Good morning, ladies and gentlemen, and welcome to the Quarter 4 and Fiscal Year 2019 Independence Realty Trust Earnings Conference Call. And instructions will follow at that time. As a reminder, this conference call is being recorded. I would like to turn the conference over to your host, Ms. Anna Pientes.
You may begin.
Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust's 4th quarter and full year 2019 financial results. Channel. On the call with me today are Scott Schafer, our CEO Jim Sebra, our Chief Financial Officer and Farrell Ender, President of IRT. Today's call is being webcast on our website atirtliving.com.
There will be a replay of the call available via webcast on our Investor Relations website and telephonically, beginning at approximately 12 pm 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, realty. 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. Channels.
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 Schafer.
Thank you, Anna, and thank you all for joining us this morning. 2019 was a year of acceleration for IRT. Our organic growth initiatives and in particular our value add program were in full swing and delivered very strong results. With a dedicated team in place to manage renovation projects in each market, we were able to execute more seamlessly and manage the lease up process more proactively, building upon the lessons learned and the momentum gained during the 1st year of this initiative. Our organic growth was further underscored by the backdrop of a strong economy, which has supported household formation and growing wages, which in turn have facilitated rent increases within our communities.
As highlighted on our year end call for 2018, research from a leading apartment rental service and research company found that young adults are renting and renting longer and that trend remained unchanged throughout 2019. The demand for quality apartments and amenity rich communities within our markets has not subsided, underscored by the fact that NOI increased in all of our 18 markets in 20 We expect macro fundamentals to remain supportive as we move into 2020. Focusing briefly on our reported results, which Farrell and Jim will expand upon later on this call. Q4 and full year 2019 produced some of our highest same store metrics to date with NOI growth of 9.6% for the quarter and 7.7% for the year. I am pleased to report that we delivered on our goal share.
Diving a bit deeper into the value add programs. Since its inception, we have completed renovations in 2,715 units, achieving a weighted average return on investment of 18.5% on interior renovation costs. As of year end, we have a total of 23 projects in the pipeline or underway representing 7,136 units. On average, we are seeing an 18.3% rent premium on renovated units, which is up from 15.8% last year. Upon our capital recycling program, which involves continuously evaluating our markets and communities to ensure we scale in MSAs where we see long term growth and conversely reevaluate those markets that are difficult to scale or may not prove to be attractive long term investments.
During the year, we acquired 3 properties, 1 each in Atlanta, Raleigh and Tampa and sold 4 existing, exiting the Austin, Little Rock and Suburban Chicago markets. As we move into next year, we will continue to prudently evaluate the portfolio for attractive opportunities communities that no longer fit within our core criteria and reinvest in communities that allow us to expand our presence in key markets. Looking ahead, we are entering 2020 from a position of strength. Our organic growth initiatives have proven successful and we expect to be able to continue to produce above market returns. Specifically, we have a robust runway of value add opportunities highlighted by 4,400 units yet to be renovated and expect to complete between 500 to 700 units per quarter this year.
This is further supported by a strong macro environment that will drive continued rental demand and favorable economics. We're also excited about how technology will continue to shape the apartment landscape. This year, we plan to continue to develop and explore technology that will both improved the daily lives of our residents as well as drive further operating efficiencies at our communities. We've already been successful at developing proprietary technology in our value add renovation group and strategy and will continue to invest in technology in a meaningful but thoughtful way. Lastly, before turning the call to Farrell and Jim, I want to highlight the strides IRT is strategy.
We are taking to continue to build upon our
sustainability platform. We have formed a cross functional sustainability group, which is led by our Head Asset Manager, who has been a lead accredited professional since 2008 with a specialty in existing buildings. Additional 2020 initiatives will include and are excited to bring our employees and residents along the journey with us. And now I'd like to turn the call over to Farrell for a deep dive into our markets and activity during
the quarter. Farrell? Thanks, Scott, and good morning, everyone. In the Q4 and throughout 2019, we accelerated our value add program with the benefit of scale in key markets, With the exception of Orlando, where we own a Class A community that is adjacent to a new construction property in lease up. At this community, occupancy declined from 96.8% to 93.7 percent with revenue remaining flat due to 3.2% rental rate growth.
