Good afternoon, ladies and gentlemen, welcome to the Q1 2019 Independence Realty Trust earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. A reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Alex Jorgensen, Investor Relations.
Thank you. Good morning, everyone. Thank you for joining us to review Independence Realty Trust first quarter 2019 financial results. On the call with me today are Scott Schaeffer, our CEO, Jim Sebra, our Chief Financial Officer, and Farrell Ender, our 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 site and telephonically beginning at approximately noon Eastern today. Before I turn the call over to Scott, I would 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 is my pleasure to turn the call over to Scott Schaeffer.
Thank you, Alex, and thank you all for joining us this morning. Our performance in the first quarter highlights IRT's ability to capitalize on the deep value embedded within our existing portfolio through the execution of our differentiated operating model. This model is grounded by three key components. First, owning and operating high-quality middle-market communities within key non-gateway markets that exhibit continued expansion of real estate fundamentals. Second, executing on our multi-phase value-add program to deliver outsized NOI growth. Lastly, delivering an accretive capital recycling program aimed at disposing of communities that no longer match our core investment thesis and reallocating that capital to target markets where we feel there is long-term growth opportunity. Looking at the first quarter, I am very pleased to report same-store NOI growth of 5.1%, signaling an inflection point in our portfolio transformation.
We are building this business for long-term stability and are excited to see our investment set the foundation for long-term value creation. We have continued to see positive momentum in leasing activity in the second quarter, which Farrell will provide an update on in a moment. I would like to now take a moment to provide an update on our ongoing commitment to execute on the key components of our operating model. First, we own and operate a differentiated portfolio of communities within the multifamily REIT space. Our strategy is centered around non-gateway middle-market communities that benefit from attractive supply-demand dynamics. Our top markets like Atlanta, Raleigh-Durham, and Columbus are being driven by strong job creation and corporate expansion while competing new construction remains low. Within this dynamic, we believe we will continue to have stable rental rate growth and heightened occupancy in all real estate cycles.
Second, in the beginning of 2018, we commenced a strategic value-add program to enhance the interior and exterior common areas at select properties with the long-term goal of increasing rental rates and net operating income. The first phase of this initiative was a large undertaking, but throughout the process, we have improved our internal operations and now feel we are well-positioned to deliver upgraded units and NOI growth as we continue with the remaining renovation projects. As of quarter end, 1,590 of our value-add units were completed with 1,453 apartments leased at an average monthly premium of $157 per unit. Our projects continue to generate strong returns with completed units leasing up at a 17% average rent premium, representing an 18.3% return on interior renovation costs. In April, we completed another 94 units and leased 116 units.
In total, we anticipate completing 400 units during the second quarter, and now we're well-positioned to take advantage of the spring leasing season. Our phase 1 and phase 2 value-add projects remain on track, and we believe they are just the beginning. As we said on our last call, we've identified 1,900 additional units across seven communities that will be incorporated into the value-add program later this year as phase 3. Many of these communities are in markets where we currently have projects underway. We plan to leverage operational efficiencies by deploying existing project teams to tackle these phase 3 projects. Some of these projects are starting soon, and we will update you on our progress as we move forward. Now, turning to our capital recycling program. We are concluding the planned acquisitions and dispositions we announced in mid-2018.
As of March 31, we had three remaining properties held for sale, as well as one planned acquisition from the proceeds of these dispositions. Subsequent to quarter end, we completed the disposition of our 370-unit community north of Chicago for $42 million, generating a net gain on sale of $12.5 million. We also completed the acquisition of a 224-unit community in Atlanta for $28 million. At the time of the acquisition, the Atlanta property was 98% occupied with an average rent per unit of $990 per month. Atlanta continues to be an attractive market where we see higher renter demand for Class B communities. The remaining properties held for sale are two Little Rock communities, are currently under contract and expected to close in June. We're always monitoring our markets, and we'll continue to evaluate additional capital recycling opportunities.
We have an operating model in place that will enhance the financial profile of the company and will deliver significant value for shareholders. We remain focused on achieving our midterm leverage targets of the mid sevens through organic NOI growth over the next few years, driven by our value-add program that is expected to generate roughly $8 million-$9 million in additional NOI through the completion of phase one and phase two projects. To that end, we also expect this incremental NOI creation to provide the additional income needed to cover our dividend on an AFFO basis by year-end. Looking forward, we expect that payout ratio to continue to improve. With that, I'll turn the call over to Farrell.
