Good morning, ladies and gentlemen, and welcome to the Q2 2019 Independence Realty Trust Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Ted McHugh, Investor Relations.
Thank you, Ashley, and good morning, everyone. Thank you for joining us to review Independent Realty Trust's Q2 2019 financial results. On the call with me today are 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 atirtliving.com. There will be a replay of the call available via webcast on our Investor Relations website and telephonically beginning at approximately 12 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 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 and Investor Relations. Participants may discuss non GAAP financial measures during the call. 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 and 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, Ted. Good morning, everyone, and thank you for joining us this morning. We are pleased with the progress made during the quarter, especially our value add initiative, which continues to drive robust same store NOI growth of 6.9% in the 2nd quarter. This is the 2nd consecutive quarter of greater than 5% NOI growth, a testament to the value we're creating through Our strategy is unique and has been unwavering since our inception. We are working every day to amass and maintain a leading portfolio of high quality communities and attractive non gateway cities that demonstrate favorable supply demand economics.
It's simple, but its differentiation within the multifamily space positions us favorably for growth across varying real estate cycles. Our 2 primary levers of growth are capital recycling and value add investment. Looking first at our capital recycling, I'm pleased to report that subsequent to the quarter end, we completed the sale of our 2 remaining communities held for sale in Little Rock, Arkansas and acquired a 264 Unit Community in Tampa, Florida, a market we believe represents attractive supply demand dynamics for our shareholders. On the value add front, we are approximately halfway through the Phase 1 and Phase 2 programs, and we are excited to officially announce the launch Phase 3. As of quarter end, we identified 8 additional communities totaling 2,402 units across 5 markets: Tampa, Louisville, Memphis, Raleigh and Atlanta.
The renovations at these Phase 3 communities will commence over the next 12 months, utilization of the existing value add platforms in these markets to maximize efficiencies and returns. We anticipate spending $25,000,000 on the renovations and once complete generating an incremental $4,500,000 in annual NOI. As we look at the balance of the year, we expect to continue to see the benefits of this value add program, capital recycling initiatives and healthy middle market multifamily fundamentals that support our growth trajectory. With this expected growth, we continue to be on track to cover our dividend and AFFO basis by the end of this year and thereafter. With that, 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. During the
Q2, we experienced revenue growth in 16 of our 19 markets with greater than 4% growth in 12 markets. This highlights the advantages of owning a portfolio of differentiated amenity rich middle market communities. When looking specifically at NOI growth, our largest markets provided significant outperformance. Raleigh, Louisville and Memphis and distribution expense. Specifically, all generated NOI growth above 10%, primarily driven by our value add communities in those markets.
Looking at specific markets, Raleigh led our same store portfolio growth by market with NOI growth of 13.2% for the quarter and overall portfolio occupancy increasing by 4.1%. The NOI and occupancy improvement in this market is a tangible example of the positive results of our value add investment program. Phase 1 of our value add program included the renovation of 253 units at the Village of Auburn to date, which has driven a 17% rental increase for that community. Raleigh continues to demonstrate the core fundamentals we look for in a market with job and population growth that exceed national averages. Atlanta continues to display optimal fundamentals for our communities.
We currently own 6 properties in this market with 4 in our same store portfolio. Our communities are located in mature infill suburban locations with high barrier Century with 3 of the 4 communities in our same store portfolio currently under renovations. Strong market fundamentals combined with our value add effort has pushed rental revenue Overall, the portfolio is performing well. Average occupancy increased slightly to 94.1% with an increased rent of 5.3% year over year as we optimize our presence in our core markets. We are also producing significant rental rate growth that should generate positive performance for the rest of 2019.
In the Q2, we were able to raise new leases by 6.8% and renewals by 5%, which yielded a combined rental rate increase of 5.9% year over year. We are continuing to generate this growth in the Q3 with new leases to date achieving an 8% increase and renewed leases producing 4.7 percent growth for a blended rental rate increase of 5.8%. The effort to build out a fully internalized renovations platform is beginning to generate the returns we anticipated. We have built scale and leveraged our local teams in Atlanta, Raleigh, Columbus and Memphis. We renovated 3.50 units in the 2nd quarter, bringing our total units renovated to date 1950.
We expect to complete an additional 1,000 units during the balance of the year with Phase 1 being largely complete by the end of this year and Phase 2 by the end of 2020. As Scott mentioned, we recently expanded to Tampa and have begun renovations at 2 of our 4 communities in this market with the balance of the Phase III properties to be started in early 2020. With the commencement of Phase III, we chose to delay renovations at 2 Phase 2 properties, 1 located in St. Louis and 1 in Indianapolis. We believe it best to prioritize value add projects in markets where we have existing renovation teams, which is the case for all the Phase 3 communities.
