Thank you for standing by, welcome to the Q3 2019 Independence Realty Trust Earnings Conference Call. At this time, participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Lauren Scott, Investor Relations Representative. Please go ahead.
Great. Thank you. Good morning, everyone. Thank you for joining us to review Independence Realty Trust's third quarter 2019 financial results. On the call with me today are Scott Schaeffer, our CEO, Jim Sebra, our Chief Financial Officer, and Farrell, 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 at approximately 12:00 P.M. Eastern Time 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 and other statistical information and a reconciliation of non-GAAP financial measures to the most direct comparable GAAP financial measures 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, Lauren, and thank you all for joining us this morning. Q3 marked another quarter of steady progress within our value-add initiative, which helped fuel strong revenue and NOI growth. Consistent demand for housing in our core markets, coupled with our ability to lease up newly renovated units, generated same store NOI growth of 8.1% for the quarter and 7% year-to-date. With phases one, two, and three underway, we have strong momentum and a sound process in place to execute our value-add projects. As of quarter end, 2,364 units have been completed, and 93% of those units have been leased. We are seeing an 18.2% average rental rate increase and nearly 16% return on total investment. We are very pleased with the progress to date.
At current cap rates, we have created $3 of value for every dollar invested. We have only just scratched the surface. We have just under 4,000 units earmarked for renovations that have yet to be completed, and six of the eight properties within our phase three have yet to commence, meaning there is a substantial amount of opportunity ahead within the current program. We believe there are more opportunities in our portfolio beyond phase three. Our decision to invest in this value-add initiative was strategic and intended to create not only short-term rental rate and NOI increases, but also to build a foundation for long-term sustainable growth as we create communities that offer residents an upgraded living experience at a lower price point. We also continue to recycle capital to both improve the quality of our assets and create operating efficiencies in our markets.
We continue to review all communities in our portfolio with the goal of building scale and operating efficiencies in attractive growth markets while reducing our exposure in markets with limited scale or lower growth. As discussed with you on our Q2 call in mid-July, we closed on the sale of our two properties in Little Rock, Arkansas, completing our 2018 capital recycling plan. Our community currently held for sale in Austin, Texas, is under contract with settlement expected in mid-December. As Farrell will discuss in more detail, in July, we acquired a community in Tampa, Florida, and in October, we acquired an additional community in Raleigh, North Carolina, increasing our exposure to these dynamic markets. I want to reiterate that our portfolio continues to benefit from our value-add initiative.
As a result, we are confident that growth will flow through to the bottom line, allowing us to cover the dividend by this fourth quarter and then beyond. Now I'll 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. To echo Scott's comments, we had a strong quarter from an execution and performance standpoint across the portfolio. Revenue increased in 15 of our 18 markets, and same store NOI grew 8.1%. Both strong indicators of the continued demand for amenity-rich middle-market communities in our non-gateway markets. Looking at NOI growth by market, the Myrtle Beach, Wilmington, Raleigh-Durham, Louisville, Charlotte, and Tampa markets all exceeded 11% growth for the quarter, leading the broader portfolio. These markets have consistently been strong performers for IRT as a combination of population and job growth, along with the sense of livability, are drawing an influx of people to these areas of the country. Wilmington, Raleigh, and Louisville also continue to benefit from our value-add initiative.
In the Myrtle Beach, Wilmington market, same store NOI increased 14.2% as compared to last year. One of our three communities in this market is going through renovations, and combined with limited supply, has enabled us to increase rents by 18.4% as compared to last year. Our other two communities in this market are also benefiting, experiencing rental rate increases of over 7%. Myrtle Beach is among the fastest-growing metros in the country, having grown four times as fast as the national average. The market has posted 28% population growth from 2010 to 2018, and has seen significant employment growth in both the education and health service industries during the current cycle. In Raleigh Durham, average occupancy is up 2.7% from Q3 2018 to 94.1%.
The Village at Auburn was one of our early and most significant value-add projects to date, and as we near completion of the renovations on this community, we are seeing occupancy normalize and rental rates increasing 17% on average. Shifting to Charlotte and Tampa, which as I mentioned, are growing organically without the aid of our value-add projects. In Charlotte, we continue to see the benefit from being located on the LYNX Blue Line in the South End submarket, which provides quick and easy access to Uptown Charlotte at a reduced cost. Given the submarket's favorable location to both high-paying jobs in uptown and suburban Charlotte, it has seen significant supply over the past couple of years, and our occupancy has risen and fallen with those deliveries.