Thanks, Scott, and good morning, everyone. We generated strong operational performance in the first quarter, driven by solid multifamily fundamentals and the momentum we continue to build through our value-add program. During the first quarter, we experienced revenue growth in 16 of our 19 markets. We continue to see the benefit of owning our differentiated, amenity-rich middle-market communities across the vast majority of our portfolio. When looking specifically at NOI growth, our largest markets provided significant outperformance, which reinforces our portfolio strategy. Oklahoma City, Memphis, Columbus, Raleigh-Durham, and Atlanta all generated NOI growth above 5%. Oklahoma City led our same-store portfolio by market in terms of NOI growth at 17% year-over-year and 33% on a two-year stacked basis. Oklahoma City continues to rebound as it is benefiting from almost no new supply being added to its 90,000 units.
We anticipate wage growth of 3.4% in 2019, paired with job growth of 1%, which should provide consistent performance throughout the balance of the year. We have grown occupancy to 94.8% and have increased rents 3.4% year-over-year. Memphis, with 11.8% NOI growth, is another market experiencing limited supply with only 800 units or less than 1% projected to be added this year. These fundamentals helped us generate revenue growth of 3.6% year-over-year, as well as average effective rent growth of 5.9%. This growth occurred while we had slightly higher vacancy as two of our communities in this market are undergoing value-add renovations. Columbus, which generated 7.2% NOI growth, is a similar story and also has two communities undergoing renovations.
While it's experiencing a little bit more supply pressure with 2% inventory growth over the last 12 months, we were able to increase revenues by 4.1% and rental rates by 6.3%. The Atlanta market continues to display optimal fundamentals for our communities. The overall market contains 440,000 units, with only 8,000 units being added annually, and the majority of this new construction occurring in the Midtown and Buckhead submarkets. The limited supply, combined with significant job and population growth, has produced a market where there are 12 people moving to Atlanta for every one unit constructed. This, combined with our value-add communities, has allowed us to push revenue 7.6% year-over-year and grow NOI 5.4%, despite large tax reassessments in the market. As you can see, we are optimizing our presence in our core markets.
We are also producing significant rental rate growth that will generate positive performance for the rest of 2019. In the first quarter, we were able to raise new leases by 3.6% and renewals by 4.6%, which yielded a combined rental rate increase of 4.1% year-over-year. We are continuing to generate this growth in the second quarter, with new leases to date achieving a 7.3% increase and renewed leases producing a 4.9% increase for a blended increase of 5.9%. As is typical in the second quarter, we expect elevated operating expenses from seasonal maintenance projects. Turning now to a couple of our challenging markets. As I've mentioned in the past, Charleston is experiencing some oversupply with projected 3% inventory growth in both 2019 and 2020.
One of our communities is a Class A property in the desirable area of Daniel Island and generates some of the highest rents in our portfolio. This community is continuing to face competitive pressures from new properties that are offering concessions as they go through lease-up. Due to these competitive pressures, revenue fell 6% year-over-year. Our second community is a well-located Class B community in the Goose Creek submarket, where we drove revenue 3.9%. Our performance in Charleston represents how different apartment classes react in a market experiencing supply pressure. Despite the near-term challenges, we're confident that Charleston will be a market that outperforms over the long term. Louisville's performance continues to be a result of our value-add initiatives in this market, which has reduced overall occupancy.
We will generate both revenue and NOI growth over the next couple quarters as we drive occupancy and continue to complete the renovations. As Scott mentioned earlier, our capital recycling initiative remains a pillar in optimizing our portfolio's value. Upon the completion of the Little Rock sales in June, we will have concluded our capital recycling initiative announced in mid-2018. We will have sold a total of $176 million of properties at a 5.42% economic cap rate based on our 2019 budgets and have purchased $170 million of properties at a 5.37% economic cap rate on our year one underwriting, with room to grow as we integrate them onto our platform. The properties we purchased through this program are located in Tampa, Atlanta, and Columbus, and fit nicely into our long-term strategy of owning in markets with outsized job and population growth, as well as limited additions to supply.
I'll now turn the call over to Jim.
Thanks, Farrell. Good morning, everyone. Before discussing the results, I wanted to mention a few changes we've made to our supplement. First, as most of you know, the new leasing standard requires that we present uncollectible lease revenue against property rental income rather than as a property operating expense. This change is required to be prospective rather than retroactive. As a result, for our GAAP income statement, this reclassification has been reflected solely for Q1 2019 and has not been reflected for the historical periods. However, to help with comparability, we have adjusted the historical periods in our same-store NOI comparisons. Lastly, we've added a same-store-by-market table on page 18 of the supplement. This reflects same-store performance for each of our markets, showing changes in revenue, operating expenses, NOI, occupancy, and effective rental rates per month. Now I'll turn to our operational results.
