Good afternoon, ladies and gentlemen, and 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 and instructions will follow at that time. As 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, and good morning, everyone. Thank you for joining us to review Independence Realty Trust's Q1 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'd like to 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, 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 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 ks available at IRT's Web 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 are 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, Alex, and thank you all for joining us this morning. Our performance in the Q1 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 3 key components. 1st, owning and operating high quality middle market communities within key non gateway markets That exhibit continued expansion of real estate fundamentals. 2nd, executing on our multi phase value add program to deliver outsized NOI growth.
And 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 Q1, I am very pleased to report Same store NOI growth of 5.1 percent, signaling an inflection point in our portfolio transformation. We are building this business Our long term stability and are excited to see our investments set the foundation for long term value creation. We have continued to see positive momentum in leasing activity in the 2nd 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. 2nd, 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, 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, 1590 of our value add units were completed with 1453 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. And 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 We believe they are just the beginning.
As we said on our last call, we've identified 1900 additional units across 7 communities that will be incorporated into the value add program later this As Phase 3, many of these communities are in markets where we currently have projects underway. We plan to leverage operational efficiencies by deploying 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-twenty 18.
As of March 31, we had 3 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 $42,000,000 generating a net gain on sale of $12,500,000 We also completed the acquisition of a 224 Unit Community in Atlanta for $28,000,000 At the time of the acquisition, The Atlanta property was 98% occupied with an average rent per unit of $9.90 per month. Atlanta continues to be an attractive market where we see higher Renner demand for Class B communities. The remaining properties held for sale are 2 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 We'll deliver significant value for shareholders. We remain focused on achieving our mid term leverage targets of the mid-7s through organic NOI growth over the next few years, driven by our value add program that is expected to generate roughly $8,000,000 to $9,000,000 in additional NOI through the completion of Phase 1 and Phase 2 projects. Further, we see an opportunity to continue to bring down over time our leverage beyond our midterm target as we execute additional portfolio enhancement initiatives. And 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. And looking forward, we expect that payout ratio to continue to improve.
And with that, I'll turn the call over to Farrell.
Thanks, Scott, and good morning, everyone. We generated strong operational performance in the Q1 driven by solid multifamily fundamentals and the momentum we continue to build through our value add program. During the Q1, 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 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 2 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, compared 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 There's 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 2 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 2 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 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 point 4% despite large tax reassessments in the market. As you can see, we're 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 1st quarter, we were able to raise new leases by 3.6% and renewals by 4.6%, which yielded a combined rental rate increase 4.1% year over year. We are continuing to generate this growth in the 2nd 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 Q2, 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 2020.
1 of our communities is a Class A property in the desirable area of Daniel Island and generate 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 the market experiencing supply pressure.
Despite the near term challenges, 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 of 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-twenty 18.
We will have sold properties at a 5.37 percent economic cap rate on our year 1 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 end 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, and 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 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 Lastly, we've added a same store by market table on Page 18 of the supplement.
This Reflect 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 Q1 of 2019, net income available to common shareholders was $2,500,000 down from $3,400,000 in the Q1 of 2018. Core FFO grew to $16,000,000 from 15 point $6,000,000 in 2018. Core FFO per share was $0.18 flat year over year, primarily due to higher corporate As well as higher interest expense.
Adjusted EBITDA for the quarter increased to $24,700,000 representing a 7% This increase demonstrates the value creation 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 point 1% with revenue growth of 4% and property level expenses increasing 2.5%. Occupancies in our same store communities 90 2.5 percent during Q1, down 120 basis points from Q1 last year, but up 50 basis points sequentially. Occupancy as of April 30, 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 $10.44 Up 4.4% since Q1 of last year. Also as Farrell mentioned, we are seeing this trend continue into Q2 As a 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 $1,800,000,000 Our leverage stayed And as of quarter end, our debt is 99% fixed with no maturities until mid-twenty 21. As of March 31, our unencumbered assets represented 48.7% of our portfolio, while as a percentage of our total NOI, Unencumbered assets represented 44.4 percent 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.
With that, 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 Q1 performance and encouraged by our continued leasing momentum into the 2nd quarter. We look forward to seeing many of you next month at REIT Week in New York. And now operator, I'd like to open the call for questions.
Your first question comes from Drew Babin with Baird.
Hey, good morning.
Good morning, Joe.
Hi, Joe.
Apologies if I missed this, but I was curious if you could provide cap rate information for year 1 On both the Atlanta acquisition, but also the Chicago sale, and also the mortgage rate on the mortgage on the Chicago property?
Yes, Drew, this is Farrell. The cap rate on the Atlanta purchase was a 5.5% cap on our year 1 underwriting. The Sale of the Chicago asset was a 5.7% on our budget 2019 budgeted numbers. And Jim, do you
know the interest rate? Yes. The mortgage balance on the property in north of Chicago was just under $19,000,000 and it had an effective interest 4.7%.
Okay. Yes, thanks for those details. And then just one more question for me. Expense growth was obviously pretty payment in the Q1, which helped same store NOI quite a bit. And I guess, the Q1 in the context of full year guidance, which 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?
Yes, sure. Thanks, Drew. I mean, generally speaking, Q2 and Q3, you typically see the higher expenses associated with some seasonal items, as Farrell in his notes, as well as just obviously all the kind of typical kind of contractor contractor Landscaping and utility costs rising.
Okay. But I would assume that that was the case to some degree last year as well. So from a comparability perspective, I guess, are the 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 expense numbers Highest absolute expense rent growth rates.
Okay, great. That's all for me. Thank you.
Your next question comes from Nick Joseph with Citi.
Thanks. Is there any debt on the Little Rock assets under contract?
There is. There is. Give me one second. There is
Maybe the rate as well while you're looking it
There's $40,000,000 I think there's $20,000,000 of debt and the rate is About 3.6%.
And that $20,000,000 is on for the 2 assets?
For the 2 assets, yes.
Great. And then just in terms of occupancy. $40,000,000 Sorry?
Yes, sorry, dollars 40,000,000 for the 2 assets, dollars $40,000,000 on both of them. They're both rates about 3.6%.
Okay. Thank you. And then 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. So I'm wondering if it's a tactical decision to push REIT at the expense of occupancy or how you think about It's up to more normalized level for the assets outside of their current redevelopment program.
We're driving our goal is to be 95%, 96%, I mean think some of what's dragging 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% You can see 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 on with John Guinee. I have a question on the Atlanta asset you purchased. How competitive was that process?
Were there other bidders?
We pre We knew the seller we bought from them before. They basically called us and said we're taking this out to market. Here's our number. We agreed with their value. We have another property Yes, within a mile of this and I think we underwrote the benefit of the combined being able to operate them, the efficiencies of being able to operate them.
So It was going to be marketed. We got to look at it preemptively.
Okay, great. And on the Little Rock So how long has that property property has been marketed? How long has this taken?
Longer than we wanted it I mean we had the properties under contract in December. And 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 fit in that process and we thought it would More prudent to just remarket the deals. So that took an additional 60 days longer than we wanted to. So the properties are under contract Our goal is to close this in the next 60 days.
Okay, great. And 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.
I
will say that we've done business with them before, so we're pretty comfortable with their
Okay, great. Thanks for taking my questions.
Your next question comes from John Massocca with Ladenburg Thalmann.
Good morning.
Good morning, John. Hi, John.
Sorry I missed this, but was there any kind of value add? I know you're obviously it's not going to be in Phase 1 or Phase 2, but as you look The Atlanta acquisition, I mean is there a potential value add component to that transaction or is this kind of bottom of the 4th moving?
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. So 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 added at all of our Atlanta properties.
I know your plan is still being kind of formulated for Phase 3, but is that still something you anticipate maybe having a more tangible idea of a timeline for 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. So we're starting that have started that in Tampa and we'll start projects there in the very near future.
Okay. And then on kind of a same store basis, there weren't 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 quarter over sorry, year over year?
Yes. I mean, the year over year was down a fair amount. If you remember Q1 of last year, we had Some weather related issues around pipes bursting that was in the Q1 number last year and that's not there this year.
So as we look forward, it should probably be a pretty I mean, obviously, there's 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 Under contract within the Q4 or somebody new?
No, somebody new. As I mentioned, we completely remarketed The properties in the Q1 as opposed to going back to any of the buyers sorry, any of the bidders that we had Top 2 in the first round.
Okay, thanks. So it seems like there's a fairly high certainty of close there. And so I guess this virtually buttons up the 2018 capital recycling plan. And so 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 Evaluate the portfolio and our assets and the markets, I want to say specifically. And we're not at this point ready to announce any further Recycling, but we think there will be some, but 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. And then, 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 and what revenue guidance would have been at the
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 factored into elements of our guidance. So the guidance the initial guidance The year would not have been tremendously different. Thanks.
And then last one for me. Just it looked like there were a couple of small moving pieces in the value Brad, pull 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.
So it looked like there were about 20 assets that you had previously