muted for a period of time. We will manage the portfolio, balancing appropriate rent growth strategies with the need to preserve occupancy. Further, our board has evaluated our dividend policy to ensure that we are well-positioned to navigate near-term uncertainty and have the financial flexibility to fund our long-term growth strategy. Given our track record of delivering organic rent growth and execution of our value add initiative, both of which supported outsized NOI growth, we were well-positioned to achieve a normalized dividend payout of 70%-75% over time.
With current market uncertainty, along with our decision to pause a portion of our value add program, we believe it is prudent at this time to adjust our quarterly dividend from $0.18 to $0.12 per share beginning in the second quarter of 2020. This equates to a payout ratio that is now more in line with our peers. The right size dividend increases our financial flexibility and will allow us to accelerate our de-leveraging efforts as we will be retaining approximately $23 million annually. This decision will provide IRT with an even stronger foundation for continued growth and expansion when normal market conditions return. We remain confident in our resilient portfolio and sustainable business model. Simply stated, our confidence stems from four factors. First, IRT has built the right team and portfolio of assets across strong non-gateway markets to navigate this unprecedented challenge.
Prior to the COVID-19 outbreak, these markets demonstrated strong employment trends and favorable apartment demand, as well as limited new construction and attractive demographics. We expect to benefit from these factors again and believe these markets should be generally less impacted than the major cities in the near term and recover sooner than most. Second, we have a clear investment strategy focused on middle-market, multi-family communities, which offer affordable, high-quality product. This segment attracts and retains a wide range of residents who recognize good value with attractive amenities, and we continue to see strong apartment demand in this highly defensive market segment that tends to benefit from when homeownership rates decline. Third, we have flexible investment opportunities. As we have discussed last quarter, 2019 was a year of acceleration for IRT with respect to our growth initiatives, in particular our Value Add and Capital Recycling programs.
We have decided to slow these efforts until we have greater visibility on market conditions. We have reduced activity behind our value add program but still realized an 18.6% weighted average return on investment on interior renovations in the first quarter. Similarly, with our capital recycling program, we have put our efforts on hold, but will continue to evaluate markets where we see long-term growth and reevaluate those that may not be attractive long-term investments. Fourth, IRT has a strong balance sheet. We have ample liquidity and no significant debt maturities until 2023. Our total liquidity position is approximately $258 million, which includes unrestricted cash as well as additional capacity through our unsecured line of credit and proceeds from our forward equity offering earlier this year, which raised about $152 million in net proceeds.
We will be prudent with the proceeds, using the funds to strengthen our balance sheet in the near term while remaining flexible until there is a clear path towards an economic recovery. As we look towards return to normalcy and for our economy to fully recover, we are well-positioned to manage through these challenging conditions, supported by our proven strategy and strong track record. Effective initiatives like our value add and capital recycling programs are ready to be fully reenacted at the appropriate time. Today, now more than ever, our IRT team remains focused on delivering our commitments and responsibilities to our colleagues, our residents, communities, and our shareholders. With that, I'd like to turn the call over to Farrell for an operational update. Farrell?
Thanks, Scott, and good morning, everyone. I want to echo Scott's comments and thank our entire operations team for their tireless efforts to protect the safety and well-being of our residents, including practicing social distancing, closing common areas, repetitive deep cleaning of commonly used surfaces, and working with those residents impacted by this crisis. The team has remained available and responsive to prospective and current residents to ensure the continuity of our business through this challenging time. I also want to take time to thank all of our teams that support our operations, such as marketing, IT, asset management, and accounting, who have all seamlessly worked together throughout this pandemic. Despite these circumstances, in the first quarter of 2020, our portfolio continued to see strong NOI growth driven by increases in rental rates.
In the first quarter, same store NOI grew 7%, increasing in all but two of our 18 markets. Eight markets saw NOI growth of over 10%, with four markets, including Indianapolis, Charlotte, Chattanooga, and Baton Rouge all seeing NOI growth of 15% or higher. Occupancy remains a key focus through this period, and the resilience of our affordable and well-maintained middle-market communities is demonstrated by our stable average occupancy through the quarter. Overall, same store portfolio average occupancy was 92.7% in Q1, 10 basis points lower compared to Q1 2019. Excluding the value add, same store average occupancy increased 30 basis points to 94% for the quarter. As of the end of April, our total portfolio occupancy rate was 92.7%. On a lease-over-lease basis for the same store portfolio during Q1, new lease rates increased 4.6% and renewals were up 3.7%, yielding a combined lease-over-lease rental rate increase of 4.1%.