For the first quarter of 2019, net income available to common shareholders was $2.5 million, down from $3.4 million in the first quarter of 2018. Core FFO grew to $16 million from $15.6 million in 2018. Core FFO per share was $0.18, flat year-over-year, primarily due to higher corporate expenses as well as higher interest expense. Adjusted EBITDA for the quarter increased to $24.7 million, representing a 7% increase year-over-year. This increase demonstrates the value creation of our renovated communities and capital recycling program are bringing to our portfolio. The benefit of our value-add program is further underscored by our same-store results. We reported same-store NOI growth of 5.1%, with revenue growth of 4% and property-level expenses increasing 2.5%. Occupancies in our same-store communities averaged 92.5% during Q1, down 120 basis points from Q1 last year, but up 50 basis points sequentially.
Occupancy as of April 30th, however, was 94.5%, up 90 basis points since quarter end. In addition to improvements in occupancy, we continue to drive rental rates. For the same-store communities, the average effective monthly rent was $1,044, up 4.4% since Q1 of last year. Also, as Farrell mentioned, we are seeing this trend continue into Q2, as our blended rental rate growth so far in this quarter has been 5.9% in our 50 same-store communities. When it comes to our property-level expenses, our initial 2019 guidance reflected a sizable increase in real estate taxes, both from normal year-over-year inflationary increases, as well as our recently acquired properties being reassessed to our purchase price. To date, only a few of our jurisdictions have released assessed values for 2019, as most will release them in the middle of the year. For Q1, we've assumed a 9.5% real estate tax increase.
This reflects the midpoint of our previously disclosed guidance range. Turning to our balance sheet, we closed Q1 with 58 properties and total gross assets of approximately $1.8 billion. Our leverage stayed consistent with a normalized net debt to adjusted EBITDA of 9.2 times. As of quarter end, our debt is 99% fixed with no maturities until mid-2021. As of March 31st, our unencumbered assets represented 48.7% of our portfolio, while as a percentage of our total NOI, unencumbered assets represented 44.4% of our portfolio, a 150 basis point sequential increase, which aligns with our goal of increasing our unencumbered assets over time. With respect to our 2019 outlook, given our performance to date and assumptions for the remainder of the year, including the impact of our value-add and potential real estate tax implications, we are reiterating the guidance we provided on last quarter's call.
I'll turn the call back over to Scott. Scott?
Thanks, Jim. As you can see from our remarks, we are pleased with our strong first quarter performance and encouraged by our continued leasing momentum into the second quarter. We look forward to seeing many of you next month at REITWeek in New York. Operator, I'd like to open the call for questions.
Ladies and gentlemen, if you have a question at this time, please press the star and then the number 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the star key. Your first question comes from Drew Babin with Baird.
Hey, good morning.
Morning, Drew.
Hi, Drew.
Apologies if I missed this, I was curious if you could provide cap rate information for year one on both the Atlanta acquisition but also the Chicago sale, and also the mortgage rate on the mortgage on the Chicago property.
Yeah, Drew. This is Farrell. The cap rate on the Atlanta purchase was a 5.5 cap on our year-one underwriting. The sale of the Chicago asset was a 5.7 on our 2019 budgeted numbers. Jim, do you know the interest rate?
Yeah. The mortgage balance on the property in north of Chicago was just under $19 million, and it had an effective interest rate of 4.7%.
Okay. Yeah, thanks for those details. Just one more question from me. Expense growth was obviously pretty tame in the first quarter, which helped same-store NOI quite a bit. I guess the first quarter in the context of full-year guidance, which is a little more robust, I guess what quarter-to-quarter volatility can we expect in expenses, and which quarters might be the toughest? As far as year-over-year comparisons go.
Yeah, sure. Thanks, Drew. Generally speaking, Q2 and Q3, you typically see the higher expenses associated with some seasonal items, as Farrell mentioned in his notes, as well as just obviously all the typical kind of contractor landscaping and utility costs rising.
I would assume that that was the case to some degree last year as well. From a comparability perspective, I guess are those same two quarters going to have the highest year-over-year growth rates or just the highest like absolute expense numbers?
They should have both. The highest absolute
Okay
expense numbers and the highest absolute expense growth rates.
Okay, great. That's all for me. Thank you.
Your next question comes from Nick Joseph with Citigroup.
Thanks. Is there any debt on the Little Rock assets under contract?
There is.
There is. Give me one second.
Maybe the rate as well while you're looking it up.
Yeah. There's $20 million of debt. The rate is about 3.6%.
That $20 million is for the two assets?
For the two assets, yes.
Great. Thanks. just in terms of occupancy-
$40 million.
Sorry?
Yeah, sorry, $40 million for the two assets, $20 million on one. $20 million on both of them. They're both rates are about 3.6%.
Okay, thank you. just in terms of occupancy, obviously the redevelopments impact in the overall portfolio, but even if you strip out the value-add, it's still around 94%, which is lower than how many of your peers run. I'm wondering if it's a tactical decision to push rate at the expense of occupancy, or how you think about getting occupancy up to a more normalized level, for the assets outside of the current redevelopment program.