Looking at NOI growth by market, the Atlanta, Raleigh Durham, Louisville, Columbus, Indianapolis, Myrtle Beach, Wilmington and Charlotte markets all exceeded 10% growth for the quarter, leading the broader portfolio. All strong indicators of the continued demand for amenity rich middle market communities in our non gateway markets. Atlanta, Wilmington, Raleigh, Columbus and Louisville also continue to benefit from our value add initiatives. Turning now to our largest market, Atlanta. Same store average effective monthly rank grew by 7.3% for the quarter and and 7.9% for the full year compared to 2018.
Same store NOI grew by 11.8% for the quarter and 7.9% for the full year. Was also up 2.3% from Q4 2018 to 93.8%. What we are witnessing in our Atlanta portfolio is representative trends within the overall Atlanta market. The market has delivered the 4th best rent growth in the nation with most of this growth occurring in suburban garden style apartments. Shifting to Charlotte, which is growing organically without the aid of our value add projects.
Charlotte saw same store NOI growth of 11.6% for the quarter and 10.1% for the full year fueled by revenue growth of 7.2%. The South Boulevard submarket where our community is located is extremely desirable area to live as it provides a lower cost option within minutes to Uptown Charlotte. This submarket has experienced significant new supply over the past few years with nearly half the inventory now less than 4 years old. New construction has abated and inventory growth over the next 5 years is projected to be 3% annually. This slowdown in new construction has allowed us to average 96.3 percent occupancy over the quarter, while at the same time pushing rents 3.9%.
The South End submarket will also benefit from Loews recently announced construction of a 23 story technology center that would be completed in late 2021 and will bring 2,000 jobs to the area. Overall, portfolio average occupancy was 92.6% in Q4, 60 basis points higher compared to Q4 2018 and 93.2% for the full year, 10 basis points lower compared to 2018. Excluding the value add, same store portfolio average occupancy remains unchanged at 93.7% for the quarter and was 94.3% for the full year. Sequentially, from Q3 2019, occupancy declined 80 basis points due to the impact of the additional value add communities and the effect of seasonality on leasing volume. The short term effect on occupancy during the renovation process at our value add communities is more than offset by the powerful long term rental rate growth.
Total portfolio average rental rates increased 4.6% year over year driven by our value add properties. On a lease over lease basis for the same store portfolio during Q4, new lease rates increased 2.3% and renewals were up 4.4%, yielding a combined lease over lease rental rate increase of 3.3%. Through the 1st month of Q1 2020, lease over lease rental rates for the 2020 same store portfolio, new leases were up 3.7%, while renewed leases are up 3.2% with a blended lease over lease rental rate increase of 3.4%. We expect this to accelerate as we move into the Q2 and Q3 leasing season. Turning our attention to our capital recycling.
On October 1, we purchased a 3 18 unit community in Raleigh, our 6 community in the market, bringing our total unit count to 16.90 units, nearly 12.5% of our total NOI. We acquired the property based on an economic cap rate of 5%. This community was added to our Phase 3 of our value add pipeline and will have a 6% cap rate of stabilization. On December 17, 2019, we completed the sale of a 300 unit community in Austin, Texas for $56,000,000
recognizing a
gain on sale of $20,700,000 While Austin is a market with good long term real estate fundamentals, Given the strong competition in the market, we were limited in our ability to grow and build scale and took advantage of selling out of a market at an extremely attractive time. The sale price represented a 3.9% cap rate on our 2020 budget. Subsequent to the Q4, In February of this year, we closed on the purchase of a 251 Unit Community in the McKinney suburb of Dallas. The community was newly constructed and is adjacent to one of our existing properties built by the same developer. The property is currently 81% leased and expects to be fully occupied in June and will yield a 5.7% stabilized cap rate in year 2.
