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Independence Realty Trust Inc (NYSE:IRT)
Q4 2019 Earnings Call
Feb 13, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning ladies and gentlemen, and welcome to the Quarter Four and Fiscal Year 2019, Independence Reality Trust Earnings Conference Call. [Operator Instructions]

I would like to turn the conference over to your host, Ms. Anna Pienkos [Phonetic]. You may begin.

Anna Pienkos -- Investor Relations

Thank you and good morning everyone. Thank you for joining us to review Independence Realty Trust's fourth quarter and full year 2019 financial results. On the call with me today, are Scott Schaeffer, our CEO; Jim Sebra, our Chief Financial Officer; and Farrell Ender, President of IRT.

Today's call is being webcast on our website at irtliving.com. There will be a replay of the call available via webcast on our Investor Relations website and telephonically, beginning at approximately 12:00 PM 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 make -- 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.

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Thank you Anna, and thank you all for joining us this morning. 2019 was a year of acceleration for IRT. Our organic growth initiatives and in particular our value-add program were in full swing and delivered very strong results. With a dedicated team in place to manage renovation projects in each market, we were able to execute more seamlessly and manage the lease-up process more proactively, building upon the lessons learned and the momentum gained during the first year of this initiative.

Our organic growth was further underscored by the backdrop of the strong economy, which has supported household formation and growing wages, which in turn have facilitated rent increases within our communities. As highlighted on our year-end call for 2018, research from a leading apartment rental service and research company found that young adults are renting and renting longer and that trend remained unchanged throughout 2019. The demand for quality apartments in amenity-rich communities within our markets has not subsided, underscored by the fact that NOI increased in all of our 18 markets in 2019. We expect macro fundamentals to remain supportive as we move into 2020.

Focusing briefly on our reported results which Farrell and Jim will expand upon later on this call, Q4 and full year 2019 produced some of our highest same-store metrics to date with NOI growth of 9.6% for the quarter and 7.7% for the year. I am pleased to report that we delivered on our goal to cover the dividend during the fourth quarter on an AFFO basis.

Diving a bit deeper into the value-add programs. Since its inception, we have completed renovations in 2,715 units, achieving a weighted average return on investment of 18.5% on interior renovation costs. As of year-end, we have a total of 23 projects in the pipeline or under way, representing 7,136 units. On average we are seeing an 18.3% rent premium on renovated units, which is up from 15.8% last year. As you will recall, we began work on our Phase 3 communities in the third quarter of 2019.

During the year we also executed upon our capital recycling program which involves continuously evaluating our markets and communities to ensure we scale in MSAs where we see long-term growth, and conversely reevaluate those markets that are difficult to scale, or may not prove to be attractive long-term investments. During the year, we acquired three properties: one each in Atlanta, Raleigh and Tampa, and sold four existing -- exiting the Austin, Little Rock and suburban Chicago markets. As we move into next year, we will continue to prudently evaluate the portfolio for attractive opportunities to sell communities that no longer fit within our core criteria and reinvest in communities that allow us to expand our presence in key markets.

Looking ahead we are entering 2020 from a position of strength. Our organic growth initiatives have proven successful and we expect to be able to continue to produce above market returns. Specifically, we have a robust runway of value-add opportunities highlighted by 4,400 units yet to be renovated and expect to complete between 500 to 700 units per quarter this year. This is further supported by a strong macro environment that will drive continued rental demand and favorable economics.

We're also excited about how technology will continue to shape the apartment landscape. This year we plan to continue to develop and explore technology that will both improve the daily lives of our residents as well as drive further operating efficiencies at our communities. We've already been successful at developing proprietary technology in our value-add renovation group and we'll continue to invest in technology in a meaningful but thoughtful way.

Lastly, before turning the call to Farrell and Jim, I want to highlight the strides IRT is taking to continue to build upon our sustainability platform. We have formed a cross-functional sustainability group, which is led by our Head Asset Manager, who has been a LEAD accredited professional since 2008 with the specialty in existing buildings. Additional 2020 initiatives will include improved procurement of earth-friendly products and identifying opportunities for energy audits. Overall IRT will continue to align sustainability with its culture and are excited to bring our employees and residents along the journey with us.