Over 50% of this market's inventory has been built in the past four years, and with less development opportunities, supply has waned. We have been able to gain occupancy while pushing rents. We increased occupancy to 96.2%, while at the same time increasing the average rental rate by 5.2%. Tampa is a market that we've discussed consistently over the past several quarters, as the supply, demand dynamics directly align with our investment criteria. While we currently own several communities in this market, only one community is in our same store portfolio. It is located in a mature infill suburb with very limited supply, great schools, and across the street from a Whole Foods anchor shopping center. We have increased both occupancy and rental rates by 300 basis points, generating revenue growth of 9.3%.
On the whole, portfolio average occupancy was 93.5% in Q3, down slightly quarter-over-quarter and flat versus Q3 2018. 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 5.9% year-over-year, driven by our value-add properties. On a lease-over-lease basis, during Q3, new lease rates increased 5.4% and renewals were up 4.9%, yielding a combined lease-over-lease rental rate increase of 5.1%. Through the first month of Q4, lease-over-lease rental rates for new leases are up 3.4%, while renewed leases are up 4.3%, with a blended lease-over-lease rental rate increase of 3.9%.
This deceleration into the fourth quarter is expected and is typical of the cyclical nature of our business and will begin to accelerate again in March as we enter the spring leasing season. Our strategy is to drive the majority of our lease expirations into the second and third quarters, where we experience the most demand and ability to increase rents. Turning our attention to our capital recycling, on July 11th, we purchased our 4th community in the Tampa market, bringing our total unit count to 1,104 units and nearly 8% of our total NOI. The property was built in 1999, contains 264 units and will be added to our renovation program. We acquired the property based on a year one economic cap rate of 5.1% and a 6.2% cap rate at stabilization. Subsequent to third quarter, in October, we closed our 6th community in the Raleigh Durham market.
The community was also built in 1999 and contains 318 units. It brings our total unit count in this market to 1,690 units and 12% of our total NOI. The property benefits from its proximity to the Research Triangle and the highly rated Wake County School District. The community has an $80,000 median household income and a $308,000 median home value within a three-mile radius. This property will also be added to our renovation pipeline and was purchased based on a year one cap rate of 5% and a stabilized cap rate of 6.2%. I'll now turn the call over to Jim to discuss our financial results.
Thanks, Farrell, and good morning, everyone. For the third quarter of 2019, net income allocable to common shareholders was $4.9 million, up from $4.8 million in the third quarter of 2018. Core FFO grew to $17 million, up from $16.5 million in 2018. Core FFO per share remained stable at $0.19 per share. Turning to the same store portfolio for the third quarter, NOI growth excuse me, was 8.1%, with revenue growth of 6.6% and property level expenses increasing 4.4%. Occupancy in our same store communities averaged 93.4% during Q3, flat year-over-year. Rental rates for the same store communities increased year-over-year with an average effective monthly rent of $1,078 this quarter, up 5.7% since last year. On operating expenses, our non-controllable expenses increased 7.9% year to date, primarily driven by real estate taxes.
Controllable operating expenses increased 1.1% in Q3 over the same period last year and 0.6% year to date. As we discussed in our second quarter call, some of the same earnings trends we mentioned then are continuing this quarter. Namely, interest expense is elevated due to higher debt balances associated with our capital recycling initiatives. Looking at Q4, the sale of our community in Austin, Texas, will reduce our overall debt balances and related interest expense. Additionally, our G&A expenses increased over 2018 as we continue to invest in the platform and in our management team. These investments have already enabled us to deliver outsized growth for the portfolio year to date and represent a critical foundation to support further scaling of the platform without incremental G&A growth. Turning towards the balance sheet, we closed Q3 with 57 properties and total gross assets of approximately $1.8 billion.
Our debt level came down slightly with a normalized net debt to adjusted EBITDA at 9.0 times. At quarter end, our debt is 94% fixed rate or hedged with no significant maturities until 2023. We expect to be in the market later this year and reprice our existing 7-year term loan, saving us approximately 40 basis points of interest annually with no change to the maturity date. During the quarter, we were active selling shares on our ATM. We issued 973,000 shares at a weighted average price of $13.45 per share, generating net proceeds of approximately $12.8 million. Year to date, though, through quarter end, we've issued 1.5 million shares and raised $18.8 million. As we discussed previously, we have used the ATM at opportunistic times with the proceeds used to fund the value-add program, and more recently, to de-lever.