Our core focus remains to own and operate middle market suburban communities in non gateway markets, but we'll seize opportunities where appropriate. This acquisition was attractive to us owning and operating 2 adjacent communities provides synergies and reduces potential competition. I'll now turn the
call over to Jim. Thanks, Farrell, and
good morning, everyone. Today, I'd like to review earnings and operating performance for 2019, provide a brief review of our balance sheet and capital structure and end with a discussion of our 2020 guidance. Beginning with 2019, for the Q4 of 2019, net income allocable to common shareholders was $23,800,000 up from $14,600,000 in the Q4 of 2018. For the full year, income allocable to common shareholders was $45,900,000 ranges, up from $26,300,000 for the full year 2018. During Q4, core FFO grew to $18,600,000 trends were up 5% from $65,100,000 in 2018.
Core FFO per share was $0.76 for 20 19, we did cover our dividend this quarter on an AFFO basis. Turning to the same store portfolio for the Q4. NOI growth was 9.6 percent, driven primarily by a revenue growth of 6.3%. Occupancy in our same store communities averaged increased year over year with an average effective monthly rent of $10.82 this quarter, up 4.6% since last year. Almost entirely driven by the 5.1% increase in average rental rates.
On the property operating expense retail. Same store operating expenses grew 1.2% for Q4 2019 and 2.7% for the full year 2019. Controllable operating expenses increased 1.7% for the full year. Our non controllable operating expenses for real estate taxes and insurance increased 4.4% for the full year. As we highlighted earlier this year, the timing of real estate tax reassessment is difficult to predict.
For 2019, we were expecting tax reassessments and guided accordingly. As it turns out, the increase in real estate taxes for 2019 was lower and expected as several communities were either not reassessed or were reassessed at values lower than we were expecting. We are now factoring these tax reassessments to occur in 2020. More on 2020 guidance shortly. As guided and previously discussed, the year over year increase in G and A expenses on a quarterly and full year basis was driven by our strategic investment in our platform and management team during 2019 with a focus on people and technology.
As demonstrated by our strong NOI growth, these investments are already payoff enabling us to deliver growth for the portfolio. Turning towards the balance sheet, we closed 2019 with 57 real total gross assets of approximately $1,800,000,000 For Q4, normalized net debt to adjusted EBITDA was 8.9 times. At year end, our debt is 91% fixed rate or hedged through 2024 with no significant maturities until 2023. As of the end of the year, based on gross assets, 51% of our assets are unencumbered. That is an increase from 44% unencumbered since Q4 2018.
Looking ahead to 2020, our guidance for EPS We expect NOI at our same store communities to grow between 4% and 5.5% following a very strong 2019. Trends. This reflects expected revenue growth of between 4% 6%. Our projected growth in operating expenses of 4.25% and 6.25 percent is a result of our expectation that we will see further real estate tax reassessment. As you know, the timing and extent of which is difficult to predict, as well as increases in payroll expenses and some newly implemented incremental revenue programs.
To further explain, we roll out a number of incremental revenue programs across our communities where we are required to grow both revenue and operating expenses. These programs are primarily related to bulk cable arrangements and valet trash services. These programs are profitable for us, but has the impact of displaying a larger than actual increase in expenses because of the gross up. For 2020, the increased cost of these ancillary programs accounts for 35 basis points of our increase in total operating expenses or about 55 basis points of our increase in controllable operating expenses. Lastly, we provided guidance around transaction volume expectations.
We are projecting an acquisition volume between $50,000,000 100,000,000 sales for $51,200,000 The ranges are meant to be indicative of the potential magnitude as we currently see it. With that, I'll turn the call back over to Scott. Scott?
Thank you, Jim. In closing, I am very pleased with our performance and the progress made during the quarter to From a macro level, we believe 2020 will be another strong year for real estate fundamentals across our core markets and we'll look for opportunities to enhance our portfolio through capital initiatives. We thank you for joining us today and look forward to seeing many of you at the Citi Conference in Florida in a few weeks. Operator, I would now like to open the call for questions.
Your first question comes from the line of Drew Daven from Baird. You may ask your question.