And now I'd like to turn the call over to Farrell for a deep dive into our markets and activity during the quarter. Farrell?

Farrell M. Ender -- President

Thanks, Scott and good morning everyone. In the fourth quarter and throughout 2019, we accelerated our value-add program with the benefit of scale in key markets, providing strong momentum going into 2020. In the fourth quarter, same-store NOI grew 9.6%, an increase in all of our 18 markets with the exception of Orlando, where we own a Class A community that is adjacent to a new construction property in lease-up. At this community occupancy declined from 96.8% to 93.7% with revenue remaining flat due to 3.2% rental rate growth.

Looking at NOI growth by market. The Atlanta, Raleigh-Durham, Louisville, Columbus, Indianapolis, Myrtle Beach, Wilmington and Charlotte markets all exceeded 10% growth for the quarter, leading the broader portfolio, all strong indicators of the continued demand for amenity-rich middle market communities in our non-gateway markets. Atlanta, Wilmington, Raleigh, Columbus and Louisville also continue to benefit from our value-add initiatives.

Turning now to our largest market Atlanta. Same-store average effective monthly rent grew by 7.3% for the quarter and 7.9% for the full year compared to 2018. Same-store NOI grew by 11.8% for the quarter and 7.9% for the full year. Significant NOI growth, even as we incurred a 12% increase in real estate taxes. Average occupancy was also up 2.3% from Q4 2018 to 93.8%. What we are witnessing in our Atlanta portfolio is representative trends within the overall Atlanta market. The market has delivered the fourth best rent growth in the nation with most of this growth occurring in suburban garden style apartments.

Shifting to Charlotte, which is growing organically without the aid of our value-add projects. Charlotte saw same-store NOI growth of 11.6% for the quarter and 10.1% for the full year, fueled by revenue growth of 7.2%. The South Boulevard submarket, where our community is located, is extremely desirable area to live as it provides a lower cost option within minutes to uptown Charlotte. The submarket has experienced significant new supply over the past few years with nearly half the inventory now less than four years old. New construction has abated and the inventory growth over the next five years is projected to be 3% annually. This slowdown in new construction has allowed us to average 96.3% occupancy over the quarter, while at the same time pushing rents 3.9%. The Southend submarket will also benefit from those recently announced construction of a 23-storey technology center, that would be completed in late 2021 and will bring 2,000 jobs in the area.

Overall, portfolio average occupancy was 92.6% in Q4, 60 basis points higher compared to Q4 2018 and 93.2% for the full year, 10 basis points lower compared to 2018. Excluding the value-add, same-store portfolio average occupancy remained unchanged at 93.7% for the quarter and was 94.3% for the full year. Sequentially from Q3 2019, occupancy declined 80 basis points due to the impact of the additional value-add communities and the effect of seasonality on leasing volume. The short-term effect on occupancy during the renovation process at our value-add communities is more than offset by the powerful long-term rental rate growth. Total portfolio average rental rates increased 4.6% year-over-year, driven by our value-add properties.

On a lease-over-lease basis for the same-store portfolio during Q4, new lease rates increased 2.3% and renewals were up 4.4% during the combined lease-over-lease rental rate increase of 3.3%. Through the first month of Q1 2020, lease-over-lease rental rates for the 2020 same-store portfolio, new leases were up 3.7% while renewed leases are up 3.2% with a blended lease-over-lease rental rate increase of 3.4%. We expect this to accelerate as we move into the Q2 and Q3 leasing season.

Turning our attention to our capital recycling. On October 1, we purchased a 318 unit community in Raleigh, our sixth community in the market, bringing our total unit count to 1,690 units, nearly 12.5% of our total NOI. We acquired the property based on an economic cap rate of 5%. This community was added to our Phase 3 of our value-add pipeline and will have a 6% cap rate at stabilization. On December 17, 2019, we completed the sale of a 300 unit community in Austin, Texas for $56 million, recognizing a gain on sale of $20.7 million. While Austin is a market with good long-term real estate fundamentals, given the strong competition in the market, we were limited in our ability to grow and build scale and took advantage of selling out of the market at an extremely attractive time.