Through the first month of Q2 2020, lease-over-lease rental rates for our same store portfolio, new leases are up 2.6%, while renewed leases are up 2.4% with a blended lease-over-lease rental rate increase of 2.5%. We anticipate Q2 rent growth to be lower as we reduced increases on proposed renewals for expiring leases throughout the quarter. This is in an effort to maintain occupancy during a period we knew would experience less traffic and leasing volume than normal. Given the restrictions in place, we have seen a decline in leasing traffic in April, which is typically the starting point of our leasing season.
The pandemic accelerated our implementation of virtual tours as we rapidly uploaded videos of different unit types on our community websites and trained our staff on best practices for using Zoom and FaceTime to give live virtual tours. Since April 3rd, when we closed our offices to the public, we provided 2,087 tours versus 3,410 a year ago. Converted at a much higher rate, 42% versus 30%, yielding 867 applications versus 1,011 applications last year. Our overall traffic began declining during the second half of March, hitting a low point in the first two weeks of April. Traffic in the last two weeks of April has rebounded by 34%. We expect leasing traffic to improve as restrictions are lifted. Turning our attention to our value add program, where across phases I, II, and III, we've completed 3,025 units as of the end of the first quarter.
In the second quarter, we've taken a more selective approach to our value add program as we balance supply and demand for renovated units. As detailed in our supplement, we have placed on hold or delayed the start of renovations at 11 of our value add communities as we evaluate the market conditions amid the COVID-19 pandemic. We are achieving a 19.7% ROI across the remaining 12 properties and are still seeing solid demand for the upgraded units. Based on what we know today, we anticipate completing 1,100 units in 2020, or about 50% of what we had previously estimated. We are now focused on preserving capital, but when appropriate, we will direct additional efforts towards value add opportunities where there's resident demand. Our recycling activities remain on hold until the recovery is underway.
Consistent with our value add strategy, we will continue to assess the market and be increasingly selective in opportunities we pursue. I'd now like to turn the call over to Jim.
Thanks, Farrell. Good morning, everyone. Today, I'd like to review our earnings and operating performance for the first quarter of 2020, provide additional detail on our balance sheet and capital structure, as well as our liquidity. Beginning with our Q1 2020 performance update, IRT recorded a net loss allocable to common shareholders of $372,000, down from net income of $2.5 million in the first quarter of 2019. During Q1, core FFO grew to $17.6 million, up 10% from $16 million in Q1 2019. Core FFO per share during Q1 was $0.19, up from $0.18 in Q1 2019. Turning to our same-store property operating results, NOI growth was 7% in the quarter, driven primarily by revenue growth of 4.7%. Occupancy in our same-store communities averaged 92.7% during Q1, just 10 basis points lower than a year ago.
Rental rates for these properties increased year-over-year, with an average effective monthly rent of $1,089 this quarter, up 4.9% since Q1 last year. While this includes the value add communities, we did see solid rental rate growth at our non-value add same-store communities, with rental rates in Q1 increasing 3.6% over the prior year. On the property operating expense side, same-store operating expenses increased just 1.3% in Q1 2020. While aspects of the future are still unknown, we are continuing to actively manage expenses and expect that our total operating expenses for 2020 will be below our previous guidance, as we expect to see lower payroll costs because of less overtime, as well as the ability to use our on-site teams to perform property maintenance rather than hiring outside contractors.
Our general and administrative expenses increased $2.3 million in the quarter, primarily due to $1.7 million in stock-based compensation expenses associated with stock awards granted to retirement eligible employees. Under GAAP, we're required to record the full expense at the time of the grant rather than over the associated vesting period. This will not be a returning expense for the remainder of 2020. Turning to our balance sheet, we have a strong liquidity position. As of March 31st, we had $57 million of unrestricted cash, approximately $100 million of additional capacity through our unsecured credit facility, and $102 million of remaining proceeds from our forward equity raise. As you may recall, on February 24th, we closed a forward equity offering of 10.35 million shares of common stock at a public offering price of $15.30 per share.
At the end of the first quarter, we settled $50 million of our forward sale agreement by issuing 3.4 million shares. After the settlement, we had approximately 6.9 million shares remaining to be issued under the forward sale agreement for gross proceeds of $102 million. Undoubtedly, many are interested to know about our plans for the capital raise under this forward equity offering. The original intent was to fund the acquisition of a three-property portfolio in Atlanta, but given the COVID-19 pandemic and intervening market stress, we let the letter of intent expire without penalty to us. At this point, we are maintaining flexibility with respect to the remaining proceeds as we manage through the current impact while preparing for the recovery. We closed the quarter carrying just over $1 billion of debt, with no significant debt maturities until 2023.