Hey, good morning. Good morning, Drew. Question on capital recycling guidance. Obviously, the low end of the acquisition range already incorporates the Craig Ranch or The McKinney acquisition. I guess my question is what are the odds of achieving the high end of the disposition guidance if Craig Ranch turns out to be the only acquisition made this year?
Obviously, understanding that it's early in the year and this is just kind of guidance. Where are the odds hitting the high end of disposition High end of the disposition range.
Well, the basis of the recycling program Drew is to match the sales with the purchases. So If we're only going to purchase the 1 Dallas property for the year, then it's unlikely that we would be disposing of $100,000,000 of assets more likely would be disposing for somewhere in the $50,000,000 range, so that we're matched on the buy and the sell.
Okay. And you mentioned that these are most likely be kind of non core underperforming properties. Are you willing to talk about what markets Maybe in and kind of how pricing has trended in those markets relative to maybe a year ago, a couple of years ago?
Well, I'll answer the second part of that question first, which is pricing has increased in all markets Across the board, whether they're core for us or not or core for someone else or not. It's just as we all know, cap rates have continued to compress everywhere they might be underperforming, but it's markets as well that we may not have the ability to grow in. For example, the Austin market. Austin is a great market. It's just that with our cost of capital, we could not acquire and acquire accretively.
So with one property, we decided it was best to just dispose of it in this low cap rate environment. So it will be both markets and we haven't identified them at this point, but it will be both markets where we see the capital being able to be better invested for future growth that we will then get out of those other markets, or where we have a property where for any number of reasons, we're not able to scale in the market.
Makes sense. And then just a couple of balance sheet questions for Jim. I see there's $71,000,000 approximately of secured debt maturities in 2021. Can you talk about what rate those are at and whether anything becomes pre payable this year And whether there's any assumptions made in guidance about that?
Yes. Those the average interest rate for those Maturities is about 3.8%, 3.9%. There is some that become prepayable, but it's in the $20,000,000 to $30,000,000 range. We did factor in some kind of expectations of refinancing some of those that are prepayable in guidance for purposes of the end of the year, But the effect is fairly insignificant.
Okay. And I guess a related question, just on leverage. I guess As implied by the 2020 guidance expectations, where do you see your net debt to EBITDA ratio by year end?
Well, it came down about a half a turn in 2019, and we would expect it to have the same effect in 2020.
Okay, great. That's all for me. Thank you. Thanks, Richard.
Your next question comes from the line of Austin Wurschmidt from KeyBanc Capital. You may ask your question.
Hi, good morning. Just wanted to touch on same store revenue guidance, which implies Deceleration versus the 4Q growth rate you achieved, given sort of the pickup in unit renovations and the value add program, the earn in from last year's renovation work, I guess can you give us a sense what you're assuming for lease rate growth for non renovated units as well as occupancy for 2020?
Austin, this is Jim. For Occupancy for 2020 for the non value add communities, we've pretty much held that kind of flat in that mid-ninety 4 percent range. For rent growth, we've assumed depending on new renewal about a blended 3% to 3.5% rental rate growth.
Appreciate the detail there. And then with the acquisition you made in Dallas earlier this year, a bit of a different ilk Or not necessarily the Class B product that you've been acquiring in the last couple of years. So I'm curious how we should think about the composition of future acquisitions between Class
We're still focused on acquiring and operating a Class B Predominantly, excuse me, Class B portfolio. This Dallas acquisition for us was just an opportunity in that it is directly adjacent to an existing community that we own built by the same builder actually Phase 3 of Realty. And we felt that it was best for us to acquire it notwithstanding the fact that it's new construction, just because we'll get realty. Great synergies out of operating 2 properties together, but also because it will reduce as Farrell mentioned, it will reduce the competition and we'd rather not have someone else own brand new property across the street from us. So that's why, but we are still focused to be an owner and operator of predominantly B Class assets.
And what do you see
in terms of pricing differential between value add assets and the Class A assets that are in lease up today?
Yes, Austin, it's Farrell. I mean, we've seen it Shrink considerably, as you can see by the cap rate that was represented on our Austin deal. We have no idea obviously what the seller With underwriting in their value add, but we're definitely seeing the compression between the Class A and Class B cab rates Across all
markets. Got it. Thank you.