The sale price represented a 3.9% cap rate on our 2020 budget. Subsequent to the fourth quarter, in February of this year, we closed on the purchase of a 251 unit community in the McKinney suburb of Dallas. The community was newly constructed and is adjacent to one of our existing properties built by the same developer. The property is currently 81% leased and expects to be fully occupied in June and will yield a 5.7% stabilized cap rate in year two. Our core focus remains to own and operate middle market suburban communities in non-gateway markets, but we'll seize opportunities where appropriate. This acquisition was attractive to us, as owning and operating two adjacent communities provides synergies and reduces potential competition.

I'll now turn the call over to Jim.

James J. Sebra -- Chief Financial Officer

Thanks Farrell and good morning everyone. Today, I'd like to review earnings and operating performance for 2019, provide a brief review of our balance sheet and capital structure and end with the discussion of our 2020 guidance.

Beginning with 2019, for the fourth quarter of 2019 net income allocable to common shareholders was $23.8 million, up from $14.6 million in the fourth quarter of 2018. For the full year income allocable to common shareholders was $45.9 million, up from $26.3 million for the full year of 2018.

During Q4 core FFO grew to $18.6 million, up 12% from $16.6 million in Q4 2018. Core FFO per share during Q4 was $0.20, up from $0.19 in Q4, 2018. For the full year core FFO grew to $68.5 million, up 5% from $65.1 million in 2018. Core FFO per share was $0.76 for 2019, up from $0.74 for the full year 2018. As promised earlier this year, and as Scott already mentioned, we did cover our dividend this quarter on an AFFO basis.

Turning to the same-store portfolio for the fourth quarter. NOI growth was 9.6%, driven primarily by revenue growth of 6.3%. Occupancy in our same-store communities averaged 92.6% during Q4, 60 basis points higher year-over-year. Rental rates for the same-store communities increased year-over-year with an average effective monthly rent of $1,082 this quarter, up 4.6% since last year. While this includes the value-add communities, we did see solid rental rate growth at our non value-add same-store communities with the rental rates in Q4 increasing 3.2% over the prior year. For the full year 2019, same-store revenue grew 5.7% almost entirely driven by the 5.1% increase in average rental rates.

On the property operating expense side, same-store operating expenses grew 1.2% for Q4 2019 and 2.7% for the full year 2019. Controllable operating expenses increased 1.7% for the full year. Our non-controllable operating expenses for real estate taxes and insurance increased 4.4% for the full year. As we highlighted earlier this year, the timing of real estate tax reassessments is difficult to predict. For 2019, we were expecting tax reassessments and guided accordingly. As it turns out the increase in real estate taxes for 2019 was lower than expected as several communities were either not reassessed or were reassessed at values lower than we were expecting. We are now factoring these tax reassessments to occur in 2020. More on 2020 guidance shortly.

As guided and previously discussed, the year-over-year increase in G&A expenses on a quarterly and full year basis was driven by our strategic investment in our platform and management team during 2019 with a focus on people and technology. As demonstrated by our strong NOI growth these investments are already paying off, enabling us to deliver growth for the portfolio.

Turning toward the balance sheet. We closed 2019 with 57 properties and total gross assets of approximately $1.8 billion. For Q4, the normalized net debt to adjusted EBITDA was 8.9 times. At year end, our debt is 91% fixed rate or hedged through 2024 with no significant maturities until 2023. As of the end of the year, based on gross asset, 51% of our assets are unencumbered, that is an increase from 44% unencumbered since Q4 2018.