We're driving, our goal is to be in that 95%, 96%. I think some of what's driving this down is the Baton Rouge asset, which hit the same-store portfolio this quarter, that we're still trying. We bought that at a 50% occupancy. We're at about 78%, 79% now. But it's just been a tough market to get that property leased up in.
Thanks.
Your next question comes from John Guinee with Stifel.
Hey, all. Good morning. This is Aaron Wolf. I'm with John Guinee. I have a question on the Atlanta asset you purchased. How competitive was that process? Were there other bidders?
We preempted. We knew the seller. We bought from them before. They basically called us and said, "We're taking this off the market. Here's our number." We agreed with their value. We have another property within a mile of this. I think we underwrote the benefit of the combined being able to operate them, the efficiencies of being able to operate them. It was going to be marketed. We got a look at it preemptively.
Okay, great. On the Little Rock asset, how long has that property or properties been marketed? How long has this taken?
Longer than we wanted it to. We had the properties under contract in December. Again, as we mentioned on our previous call, there's some volatility in December which made the sale not happen. We were going to go back to the other people that bid in that process, we thought it would be more prudent to just remarket the deals. That took an additional 60 days longer than we wanted to. The properties are under contract, going through due diligence, our goal is to close this in the next 60 days.
Okay, great. The type of buyer, if you are able to disclose that.
I'm really not, just based on where we are in the process.
Okay. All right. Great. Well, thanks for taking my question.
I will say that we've done business with them before, so we're pretty comfortable with their execution.
Okay, great. Thanks for taking my questions.
Your next question comes from John Petaccia with Ladenburg Thalmann.
Good morning.
Morning, John.
Hi, John.
Sorry to miss this. Was there any kind of value-add? I know you're obviously, it's not going to be in phase one or phase two, but as you look at the Atlanta acquisition, is there a potential value-add component to that transaction? Or was this kind of bought as a fully performing?
There is. We haven't underwritten it. We've built out a pretty strong team in that market, considering how much other value-add we're doing. Even if it's just floors or appliances and not a full-blown unit renovation, we do believe that we'll be able to create some value-add at all of our Atlanta properties.
I know your plan's still being kind of formulated for phase three, but is that still something you anticipate maybe having a more tangible idea of a timeline for at the end of this year? Or is that maybe a little earlier?
On our next call, as Scott mentioned, on our next call, we'll be able to provide more detailed information. I will say we are starting Each market we're building out teams. We have started that in Tampa, and we'll start projects there in the very near future.
Okay. On kind of a same-store basis, all the moving pieces were kind of pretty explainable. The only thing that was a little, it wasn't a huge delta, but the other expenses, what kind of flows through there, and why was that maybe down so much kind of year-over-year?
Yeah. The year-over-year was down a fair amount because if you remember, first quarter of last year, we had some weather-related issues around pipes bursting. That was in the first quarter number last year, and that's not there this year.
As we look forward, it should probably be a pretty, obviously some seasonality, a pretty comparable number to this quarter versus last year.
That's right.
Okay. That's it for me. Thank you very much.
Your next question comes from Austin Wurschmidt with KeyBanc.
Hi, good morning, everyone. Just a quick clarification on the Little Rock assets. Is this the same buyer that you were previously in negotiations with or under contract with in the fourth quarter, or somebody new?
No, somebody new. As I mentioned, we completely remarketed the properties in the first quarter as opposed to going back to any of the bidders that we had talked to in the first round.
Okay, thanks. It seems like there's a fairly high certainty of close there. I guess this virtually buttons up the 2018 capital recycling plan. As you look out through the balance of the year, what's kind of the appetite for additional deals on both the buy and sell side?
There's a good appetite, but we continue to evaluate the portfolio and our assets and the markets, I want to say specifically. We're not, at this point, ready to announce any further recycling, but we think there will be some. It depends on what the acquisition market looks like and how we continue to evaluate the existing portfolio.
Have you seen any pullback or changes in demand for the types of assets that you're looking to sell?
We have not.
Okay. Jim, just curious, I know we talked a little bit about this offline, but just digging in a little deeper, can you remind me what same-store revenue growth was excluding the accounting change this quarter? What revenue guidance would have been at the outset of the year had that accounting change not occurred, to give us a sense of the change on a comparable basis?
The first question in terms of what revenue growth was pre the accounting change on what we call bad debt or uncollectible lease revenue, the revenue growth would have been 4.3%. We did have a sense that this was obviously coming, so we did factor it into elements of our guidance. The initial guidance at the outset of the year would not have been tremendously different.
Thanks. Last one for me. It looked like there were a couple small moving pieces in the value-add pool, and I'm just curious, the property in Atlanta, looks like you pulled some units from. What kind of drove that decision?
I'm not following your moving pieces.
It looked like there were about 20 assets that you had previously