Austin, let me just address one other comment that was at the beginning of your question regarding the deceleration, last year we guided 4% to 6% revenue growth At the beginning of the year and then we increased it later in the year and ended up I think at 5.7%. This year we're guiding 4.6% again at this time. It's early in the year. We want to be prudent and just make sure that we're delivering and executing on the value add, But didn't want to get too far ahead of ourselves relative to guidance.
I appreciate the comment and the level of potential conservatism in there as it is early
in the year. So thank you.
Thank you.
Your next question comes from the line of John Guinee of Stifel. You may ask your question.
Great. Thank you. Just one just curiosity question, looks like you paid about $200,000 a unit Or Dallas, Texas?
204,000 units.
Yes, 204,000 units. Yes, what's it okay. I've got the answer. Hey, Scott, you guys are trading at a 4.8 implied cap, dollars 15.
So it looks to
us like a 4.8 implied cap. People obviously like the strategy and you're delivering stabilized Acquisitions at a 5.5 to a 6. Why not turbocharge this investment strategy as opposed to doing $50,000,000 or $100,000,000 a year?
Well, it's 1, assets are they're in high demand today. Again, we've been patient And I've stated before, I don't want to grow just for the sake of growth. I want to do it when we can do it accretively and where we're building out a portfolio that makes sense For the long term. I hear you. But at the same time, we were laser focused, as we mentioned before, of covering the dividend at the end of last year and continue to have it covered this year and to grow into a more normalized payout ratio.
So we're going to opportunistically acquire assets that make sense for us, but only do it when we can do it accretively and at the same time have to continue to correct the leverage ratio and bring that down.
And then the next question is CBRE, who seems to be pretty good at this, just changed their expected delivery number in 2020 From about 270,000 units to about 340,000 units, a huge uptick. Where do you see new product getting built and what are they building? Are they building Still building a surface park at 180,000 a unit or in your markets are they building Texas Donuts or podiums at a much higher number.
It's mostly obviously the rents you need to build Have to be pretty significant now especially with the cost of labor. So we're seeing most of it in urban centers. I mean, don't get me wrong, there's still some suburban sites like the one that we bought. But in Atlanta, it's mostly Midtown Buckhead where you can achieve the rents you need to justify the cost
Your next question comes from the line of Nick Joseph from Citi. You may ask your question.
Hey, this is Michael Griffin on for Nick. Just curious, you mentioned the valet trash earlier. What other ancillary revenue opportunities, if any, still exist and the portfolio today?
Yes, we're always looking at options. As Scott mentioned, we're exploring smart home technology, which a lot of people have been talking about. We're launching and ability for our residents to report their rent payments to create better credit. So we're constantly looking for avenues to generate additional revenue.
Thanks. And I noticed in your sup here, you have 3 market or sorry, 6 markets where you have one asset. Does it make sense in any of those to sell in those markets? And would you look to recycle it into current markets within your portfolio? Or are there any new markets that might be attractive?
Lots to digest there. So we're always looking at the portfolio and as Scott uses the word prune where we think that The specific markets may not have the long term fundamentals we look at or we need. And we also look to add like Huntsville is a market where we're actively looking to add because of the population of job growth And the muted supply is generating really, really good fundamentals. Right now, we're really focused on building out the markets that we're in. In the future, we'll probably we will look to expand into additional markets, but right now we're really focused on the markets that we're in.
But at least
let me add to that. For example, Orlando, we have one asset Orlando is a very attractive market, but we have 4 assets in Tampa, which is very, very close. So we can really run them almost as a region. And it's the same thing with Charlotte where we have one asset, but we have many other assets in and around North Carolina that again make that more of a region and not so much of a one off market.
Question comes from the line of Neil Molchan from Capital One Securities. You may ask your question.
Hey, guys. Good morning. Just wanted to dive in a little bit more to the operating expenses. Do you bake in any successful appeals in real estate taxing or taxes during the year?