We do have $76 million of debt maturities in 2021. Have enough liquidity to repay or refinance that debt should the capital markets continue to be restrained. Our normalized net debt to adjusted EBITDA was 9x at the end of the quarter. With regards to our debt covenants, we are in compliance with our debt covenants. Have added an additional page to our supplement detailing our financial covenants. Regarding our capital allocation program, we have suspended all non-essential capital improvement projects. Remain focused on properly serving our existing communities. In the first quarter, our recurring capital expenditures for the total portfolio were $7.3 million, or $84 per unit. With regards to our value add program, as Farrell mentioned previously, we've pushed the pause button on several value add projects at this time.
At the beginning of 2020, we had budgeted $21.2 million towards our full value add initiative this year. We now expect to invest $11 million this year, a savings of $10.2 million in 2020. We will continue to monitor traffic and leasing flow at these on-hold value add projects and may restart them later this year if traffic and leasing flows return. Given the uncertainty around the length and depth of the coronavirus and its impact on the economy and our residents, we continue to take the prudent step of suspending guidance while monitoring the situation closely. With that said, let me summarize a few key assumptions that have implications for Q2 and for the full year. First, a moderating of rent growth in Q2 as we work to preserve near-term occupancy and provide payment flexibility to our residents experiencing financial hardship.
Continued cost migration efforts, including lower property operating expenses such as on-site payroll, as well as a reduction in G&A expenses as we adapt to the new operating environment. Pausing a portion of our value add initiatives. No assumed capital recycling activity for the second quarter. A lower interest rate environment and therefore lower interest expense. Finally, the retention of capital from the $0.12 quarterly dividend will result in accelerated de-leveraging of roughly one quarter turn annually. Looking ahead, the IRT team remains focused on carefully managing our business through these turbulent times. Our financial flexibility will allow us to withstand this crisis as we plan to emerge as a stronger and more efficient operator in the multifamily real estate sector in the better days ahead.
Our strategy will include, first, actively engaging with our residents to meet their housing and payment needs while providing a safe place to live. Second, tightly managing our costs and reducing expenses that are not required in the current operating environment. Third, carefully reevaluating our strategic initiatives during these uncertain times and as we prepare for the gradual market and economic recovery. With that said, I'll turn the call back over to Scott. Scott?
Thank you, Jim. In closing, I'd like to thank again our team for their dedication and hard work. During times like this, we are incredibly grateful for your support as we look to care for our residents and communities, as well as strengthen our company. We thank you for joining us today. We hope that you all stay well and look forward to speaking with you again at Nareit's Virtual REITweek at the beginning of June. Operator, at this time, I'd like to open the call for questions.
Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Austin Wurschmidt with Key Banc.
Hi, good morning, everyone.
Morning.
Morning.
You guys mentioned holding occupancy has been a focus for you, and you certainly managed to hold it from the first quarter into April. Not getting that seasonal lift that you've historically achieved, but with the pace of value add renovations slowing, you mentioned a pickup in leasing demand in late April. Perhaps you've seen some higher retention. Do you think occupancy could increase a bit into May and June, or has demand fallen off to the extent you think more stable is a more likely outcome?
Austin, we believe it's going to improve. Based on just the retention and the leasing traffic that's really starting to pick up. Assuming that everything starts opening up, we really expect to see a lot more traffic.
Thanks. Appreciate the thought there. You talked a little bit about the balance sheet. Curious how you're thinking about settling the remaining forward equity over time and using it to decrease leverage or revisiting either the Atlanta portfolio that you previously had teed up or some other acquisition down the line?
Yeah. Good question. I tried to kind of head that off in my prepared remarks. Right now we're remaining flexibility. We're not necessarily giving guidance on one way or the other. It just depends on how the economic recovery comes back. I think if you were to kind of look at what the impact would be if we were to use it to de-leverage, it would be roughly a full quarter turn improvement in our leverage, such that if you were to kind of fast-forward to the end of 2020, we should be sub 8 x net debt to EBITDA, a full turn lower, so sub 8 x, so probably in that 7.8, 7.9 net debt to EBITDA. Again, I just want to echo we're continuing to maintain flexibility during this period of time.
Yeah. With that sort of quarter turn that you referenced, what type of operating assumptions did you assume as it relates to NOI to get to that type of assumption?
I think for the rest of the year, we haven't necessarily given guidance on kind of NOI. I think if you were to look at kind of just retaining that capital and reducing leverage, it's roughly a one-quarter turn kind of reduction in the overall leverage.
To be clear, Austin, Jim is speaking about the $23 million from the reduced dividend payout ratio is a shorter term here.
Yes. Understood. I guess I'm just curious if that factors in any type of rollover in NOI to the extent that we do see things continue to soften into the latter part of the year.
No, I think that's just commenting on just current base case today.
Got it.
where we are. No future assumption around where it might.
Got it. No, that's fair. All right. Thanks for the time.
Your next question comes from the line of Nick Joseph with Citi.
Hey, this is Michael Griffin on for Nick. I'm curious, are you seeing any difference in collections across your markets or across price points within the portfolio?