As highlighted in our earnings release today, we updated our 2019 full year guidance. Our EPS and gain on sale guidance have been reduced to reflect the lower number of property dispositions in 2019 than what was assumed in our previous guidance. Our guidance range for core FFO per share remains unchanged at $0.75-$0.78 per share. Turning to same store guidance, we are updating our property rental revenue growth outlook to be at the top end of our previous guidance range, while lowering total operating expenses to be below our previous guidance range. This increase in expected property revenue growth to a range of 5.5%-6% is due to the strong results we have realized year to date, which will help drive revenue into the fourth quarter.
The decrease in expected property operating expenses to a range of 3%-3.5% reflects additional favorable real estate tax assessments and appeal results. Overall, we now expect same store NOI growth within a range of 7%-7.5% for 2019. Looking forward to 2020, we believe the value-add renovation program will continue to provide strong NOI growth. We will provide guidance for 2020 on our year-end earnings call in February 2020. With that, I'll turn the call back over to Scott.
Thank you, Jim. As we move into the final months of 2019, I want to take a moment to recognize our team, both in the field and in our corporate offices, for their dedication and strong execution. Over the past 10 months, we have generated the strongest NOI growth since our inception. Looking out into 2020, we are very excited about the state of our business and the tremendous opportunities that lie ahead. First, as it relates to the value-add initiative, we have an additional 4,000 units to be renovated under the first three phases of the program and expect to complete between 500 to 700 units per quarter next year. Secondly, we continue to see strong real estate fundamentals across our core markets and will execute a capital recycling strategy to align our portfolio to best capitalize on these positive trends.
Lastly, our ability to continue to drive outsized growth provides a line of sight to improve our leverage profile over time and deliver long-term shareholder value. Now I'd like the operator open the call for questions.
Thank you, ladies and gentlemen. If you would like to ask a question, you may do so by pressing star then the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Again, star one to ask a question. Your first question comes from the line of Drew Babin from Baird.
Hey, good morning.
Hey, Drew.
Hi, Drew.
Wanted to touch on Charleston. That's been a market where both occupancy and rent growth kind of been under some pressure. I'm presuming that supply is sort of working into that equation there. Could you just maybe give a little more color on that market and when you expect it to turn more towards the positive?
Sure, Drew. We have two communities there. One is a Class A and one is a Class B. Class B's in the northern suburbs and is doing okay. We're seeing on average 2%-3% rent growth. The Class A assets on Daniel Island is the one that's facing a lot of supply pressure. We don't see that going away, at least for another year or two as they continue to build in that market. We're just going to have to manage through it.
I will add though, Drew, long term, we believe in that property and that market. We are, as Farrell says, managing through that.
Okay. Appreciate the color there. Just one more from me. Just based on current capital costs that you're evaluating today, potential assets that you sort of might want to sell longer term, do you envision Independence being a net acquirer next year based on everything we know today?
Yes, I do.
Okay. I guess just building on that, can you talk at all about maybe the number of properties or some subset of the portfolio that you prefer to sell at some point, sort of addition by subtraction, potentially non-core assets. How large is that portfolio, and how aggressively might you be willing to trim?
Well, we're consistently, as we've stated, looking at the portfolio, relative to recycling of the capital. We've stated that we're looking to exit markets where we have limited exposure and either the inability or the desire not to grow. At this point, we really haven't concluded on any specific assets that we're going to recycle out of in the near term. Just please recognize that it is an important part of our business strategy, and we do expect to be, again, focusing the portfolio in growth markets and expanding it that way.
Okay. Appreciate the color. That's all for me.
Thanks.
Your next question comes from the line of Austin Wurschmidt from KeyBanc.
Hi, good morning, everyone. Scott, I think towards the end of your remarks, I believe you said you're targeting 500-700 of value-add turns per quarter next year. If I'm not mistaken, that's a pickup from sort of the 350-400 you've been achieving per quarter this year. Just curious if you think you have the personnel in place today to handle that heightened level of renovations, and really what's driving that decision.
Thanks, Austin. We do have the personnel in place. We think we have a very good team. We've been working on the processes since we've started this program. Really, the increase is more due to the fact that we are starting phase 3, while winding down phase 1 and then continuing with phase 2. It's still having some units in phase 1 being completed, phase 2 continuing through all of next year, and then adding phase 3. Just gives us more units to renovate. Yes, the team is in place, and we're very excited about it.
Just to add, Austin, these are all in markets that we're already in with teams built out, so we're just leveraging what we've already put in place.
Understood. Appreciate the thoughts there. Then Farrell, is the decel that you referenced in new lease rates in October, is that strictly within non-value add assets that's driving that, or do you also expect a little bit of moderation in the increases you're achieving on value-add units as well?