As Scott mentioned earlier, we now have completed the capital recycling initiatives announced in mid-twenty 18. In total, we sold 5 communities for $176,000,000 at a 5.4 percent economic cap rate markets we believe will not outperform the overall market. We redeployed this capital into 5 communities located in Tampa, Atlanta and Columbus. These acquisitions totaled $170,000,000 with a blended economic year 1 cap rate of 5.3%. In addition, in July, we Purchased our 4th community in the Tampa market and began the sale process of our community in Austin.
We targeted Tampa as a market to grow due to its favorable economic fundamentals. Employment growth is expected to remain above the national average for the next 5 years, providing solid footing for robust multifamily performance. Securities and Exchange Commission. I'll now hand the call over to Jim.
Thanks, Farrell, and good morning, everyone. For the Q2 of 2019, net income share count. All applicable to common shareholders was $14,700,000 up from $3,500,000 in the Q2 of 2018. Core FFO grew to $16,900,000 up from $16,400,000 in 2018. Core FFO per share was $0.19 level expenses increasing 3.1%.
As Sal mentioned, we continue to see strong rental rate growth in our markets. On the revenue side, occupancy at our same store communities averaged 94.1% during Q2, up 10 basis points from Q2 last and the average effective monthly rent was $10.62 up 5.3% since Q2 of last year. On the expense side, controllable operating expenses, while seasonally higher in Q2, trends. Our overall trending lower than our original forecast as increases in utility, payroll and contract services were not as significant as expected. We do not see these categories increasing significantly in the second half of twenty nineteen.
As for our largest category, real estate taxes. We've received assessments on the majority of our communities and believe the remaining assessments will be consistent with our expectations. Given these assessments, we expect the outcome for the year to be at the midpoint of our guidance range. Interest expense was elevated this quarter as compared to Q2 last year primarily as a result of the timing of capital recycling activities. The year over year increase in G and A expenses As a result of our investment in the platform during 2019, including people and technology, which is consistent with our original guidance.
We are focused on recruiting and retaining top talent to help drive future growth at IoT. The sequential increase income statement from Q1 2019 in G and A is driven by higher expenses associated with the timing of stock compensation and some normal annual meeting costs. Turning towards the balance sheet. We closed Q2 with 50 Total gross assets of approximately $1,800,000,000 As Farrell mentioned, we started the sales process for 1 community in July of this year. As a result, in the Q3, that community will be considered held for sale and will be removed from our same store portfolio in Q3.
Our debt level stayed consistent with a normalized net debt to adjusted EBITDA of 9.2 times. And as of quarter end, our debt is 97% hedge with no significant maturities until June 2021. Regarding our ATM, we issued 66,000 shares at an average price of 12 point $0.09 per share and use the proceeds to fund CapEx associated with the value add program. As included in our earnings release today, and full year guidance. For same store, we are increasing the outlook range for our property revenue growth expense growth to be between 5% to 6% and lowering our controllable property operating expense growth to be between 0.5 percent to 1.5 percent to reflect lower controllable expenses as previously discussed.
We are increasing our same store property NOI growth to be between 6% to 7% to reflect the strong performance year to date and expectations for the second half of twenty nineteen. We are updating the range of our EPS to be between $0.65 $0.70 per share. Core FFO per share is now projected to be in a range of $0.75 to $0.78 per share. With that, I'll turn the call back over to Scott.
Thank you, Jim. As we move into the second half of twenty nineteen, we continue to be excited by the opportunity ahead and remain confident in and Our Portfolio and Strategy. We appreciate you joining the call today. Operator, I'd like to open the call for questions at this time.
Gen comes from Austin Wurschmidt with KeyBanc Capital Markets.
Hey, good morning, everyone. Thanks for the Just curious today as you look at your cost of capital and the stock now trading at a premium to NAV, you Kind of dripped out a little bit under the ATM this quarter, but just curious how we should think about your willingness to use the ATM program using Forward as you look to kind of manage your leverage and become opportunistic maybe on the acquisition front.
Well, Thanks, Austin. The marketplace today is very competitive on acquisitions, especially in the markets that we're focused We had set a goal and we're in line to cover the dividend by the end of the year. So we're not going to do anything that might be considered or might ultimately be dilutive to those earnings. So we did use the ATM a little bit in the second quarter As we talked about, that was money that was then directly used to fund The capital renovation or renovation program at the properties, and it's accretive. So I think depending on the price and consensus NAV because I don't want to do anything that's dilutive to consensus NAV either.
We will be opportunistic using the ATM in the future. But again, not in any way that will impact covering the dividend in the 4th quarter or would be investing that capital being dilutive.
Great. Appreciate the thoughts there. I mean, you mentioned a competitive acquisition Landscape in your comments there. But you did take your acquisition guidance up a bit for the full year. So just curious how the
scenario is very competitive in again in the markets that we're focused on, especially in the B Class assets. Everybody is chasing these 15 to 20 year old assets with this view of value add, And it's driven cap rates down, in many instance, well below 5%. So it's actually been a little bit upside We're seeing A assets in these markets that are trading at cap rates that are in some instances as much as 25 to 40 basis points higher B assets. So we're keeping a close watch on it. We want to be opportunistic, But it's an aggressive scenario right now for the B assets.
I would agree. And Austin, I just wanted to say where we've been successful, the deal we've mentioned in Tampa is where we people value our execution and we're able to preempt at a number that makes sense for us and the seller. That was a deal that was going to be marketed. They came to us with a number we agreed and obviously closed.
Is it fair to say that that was similar to the cap rate on what you closed in the second quarter?
It was a little bit lower. The cap rate on the Tampa deal was a 5.1 economic cap rate. And the deal we bought in Atlanta In April was a 5.5 percent economic cap rate on our year 1 underwriting.
Got it. Thanks. And then last one for me is, Of the 2 properties you pulled from Phase 2 of your value add program, how much does that incorporate or how much of the spend on Phase Did those properties account for?
They were 2 of our smaller projects. The total capital or construction costs were $3,000,000 Would have yielded about a $500,000 rent premium or NOI premium.
And that's $3,000,000 Correct.
$3,000,000 total construction costs. Between those 2 deals.
Great. Thank you.
Thank you.
Your next question comes from Nick Joseph with Citi.
Hey, there. This is Michael Griffin on for Nick. Regarding same store NOI, How do you see the spread between total same store NOI and excluding the value add, the same store NOI
trend. Yes, I mean, I think Michael, it's a good question. I think generally speaking, we would expect the trend as you've seen it so far in the first half of the year continue into the back half. We don't see any significant kind of alteration today.
Thanks. And regarding the timing of Phase 3, I'm just curious, why you decided to announce Now as opposed to waiting for Phase 1 and 2 are closer to completion.
Phase 1 will be largely complete by the end of this year, so in the next 5 months. We're only doing the improvements as we've discussed So if tenants keep renewing, there will be some straggler units at Phase 1 properties that will carry on into 2020. But Phase 1 will be largely done at the end of this year. And we've identified it. We've started some of the work on the Tampa assets that are in Phase 3 and we just thought it, we're doing it, we should announce it.
Okay, got it. That's it for me. Thanks.
Thank
Your next question comes from John Guinee with Stifel.
Hey, everyone. This is Aaron Wolf on for John. A quick question. You mentioned the 5.1 economic cap rate on the Tampa acquisition on year 1 underwriting. What does that cap rate, what does the yield look like in year 2 and 3 once the value add initiative is complete and you rent roll ups.
Sure. So in year 3, once we're done fully renovated, it's a 6.2? Okay, great. I don't have the year 2 number is obviously in between that as we go through the renovation.
Okay, perfect. And last question for me. Are you seeing any signs of softness in any of your core markets or markets that you
I would say we're watching Louisville and Memphis are just not as dynamic as the other market In terms of job and population growth, so given that we have pretty considerable holdings in those markets, we're watching them very carefully. Our communities there have been performing well. But again, like I said, just with the fundamentals in those markets, we're watching them very carefully.
Okay, great. Thanks for taking my questions. Nice quarter.
Thank you. Thank you, Aaron.
Your next question comes from Craig Kucera with B. Riley FBR.
Hey, good morning, guys. I may have missed this, but which was the asset that you're now marketing for sale here in Q3 and kind of what's the size of the asset from a dollar perspective?
It's, our property in Austin, Texas And we think it's going to sell in the $50,000,000 to $55,000,000 range.
Got it. And as far as Phase 3 go, I understand you're starting it here in early 2020. But As you think about sort of pacing for that project or that program, is that likely to take 12, 18, 24 months or how are you thinking That relative to turn in those assets.
To completion or when we are going to start them?
To completion.
Probably about 18 months.
Okay, terrific. Thank you.
Craig, I would like to this Scott, I would like to just add one thing about the Austin property. You may wonder why we would be selling in Austin when we say we're selling out of markets that don't have long term positive long term growth fundamentals. Austin clearly does, but it's so good in Austin that it doesn't make sense for us to be acquiring anymore, and
Growth.
I'm showing no further questions at this time. I will now turn the conference back for closing remarks.
Well, thank you for joining us this morning. We look forward to speaking with you again in approximately 90 days. Have a good day.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.