Yes. So this is Jim. Thanks for the question. We do get obviously we do have tax consultants that help us kind of look at tax assessments and what's going to happen in 2020. We do look at the ability to appeal and the ability to be successful upon appeal and we do factor that into guidance.
Okay, great. Just wondering what's the current cap rate or NOI yield on that on the McKinney lease up digit? Imagine it'd be dilutive near term, right?
Not quite, it's probably breakeven. I think it's a 5.1 Currently. Okay.
Awesome. And then last for me would be how you Think about, I guess, revenue management from the leasing angle. What do you think your stabilized ditch? The occupancy would be, just for example, the non value add portfolio, can you get To 95, 96 like it seems like where the rest of the REIT peers are going. Are you still trying to optimize Lease expirations, any color or insight into how you're thinking about that would be great.
Yes. To answer your question, yes. We're always looking to optimize revenue through Both occupancy and rent growth. So and that's the benefit of the LRO process that we have in place. Our non value add portfolio for last year was 94 Mid-ninety four percent range of occupancy for the year.
I've always been a believer of 95% being full occupancy. You'll hear other people say 96%. But we've also been pushing rents a healthy amount. So the fact that we were at 94.5, I attribute that to the fact that we have been pushing rents so much. But I think what it does is it gives us some comfort that there's room in the occupancy to grow going forward, especially as a number of these Phase 1 value add property renovations are completed, We'll be able to bring them back up to a more normalized 95%, give or take occupancy.
1 on your telephone keypad. Your next question comes from the line of John Massocca from Ladenburg Thalmann. You may ask the question.
Good morning.
Good morning, John. Good morning. Hi, John.
So specifically on kind of the real estate tax, you mentioned the reassessments, they were kind of lower than what you were kind of guiding to and if I drove 4Q number, but what were the specific markets where you kind of saw better than expected tax outcomes?
Realty? Really, the biggest one was just in Ohio. We continue to just be pragmatic and be thoughtful about it, but that was the one that had Lower than expected tax increase.
Okay. So just really specifically that one market?
That was the biggest one off
the top of my head. I mean,
I can give you further details off the call.
And then as we kind of think about the redevelopment and renovation kind of pipeline, And potentially maybe I know it's we're still very early days on Phase 3, so this is a little unfair. But as we go to Phase 4 maybe in your kind of thought process, I mean is that primarily going to be stuff that you need to acquire to kind of create that Phase 4 pipeline? I noticed that some of the additions to Phase 3 were recent acquisitions. Or is there stuff within the existing portfolio that makes sense? And I guess what drives Timing of waiting on that stuff within the existing portfolio in terms of doing the redevelopments.
We think there are still opportunities Within the existing portfolio. So if there is a Phase 4, much of it will come from properties that we already own. As far as some of the Phase 3 being newly acquired, it just so happened that we acquired an asset that was Perfect for the renovation program in a market where we already had a renovation team in place. So it just made sense to begin those renovations sooner rather than later It's part of the Phase 3 process. And one of the things that we're very cognizant of is The pressure that this renovation process puts on occupancy in the near term.
So that's why we're doing the Phase 1, Phase Phase 3 and not just rolling it all out at the same time, because we're trying to manage the portfolio and continue to grow NOI overall and core FFO and bring down leverage and do all of the things that are beneficial in the long term.
And just to add, John, as Scott mentioned, this is more market specific. So we build out teams and we We're self performing on this work. So if you'll notice, we've built out teams in Atlanta and Tampa and Louisville. So we still have Indianapolis, we still have Dallas, Properties in our portfolio that we can expand into new markets to do the value add.
How transferable is that kind of expertise from market Mark, you guys obviously pick up a lot of kind of intellectual capital as you do these projects. But when you think about building these teams, I mean, is any of that transferable if you were to say do a whole program in Indianapolis?
It's very transferable. I mean, obviously, you need the people at the property level, but the process is The same in Indy as it is in Columbus and it's really just the people on the ground and the vendors that are different.
Okay. That's it for me. Thank you very much.
Thanks, John.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.