It's across the board. It's just, again, the cyclical nature where we have less leases expiring and less traffic, and we see it every year. If we go back to Q3 and Q4 of last year, there's a similar trend.
Got it. Jim, maybe one for you. You highlighted you were a bit more aggressive under the ATM this quarter. Just curious, should we continue to expect you to utilize the ATM moving forward opportunistically?
Yeah. Austin, that's right. Opportunistic issuances on the ATM, that would be appropriate for accretion to the NAV. That's accretive to NAV and earnings per share.
Great. Thanks, guys.
Thank you.
Awesome.
Your next question comes from the line of Nick Joseph from Citi.
Thanks. Jim, I'm wondering if you can give a little more color and walk through updated guidance. Same store NOI growth went up 75 basis points at the midpoint. Again, some additional net acquisition growth, but the core FFO guidance was maintained at the midpoint. Wondering if you can go over the pushes and pulls there.
Yeah, sure. As we kind of mentioned in the call, the timing around capital recycling, the acquisition's happening a little bit later than we expected originally. As well as just some of the cap rates. The cap rates we're acquiring at in the last half of the year, as Farrell mentioned, are 5.1 and five. We had assumed a slightly higher cap rate. Also just the effects of the deleveraging from the ATM issuances in the last part of the year.
Given those and that some are still just in the fourth quarter, I think implied guidance is a little over $0.21 for 4Q. Is that a fair run rate going forward, or how do you think about the run rate going into 2020?
Obviously, we'll give guidance in the early part of next year. I think, the 2020, the $0.21 you're citing has a little bit of a double up with the acquisition of the property in the beginning part of the quarter, obviously, when the capital recycling sales occur, we'll offset that. I think, in that kind of $0.20 to $0.21 a quarter is certainly a fair run rate.
Thanks.
Your final question comes from the line of Neil Malkin from Capital One Securities.
Hey, guys. Good morning.
Good morning.
Morning.
Following up on Austin's question. Obviously, you guys have had impressive share price appreciation this year. I just wonder, with that and given your elevated ATM issuance this quarter, are you looking to potentially get more aggressive? Are you seeing more opportunities to take down deals like Raleigh? Just given that it's easier to get accretive acquisitions day one, which would kind of kill two birds with one stone in terms of deleveraging and funding the dividend.
Well, as we've always stated, we're looking to do transactions that are accretive. We are laser-focused to be covering this dividend in this fourth quarter, and keeping it covered and growing into a more normalized dividend ratio, payout ratio in the future. We will continue to look at opportunities, and we will use the ATM when opportunistic, and again, always focused on transactions that will be accretive to both NAV and earnings per share.
Is your pipeline kind of more robust than it was, say, one year ago?
No. The market continues to be very aggressive and there's a lot of money chasing multifamily assets. We've always had a very fulsome pipeline and we're looking again to do deals opportunistically, where we can grow in the markets that we've identified and have current exposure.
All right. Thanks. A question I had about your strategy in general. What would you say as a pushback to the following? The Sun Belt non-coastal markets are expected to have really strong population growth, and that's a great thing. At the same time, those markets are notorious for being able to bring supply on a lot more easily than in the more blue state coastal markets. I wonder if you obviously subscribe to that in the current day and age. How do you maybe put a competitive moat around yourself or the assets that you invest in when thinking about that?
Well, sure. It's really the basis of our investment thesis. We are looking in non-gateway, non-coastal markets, where there is good population growth and job creation. You're right, that's where people who are developing want to build new communities as well. However, that goes to the other part of our strategy, which is the Class B assets that are typically 10 to 15 years old. New supply is not being built as Class B, so we have a very attractive price point advantage. With the value-add program, we can deliver a product, and are delivering a product that competes effectively with the newer Class A supply, but still at a much lower price point. I agree with you that there is more development in the Sun Belt markets. That goes to our Class B strategy and how we compete effectively.
Sure. Last thing for me. Could you just give us an example of what sort of spread is normal for a post-renovated asset rent per unit compared to a Class A asset in the same market?
When we're analyzing to do a renovation, post-renovation, we still want to be $300-$500 below a new Class A constructed deal.
All right. Thank you.
I show no further questions at this time. I will now turn the call back to Mr. Scott Schaeffer for any closing remarks.
Thank you all for joining us today. We look forward to seeing many of you at NAREIT in a couple of weeks. If we don't see you at NAREIT, we will speak with you again next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation.