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Edited Transcript of IRT earnings conference call or presentation 21-Feb-19 3:00pm GMT

Q4 2018 Independence Realty Trust Inc Earnings Call

Philadelpia Mar 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Independence Realty Trust Inc earnings conference call or presentation Thursday, February 21, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alex Jorgensen

Independence Realty Trust, Inc. - IR Officer

* Farrell M. Ender

Independence Realty Trust, Inc. - President

* James J. Sebra

Independence Realty Trust, Inc. - CFO & Treasurer

* Scott F. Schaeffer

Independence Realty Trust, Inc. - Chairman & CEO

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Conference Call Participants

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* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Brian Dean Hogan

William Blair & Company L.L.C., Research Division - Associate

* Daniel Marc Bernstein

Capital One Securities, Inc., Research Division - Research Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Merrill Ross

Boenning and Scattergood, Inc., Research Division - Senior Research Analyst of REITs

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. We welcome you to the Independence Realty Trust Fourth Quarter and Full Year 2018 Earnings Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Alex Jorgensen, Investor Relations. Please go ahead, sir.

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Alex Jorgensen, Independence Realty Trust, Inc. - IR Officer [2]

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Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust's Fourth Quarter and Full Year 2018 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 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 noon, Eastern today.

Before I turn the call over to Scott, I'd like to remind everyone that there may be forward-looking statements made in this call. These forward-looking statements reflect IRT's current views with respect to future events and financial performance. Actual results could differ substantially and materially from what IRT has projected.

Such statements are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to IRT's press release, supplemental information and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations.

Participants may discuss non-GAAP financial measures during this call. A copy of IRT's press release and supplemental information containing financial information, 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's my pleasure to turn the call over to Scott Schaeffer.

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [3]

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Thank you, Alex, and thank you all for joining us this morning. 2018 was a transformational year for IRT as we commenced our value-add initiatives, bringing immense value to our portfolio. Our long-term focus continues to be underlined by driving organic growth in tandem with our capital recycling program, which reflects our ongoing effort to own the right properties in the right markets.

This morning, I will first address our operational results for the fourth quarter and then update you on the progress we've made on our value-add and capital recycling initiatives. Lastly, I'll provide an overview of our outlook as we continue through 2019.

For the fourth quarter of 2018, we reported same-store NOI growth of 3.9% and 2.6% for the full year of 2018. Core FFO was $0.19 per share for the quarter, up from $0.18 in the fourth quarter of 2017. As we will discuss, we are at the precipice of accelerated growth as we begin to see the incremental NOI impact of our value-add execution. To that end, our value-add program remains the cornerstone of our plan to unlock value in our portfolio. And we're pleased to report our projects are seeing strong returns on our invested capital.

As of year-end, 1,232 of our value-add units were completed, driving strong demand with over 90% of our completed units leased ahead of the 2019 spring leasing season. These renovations are producing an average rent premium of 15.8%, representing an 18.4% return on our interior renovations. We are also improving the common area amenities as we position these communities to complete with younger Class A properties but at a much lower price point. Looking to 2019, we are expecting to renovate an additional 1,500 units in our value-add communities.

Our value-add long-term returns continue to remain on course. And we expect to see the full impact of the $8 million to $9 million of incremental annual NOI generated from these initiatives by the end of 2020. We currently review our portfolio to identify additional value-add projects.

Currently, we have identified a pipeline of approximately 1,900 additional units across 7 communities. We are evaluating when to commence these additional projects as we work through and complete the communities already in process. Many of these additional projects are in markets in which we have existing value-add projects underway. Therefore, we can leverage the operational efficiencies and project teams we've developed thus far.

Looking at the other side of our portfolio optimization efforts. We continue to execute against our capital recycling goals laid out in 2018. In November, we completed the previously announced acquisition of the 276-unit community in Tampa, Florida, for $47 million. Additionally, we completed the disposition of 2 communities in December of 2018 for approximately $77 million.

We are consistently evaluating our portfolio and identifying markets in which we no longer see favorable long-term fundamentals and looking to exit those markets for opportunities to further our presence and build scale in markets that are displaying positive trends. In a moment, Jim will provide more details around our expectations on our capital recycling activity for 2019.

The portfolio transformation continues to be a critical initiative in unlocking long-term value. In the past 2 years, we've grown our portfolio by 22% in net units and our value-add efforts, paired with the capital recycling activity, will further drive portfolio optimization. The value-add infrastructure we've built in 2018 will allow us to maximize shareholder value for years to come. Additionally, our capital recycling program has phased out noncore communities from our portfolio while supplying capital to acquire ideal assets in core markets.

The portfolio is growing, and growing in the right markets. We are leveraging economies of scale at the property level in these MSAs and identifying opportunities to grow our value-add pipeline. This groundwork we've laid has positioned us for success in 2019 as well as substantial long-term growth. On a macro level, multifamily fundamentals continue to be positive with strong job and population growth in our core non-gateway markets, outpacing both the national average and gateway cities as we drive demand throughout the year to come.

Additionally, we continue to experience a generational shift in which young adults are renting, and renting longer. Accordingly to a recent survey by a leading apartment rental service and research company, less than 5% of millennials say they want to purchase a home in the next year while over 1/3 of respondents expected to wait an additional 5 years. This was further highlighted by Bloomberg earlier this month, who reported that the effects of the 2009 housing crisis continue to impact single-family residence construction nationwide.

In other words, the limited housing supply continues to drive rental demand and affordable living solutions as housing cost continue to increase around the country. We see this trend as further evidence that we are well positioned to provide these solutions as we look to 2019 and beyond. In summary, IRT is posed for accelerated growth in 2019.

With that, I'll turn the call over to Farrell.

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Farrell M. Ender, Independence Realty Trust, Inc. - President [4]

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Thanks, Scott, and good morning, everyone. In the fourth quarter, we made significant progress executing on our value-add program and have solid momentum going into 2019.

We executed across our same-store portfolio in the fourth quarter with revenue growth achieved in 13 of our 16 markets and outperformance in key markets. We saw solid rental increases across the portfolio in the fourth quarter with new and renewal leases generating a 3.8% and 4.7% rental rate growth, respectively. We continue to see that momentum in the first quarter with a blended rental rate increase of 4.6%.

Now I want to provide updates on a few of our markets. Huntsville, for the second consecutive quarter, led the portfolio in revenue and NOI growth, achieving 11.6% and 28.7%, respectively. Huntsville contains the Redstone Arsenal, which is the Army's missile command center, and NASA Jet Proportion Labs. Additionally, Toyota and Mazda are building a joint manufacturing facility, which is projected to produce over 5,000 jobs. Overall, the market benefits from a highly educated, well-compensated workforce with significant job growth projected for the coming years and minimal supply pressure. These factors contributed to the ability to increase occupancy 160 basis points to 98% while raising rents by 7.9%.

We continue to see momentum in Oklahoma City as revenue increased 4.1% with occupancy hitting 94.4%, a 150 basis point increase, and average rent per unit 2.6% higher as compared to the fourth quarter of 2017. Raleigh, Atlanta and Dallas performed well, all with revenue growth of 3.8% and stable occupancy. Raleigh and Dallas had an average occupancy over the quarter of 95.6% and 96.2%, respectively. In Atlanta, 2 of our 3 communities in the same-store portfolio are being renovated, causing occupancy to dip to 92% as the time it takes to renovate a unit is longer than to turn a typical unit.

Turning to more challenging markets. We continue to feel pressure from supply in Charleston and experienced a drop in occupancy, leading us to lower rents and resulting in a 2.8% decline in revenue. Supply issues persist in Austin as well, where our gains in rental increase were offset by a decline in occupancy resulting in a net decline in revenue of 1.4%. We have turned the corner in Louisville. But the impact of the 2 communities experiencing some of the heaviest disruption from our extensive value-add project significantly impacted the quarter. Revenue was 4.5% lower year-over-year.

At our Jamestown community, we are currently achieving rent premiums of $236 per month and recently hit 90% occupancy. At Oxmoor, our other value-add community in Louisville, we are currently leased to 84% with $199 rent premiums per month. We are encouraged by the recent activities of these communities and are well positioned to drive occupancy while pushing rental premiums as we enter the spring leasing season.

Lastly, I want to provide an update on our capital recycling program. As Scott mentioned, in addition to our previously announced acquisition in the Tampa market, we completed 2 dispositions of our 5 communities identified as held for sale: the first was a 346-unit community located in Greenville, South Carolina, for $52.5 million; and a second, a 170-unit community located in Jackson, Mississippi, for $24.8 million.

On our third quarter call, we mentioned that 2 additional held-for-sale communities located in our Little Rock market were under contract. As we all know, the month of December saw heightened capital market volatility and concerns of a pending recession. Due to this volatility and the recession fears, the buyer requested significant additional time to further evaluate their investment. We declined their request for additional time and are currently working on other opportunity to consummate the sale of these communities. In the interim, the communities are performing well with occupancy above 94%.

The final community in Waukegan, Illinois, was openly marketed, awarded and we are currently negotiating the agreement of sale. We anticipate closing on this property in April. We are still targeting the consummation of all sales for properties identified as held for sale for the first half of 2019 the total price of $100 million.

Upon the closing of these assets, we will have completed the dispositions that were part of our 2018 capital recycling program. The total sale price of the dispositions represent a 5.32% economic cap rate as compared to a 5.39% economic cap rate on the 4 communities we purchased as part of our recycling plan. We plan to invest the remaining proceeds in 2019, which is reflected in our acquisition volume guidance.

I'll now turn the call over to Jim.

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James J. Sebra, Independence Realty Trust, Inc. - CFO & Treasurer [5]

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Thanks, Farrell, and good morning, everyone. Today, I'd like to review earnings and operating performance for 2018, followed by a brief review of our balance sheet, capital structure and end with our 2019 guidance.

Starting with our 2018 performance. For the fourth quarter, net income allocable to common shares was $14.6 million compared to $6.3 million for the 3 months ended December 31, 2017. For the full year, income allocable to common shares was $26.3 million compared to $30.2 million for the full year 2017.

Core FFO per share was $0.19 for the quarter ended December 31, up $0.01 year-over-year, which demonstrates our continued ability to produce consistent bottom line results amidst reinvestment in our portfolio. Full year core FFO of $0.74 per share was up from $0.73 per share in 2017. Fourth quarter adjusted EBITDA increased 18% year-over-year to $25.7 million while full year adjusted EBITDA grew 20% to $97.1 million.

Fourth quarter same-store NOI growth was 3.9%, lifting our full year same-store NOI growth to 2.6%. Same-store revenue grew 1.7% in the fourth quarter, consistent with growth for the full year. Same-store operating expenses decreased 1.5% in the fourth quarter, driving down the full year increase to just 1.1%, demonstrating our focus on managing our property level expenses. We saw continued expansion in our same-store NOI margin, which increased 30 basis points in the full year 2018 to 60.1%. We also continue to make progress on reducing G&A as compared to our historical run rate with G&A, excluding stock-based compensation, coming in at 46 basis points of our total gross assets.

Turning to our balance sheet. We finished 2018 with 58 properties aggregating total gross assets of $1.8 billion, up from $1.6 billion at year-end 2017. While our gross assets have increased approximately 16% in 2018, we made progress in exiting markets where we did not like the long-term fundamentals, such as Greenville, South Carolina, and Jackson, Mississippi. We invested further in markets where we do like the long-term fundamentals, like Tampa, Florida, and Columbus, Ohio.

During 2018, we used our line of credit to acquire net 2 communities ahead of dispositions. At year-end, as Farrell mentioned, we had 3 assets held for sale. Upon completion of these dispositions, we would expect our leverage to drop by approximately $70 million.

With respect to leverage, we ended 2018 with a pro forma net debt-to-EBITDA of 9.2x. That said, we remain on track to achieve our long-term goal of a net debt-to-adjusted EBITDA ratio in the mid-7s range by the end of 2021. We will begin to see further progress on our deleveraging in 2019 as our property NOI growth from the value-add program and organic rent increases. Based upon the guidance that we provided, we would expect our net debt-to-adjusted EBITDA ratio to be 8.8x at the year-end 2019.

As announced on our third quarter call, we completed a $200 million unsecured 5-year term loan with an interest rate equal to LIBOR plus the spread based on our leverage. As a reminder, we effectively fixed the interest rate on this floating rate term loan by using an interest rate collar for the entire 5-year term. At closing, we drew $150 million of the $200 million available, leaving $50 million undrawn and providing flexibility during our capital recycling efforts. The initial $150 million in proceeds were used to reduce borrowings outstanding on our revolving unsecured line of credit, freeing up liquidity and extending maturities to 2024.

We drew the final $50 million in January 2019 using those proceeds to repay borrowings on our line of credit. Additionally, we continue to improve the composition of our total portfolio by increasing our percentage of unencumbered assets. As of December 31, our unencumbered assets represented 44% of our portfolio while as a percentage of our total NOI, unencumbered assets improved to 43% of the portfolio. This represents a sequential 170 basis point and 70 basis point increase, respectively.

During 2018, we opportunistically issued 2.2 million shares of our common stock under our ATM program at an average price per share of $10.32, generating net proceeds of approximately $22.2 million. These proceeds were used to fund the capital expenditures under our value-add program and reduce indebtedness on our line of credit. For the fourth quarter, recurring CapEx for the total portfolio was $1.9 million or $120 per unit. For the full year, recurring CapEx for the total portfolio was $7.3 million or $463 per unit.

Looking ahead to 2019. Our guidance for core FFO is a range of $0.74 to $0.78 per share. We expect NOI at our same-store communities to grow between 3.5% and 5.5%. This reflects expected revenue growth between 4% and 6% and operating expense growth between 4% and 6% as well. Our projected growth in operating expenses is a result of our expectation that real estate tax will continue to pressure our expense levels with an expected increase between 6% to 12% in 2019 in our same-store portfolio. Just over half of this increase in real estate taxes is associated with communities that are entering our same-store portfolio for the first time in 2019.

As you can imagine, it's difficult to predict when and by how much real estate taxes will increase, if at all. Our guidance reflects 2 possibilities: first, inflationary increases at our new same-store properties at the low end of our guidance range; and second, inflationary increases plus tax reassessments to our purchase price for newly acquired assets at the top end of our guidance range.

As we always do, we will continue to work with tax assessors or tax consultants to appeal significant real estate tax increases. I'll offer one point of clarity though. We always underwrite expecting a tax increase when acquiring assets. As a result, these tax increases are underwritten in our individual property returns and the respective cap rates we quote.

From an NOI perspective, while we are expecting large real estate tax increases, our value-add program is clearly benefiting the portfolio. For 2019, we are forecasting occupancy in our value-add communities to be 91% and at our non-value-add same-store properties, our occupancy to be 95%. Altogether, we are forecasting occupancy to be flat from 2018 into 2019 at 93%. This means that most of our revenue growth is coming from rental rate increases with a small portion coming from increases in other income opportunities in the portfolio. After all is said and done, we are estimating same-store NOI growth to be within a range of 3.5% to 5.5% or 4.5% at the midpoint.

Lastly, we will continue our capital recycling activity into 2019 as we look to further refresh and transform our portfolio. We are projecting an acquisition volume between $30 million and $110 million for the full year of 2019 as well as a disposition volume of $100 million to $180 million in the year. As Farrell mentioned, the low end of our acquisition and disposition guidance includes the completion of our 2018 capital recycling activity with the high end including additional 2019 potential capital recycling activities.

Lastly, I'd like to address the topic of our dividend coverage in 2019. As Scott mentioned on our Q3 call, we've experienced some delays in our value-add initiatives leading into 2019. These delays, along with a potential for a large increase in our real estate taxes, could push our quarterly dividend coverage into the back half of 2019.

With that, I'll turn the call back over to Scott.

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [6]

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Thank you, Jim. This past year has set the table for acceleration in 2019. The foundation we've built has brought significant momentum to our platform. We're focused on execution as we remain on track to achieve our long-term financial objectives and near-term guidance targets.

At this time, operator, I'd like you to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Drew Babin with Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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I just wanted to ask a quick question on the acquisition and disposition assumptions for this coming year. Are you willing to kind of give general cap rate assumptions on those to sort of underlie the guidance for the year?

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Farrell M. Ender, Independence Realty Trust, Inc. - President [3]

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On the -- well, on the dispositions, the 3 that we have remaining will be between a 5.25% and a 5.4% cap. And we're looking to recycle into the markets that we've highlighted in the 5.25% to 5.5% range, basically trying to match as we've done in the past.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Okay. And I guess, as a related question, obviously pricing for the assets you would typically look to acquire be value-add type properties in the Sun Belt, has been pretty tight. Has anything really changed over the last, call it, 90 days in that market? Has some of the perceived economic volatility maybe created some opportunities that might have not been there before?

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Farrell M. Ender, Independence Realty Trust, Inc. - President [5]

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Not that we've seen, Drew. We were able to buy the 2 Tampa deals in the low 5% cap range on an unrenovated basis and stabilized in the 6.25%, 6.5% once we get through the value add. But it's competitive out there, and we're leveraging all the relationships we have to finish the capital recycling.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay. And I guess, just one more follow-on question. It seemed like over peak leasing season, while getting the rate increases you expected on the renovations, there was some occupancy disruptions, where it was maybe creating a little more turnover, tenants not willing to eat the increase and moving out, so a little bit of a downtime before you find a new tenant. So you'd expect the occupancy -- and I know you mentioned it will be roughly similar as it was in 2018 overall. But I guess, would you expect some choppiness? And maybe where would we expect that choppiness sequentially?

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [7]

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I'm not sure there's going to be choppiness, Drew. And we've learned from the process that we went through in 2018. And as part of our guidance for 2019, we've factored in that lower occupancy at the renovation communities, the communities that are being renovated. So I'm very comfortable. I think we're all very comfortable with the guidance. And that's why we're again talking about 93% occupancy for the same-store pool as a whole with it being 95% at the properties that aren't being renovated and as well as 91% on the properties that are. And that's consistent with where we were last year. So I think the issue last year was that we didn't forecast that lower occupancy or occupancy as low in the renovation communities. And this year, we are.

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Operator [8]

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And our next question comes the line of Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [9]

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Where are you in the marketing process with the disposition assets that fell out of contract?

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Farrell M. Ender, Independence Realty Trust, Inc. - President [10]

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We have gone back to the buyer pool and are trying to negotiate the best deal with basically the backup buyers.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [11]

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So what's the expected timing of the disposition assumed in guidance?

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Farrell M. Ender, Independence Realty Trust, Inc. - President [12]

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The goal would be to get these closed in the same time frame as the last one in Wauwatosa's, mid-April.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [13]

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Then for Phase 1 and 2 of the development program, are the delays due to slowing down the program or more from construction delays?

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [14]

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Slowing down the program. We want to have less impact on the occupancy, so we are slowing down the program and pushing rents and only renovating those units where the tenants are unwilling to pay those push rents and are vacating.

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Operator [15]

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And our next question comes from the line of Austin Wurschmidt with KeyBanc.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [16]

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Appreciate the detail you provided on the occupancy targets for the year. But as I think about the 91%, it's a little bit below the 92% to 93% that you had hoped to target on the renovated properties. So just curious what the change is there? And then 3 of the 4 properties where you were looking to get occupancy from the low to mid-80s back up into that low 90% range still look to be challenged a bit. And so curious what you're doing to try and drive that back up to the low 91% range.

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [17]

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Thanks. I'm going to take the first question. I'm going to let Farrell talk about -- or answer the second question. So as far as the occupancy goes, we are forecasting it to be a little lower at 91% other than the 93% that we had previously in the prior year looked to. And it's really because we're just being more conservative and more conservative with the guidance. Obviously, we're going to do everything we can to keep occupancy as high while still driving the rent premiums that are available for the dollars we're investing. But we recognize that there is going to be an occupancy impact. And we want to make sure that we are forecasting a realistic number.

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Farrell M. Ender, Independence Realty Trust, Inc. - President [18]

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And part of that occupancy of 91% is where we've started with 4 of the value-add properties in the low to mid-80s. I can tell you that we're seeing really good leasing momentum. And all of them are in the mid-80s. And as I mentioned, Jamestown is at 90%. And I think we just had too much inventory in the winter months, where you're not seeing the traffic to fill the inventories. I think we're in a pretty good shape heading into spring.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [19]

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That's helpful. And then just curious, what would you have to see on the macro front to give you pause and kind of moving forward with the Phase 3 of renovations that you started to discuss?

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [20]

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Well, for -- I think with the Phase 3 renovations for further acquisitions in any given market, it's all about population and job growth and demand. And right now, for the markets that we've identified or the properties we have identified for Phase 3, they are in markets where we're continuing to see good demand for rental properties and where the renovated rents that we will look to achieve for the capital we're investing are still well below what newer, younger assets are achieving. So we're going to have a good, competitive price point and demand. And as long as that continues, we'll move forward with Phase 3. And if we see for any reason that those dynamics are changing in a market, then we would put it on pause.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [21]

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And then just one more for me, and I may have missed this, but did you assume any additional ATM issuance in the FFO guidance for '19?

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James J. Sebra, Independence Realty Trust, Inc. - CFO & Treasurer [22]

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No, we did not.

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Operator [23]

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(Operator Instructions) And our next question comes from the line of Brian Hogan with William Blair.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [24]

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A quick question on the competitive landscape and where you're sourcing the acquisitions. How competitive is it? And then are you sourcing those deals through relationships? Or is it marketed transactions?

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Farrell M. Ender, Independence Realty Trust, Inc. - President [25]

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This is Farrell. We -- it's competitive. I mean, there's a lot of money moving into our space over the past year. I think as I've said in the past, we have a reputation in the market that allows us to win deals. We leverage both our -- we have a really good group of marketed deals that we look at through brokers that we know. And we bought some off-market deals, too. They're harder to come by in this market, but we have been able to purchase them.

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [26]

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And I think it's fair to say that, that will continue. We fully expect for the acquisitions that we make in 2019 to really be encompassed both by marketed transactions but also some off-market opportunities just through existing relationships.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [27]

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All right. And then which -- in the dispositions, obviously, you have the ones that are held for sale. But with other ones, will you be looking to sell the ones that are kind of outside the Southeast region? Or what -- can you give us any color there?

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [28]

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Well, we haven't identified any dispositions at this point other than the ones were held for sale in 2018. And as Farrell mentioned earlier, we expect to still sell the 2 in Little Rock. The only way that would change is if we determined that the redeployment of that capital would be -- would not be accretive but actually dilutive. If we found that the -- again, the redeployment was dilutive, we might delay the sale of those Little Rock assets further. But we have full intention to sell them; and to sell them, as Farrell said, in early second quarter. But for 2019 guidance, we're giving you a range of what we might be doing, but we haven't identified assets.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [29]

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All right. You said you were selling -- you gave some ranges of what you're buying and selling at roughly the same cap rates. But when you buy those, do you put on value-add initiatives where your cap rate is actually theoretically 6% instead of 5.25% or whatever it is? Or what -- can you give us what your thought process is there?

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [30]

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Well, let me just -- and I'll let Farrell jump in, but let me start. So the first thing I just want to make clear is that, yes, we're buying and selling at similar cap rates. But we believe that we are improving our portfolio profile by exiting markets that don't have the same long-term fundamentals. So we're exiting slower growth markets and acquiring for the same initial yields in markets that we think will have a much better long-term potential.

So Farrell, you can answer the second part.

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Farrell M. Ender, Independence Realty Trust, Inc. - President [31]

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Yes. I mean, we only bought 2 properties so far, the 2 properties in Atlanta specifically underwritten as value add. And they have a similar profile in the sense that the going-in cap rate on renovated is in the low 5s. But we expect, once we implement the renovations and stabilize, it will be in the mid- to low 6s.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [32]

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All right. And then last one for me is have you seen changes in turnover within your rental base? I mean, is it people leaving more frequently or people staying longer? Just curious there.

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Farrell M. Ender, Independence Realty Trust, Inc. - President [33]

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In general, no change. I mean, I will say in the renovation properties, what we're doing, we're turning over the tenant base to a better tenant base because of the rents we're achieving.

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [34]

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Higher credit tenant base.

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Operator [35]

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And our next question comes from the line of Merrill Ross with Boenning, Inc.

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Merrill Ross, Boenning and Scattergood, Inc., Research Division - Senior Research Analyst of REITs [36]

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This question has sort of been answered -- asked and answered. I'm going to ask it a little differently. Farrell, you mentioned that the value-add turn takes longer than the typical turn. So maybe you could just give us some insights on how long is a typical turn and how much longer is a value-add turn?

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Farrell M. Ender, Independence Realty Trust, Inc. - President [37]

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So our typical turns, when you're just doing a unit turnover, is 5 to 7 days. Our renovations take between 20 and 30, depending on the property. A property like Jamestown that's older, vintage 1970s, you run into things that you wouldn't typically run into at a 10- or 15-year-old property.

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Merrill Ross, Boenning and Scattergood, Inc., Research Division - Senior Research Analyst of REITs [38]

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Sure. And just a follow-on, are you encouraging vacancy in order to turn apartments?

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Farrell M. Ender, Independence Realty Trust, Inc. - President [39]

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No. What we've learned from our past experiences, we're managing the renewal process basically on a daily basis and trying to control the inventory that we're getting back. So if we see that we don't have enough renovated inventory, we'll push our renewal rates to try to create vacancy. And if we see that we have too much renovated inventory, we'll back off those rental increases to try to incentivize people to stay. So we're managing that process much more closely.

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Operator [40]

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And our next question comes from the line of John Massocca with Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [41]

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Most my questions have already been answered. But just a quick one, with regards to this potential Phase 3 of the value-add program, could that potentially start in the back half of 2019? Or is that really more of a 2020 event in terms of -- obviously it takes time to renovate these apartments -- but in terms of initial capital deployment?

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Scott F. Schaeffer, Independence Realty Trust, Inc. - Chairman & CEO [42]

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No, John. It could potentially start at the back end of 2019. We're actually going through the groundwork now, looking at staffing requirements, making sure that we understand the demand in the market -- in these markets completely with the idea being that as we get further through 2019 with the initial projects that are in process, that we would be ready to go by the second half of 2019 with this Phase 3.

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Operator [43]

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And our next question comes the line of Daniel Bernstein with Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [44]

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I just wanted to ask, so the assets that you're acquiring that are value add, are those -- the redevelopment on that, is that considered part of that Phase 3 that's going to be pushed off to a later time? Or are you immediately starting to put CapEx into those assets?

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Farrell M. Ender, Independence Realty Trust, Inc. - President [45]

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No, those are included in the Phase 3 that we've mentioned.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [46]

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Okay. And then the other question I have was in the recurring CapEx, picking up to $8 million to $9 million from $7.3 million, wanted to understand what is in that number versus '18.

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James J. Sebra, Independence Realty Trust, Inc. - CFO & Treasurer [47]

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Yes, I mean, we typically look at recurring CapEx to be in that kind of $550 per unit per year. And it's just a larger portfolio for '19 than it is for '18.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [48]

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Okay, that's all it is. All right. And the last question I had is -- I know you're focused on the value add and that's what you've been buying as well. But are you seeing any -- given the amount of supply that's out there, are you seeing any opportunities to buy newer assets that haven't leased up or undermanaged?

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Farrell M. Ender, Independence Realty Trust, Inc. - President [49]

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We are looking into that. Obviously, our focus has always been the Class B space that is the majority of our portfolio, but where we see an opportunity that may make sense. We've looked at situations where there's Phase 2s of Class A properties that we already own that we may be able to leverage staff. But yes, to answer your question, we are looking at opportunities -- potential new lease-up opportunity.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [50]

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Nothing imminent, but if the opportunity pops up, you'll take it.

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Farrell M. Ender, Independence Realty Trust, Inc. - President [51]

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Correct.

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Operator [52]

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Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. Thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.