We're seeing the markets that have the highest exposure to travel and leisure. Wilmington, Myrtle Beach, Orlando, where we have a community there that's across the street from Universal and next to The Mall at Millenia, which is arguably the best mall. You have exposure to both tourism and retail sales. That's what we're currently seeing. We're also seeing some pressure from some of our Class A communities where there's new supply, and that new supply doesn't have the luxury of an existing tenant base. We're seeing some concessions increase. That's where the strain is across the portfolio.
Got you. Then just on ancillary revenues, you mentioned valet, trash in the past. How do you see the impact of those revenue streams going forward?
Listen, the residents, it's competitive across the market. What we're offering is services that are similar to what other properties are offering that we compete with. If they start reducing those costs for pet rent or valet, trash, or other amenities, then we have to look carefully and see how we compete directly with them. So far, we're not really deep enough into that. We haven't had any pushback. This has only been a six-week process. We think it's coming back relatively quickly based on, again, the renewal rates we see and the traffic that we're starting to see over the past couple of weeks. We're not seeing really any pushback on those fees.
Okay. That's it for me. Thanks for the time.
Thanks, Michael.
Your next question comes from the line of John Guinee from Stifel.
Oh, great. Thank you, guys. Nice quarter.
Hi, John.
Question, probably Scott, if you were at the NMHC conference back in January, which seems now like just light years ago, most participants thought that you were going to see some downward pressure on cap rates given the strength of the multifamily market. Now you've had the long end of the interest rate curve drop at least 100 basis points. Any thoughts for how cap rates will settle out when the investment sale market opens up, assuming interest rates stay where they are now?
John, I think if you polled those people, the same people today, they would tell you that clearly, there have not been a lot of transactions. There's not many data points to look to see what's happening at the moment regarding cap rates. Over the foreseeable, the near term after the recovery, the cap rates will be either the same or lower than where they were ahead of the crisis. I think that is largely attributed to the fact, to your point, that interest rates are lower. It is one of the most resilient property types. Again, the most predictable type of property to invest in. It hedges against inflation. It's where people are going to want to put their money.
When you put that together with lower interest rates, I think the conventional wisdom is the cap rates will be where they are or lower, where they were ahead of the crisis or lower when this is all over.
The second question is, let's assume that 2020 property level NOI is flat to down from 2019. Is that going to have a material effect on property taxes in various municipalities?
I would hope it does. As we all know, these municipalities are all going to be hungry for cash. I don't know. It certainly should, but I wouldn't bank on it.
Great. Thank you. Nice job.
Thanks, John.
Thanks, guys.
Your next question comes from the line of Neil Malkin from Capital One Securities.
Hey, guys. Good morning.
Good morning, Neil.
I was wondering if you guys could give some color on what the new leases the rent change like for like have been in April, and then what they are kind of earlier in May, and the difference between the renovated and non-renovated?
Neil, I don't have the April and May just for purposes of Q2 for the whole same store. Farrell kind of went through that. When you look at the non-value add same store properties, new leases are up 1%.
Renewal leases are up 2%, blending to an increase of about 1.9%. For the value add properties in Q2, new leases are up 8.1%. Renewal leases are up 3.6%, blending to an increase of 4.8%.
Okay. That's thus far, you're saying?
That's thus far for new leases that have started and renewals that have commenced.
Okay, thanks. Just, I guess, more of an accounting or modeling question. How are you going to account for the delinquencies? Are you going to basically assume you're going to get paid and straight line that and then have some sort of offset for AFFO? How is that going to work in terms of what to expect for the impact of FFO this year?
Yeah, it's a good question. There's no decision yet. Thankfully, we have some time to evaluate that and talk with our auditors and accountants around the proper accounting for that going forward. We do have, obviously, a fair amount of payment plans where folks have associated themselves to pay us back over a period of time. You have the remaining delinquency. I think the bigger question will be around that remaining delinquency. Certainly, more color on that when we get to the second quarter earnings call.
All right, great. Last one for me. I know it may be early, but any sense for the possibility or opportunities seen in some of your markets, particularly your less institutional markets, maybe some value-add players that's been a very hot topic over the last maybe 12-24 months, who may have got in at high leverage and this environment doesn't really allow you to get those bumps. Do you think you will see opportunities to consolidate some of those players in your markets?
We think there will be. It's still pretty early in the process. As Scott mentioned, there's very little transactions out there. What's closing right now are generally 1031 exchanges that need to close, and there's very little new product coming out. We think there will be some distress, and that's why we're being opportunistic with our liquidity.
Thank you.
I am showing no further questions at this time. I would now like to turn the conference back to Scott Schaeffer.
Thank you again for joining us, and please, everyone, stay safe and healthy as we move through this crisis.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.