Looking ahead to 2020. Our guidance for EPS is a range of $0.08 to $0.11 per share and for core FFO is a range of $0.79 to $0.82 per share. We expect NOI at our same-store communities to grow between 4% and 5.5%, following a very strong 2019. This reflects expected revenue growth of between 4% and 6%. Our projected growth in operating expenses of 4.25% and 6.25% is a result of our expectation that we will see further real estate tax reassessment. As you know, the timing and extent of which is difficult to predict, as well as increases in payroll expenses and some newly implemented incremental revenue programs. To further explain, we rolled out a number of incremental revenue programs across our communities where we are required to gross up both revenue and operating expenses. These programs are primarily related to both cable arrangements and Vale trash services. These programs are profitable for us, but has the impact of displaying a larger than actual increase in expenses because of the gross up. For 2020, the increased cost these ancillary programs accounts for about 35 basis points of our increase in total operating expenses, or about 55 basis points of our increase in controllable operating expenses.

Lastly, we provided guidance around transaction volume expectations. We are projecting an acquisition volume between $50 million and a $100 million for the full year 2020 as well as a disposition volume of up to $100 million in the year. While we provide acquisition and disposition volume guidance, it is important to note that our core FFO guidance does not assume any transactions aside from the one property acquired in Dallas, Texas this month for $51.2 million. The ranges are meant to be indicative of the potential magnitude as we currently see it.

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

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Thank -- thank you, Jim. In closing, I am very pleased with our performance and the progress made during the quarter to further our organic growth initiatives. We are confident that we have the right team and processes in place to continue to execute on our planned initiatives. From a macro level, we believe 2020 will be another strong year for real estate fundamentals across our core markets and we'll look for opportunities to enhance our portfolio through capital recycling initiatives. We thank you for joining us today and look forward to seeing many of you at the Citi Conference in Florida in a few weeks.

Operator, I would now like to open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Drew Babin from Baird. You may ask your question.

Andrew Babin -- Robert W. Baird -- Analyst

Hey, good morning.

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Good morning Drew.

Andrew Babin -- Robert W. Baird -- Analyst

A question on capital recycling guidance. Obviously, the low end of the acquisition range already incorporates the Craig Ranch or the McKinney acquisition. I guess my question is what are the odds of achieving the high end of the disposition guidance if Craig Ranch turns out to be the only acquisition made this year. Obviously, understanding that it's early in the year and this is just kind of guidance. Where are the odds hitting the high end of disposition -- high end of the disposition range?

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Well, the basis of the recycling program Drew is to match the sales with the purchases. So if we're only going to purchase the one Dallas property for the year, then it's unlikely that we would be disposing of $100 million of assets and more likely would be disposing for somewhere in the $50 million range, so that we are matched on the buy and the sell.

Andrew Babin -- Robert W. Baird -- Analyst

Okay. And you mentioned that these will most likely be kind of non-core underperforming properties. Are you willing to talk about what markets those may be. And kind of how pricing has trended in those markets relative to maybe a year ago -- a couple of years ago?

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Well, I'll answer the second part of that question first, which is pricing has increased in all markets across the board. Whether they are core for us or not or core for someone else or not, it's just -- as we all know, cap rates have continued to compress everywhere as people look for yield. It's not so much on our recycling that we're limiting it to markets where we think that they might be underperforming, but it's markets as well that we may not have the ability to grow in. For example, the Austin market. Austin is a great market. It's just that with our cost of capital, we could not acquire and acquire accretively. So with one property, we decided it was best to just dispose of it in this low cap rate environment.

So, it will be both markets and we haven't identified them at this point, but it will be both markets where we see the capital being able to be better invested for future growth, that we will then get out of those to other markets. Or where we have a property where for any number of reasons, we're not able to scale in the market.

Andrew Babin -- Robert W. Baird -- Analyst

Makes sense. And then just a couple balance sheet questions for Jim. I see there's $71 million approximately of secured debt maturities in '21. Can you talk about what rate those are at and whether anything becomes pre-payable this year and whether there's any assumptions made in guidance about that?

James J. Sebra -- Chief Financial Officer

Yes. Those -- the average interest rate for those maturities is about 3.8%, 3.9%. There is some that become pre-payable, but it's in the $20 million to $30 million range. We did factor in some kind of expectations of refinancing some of those that are pre-payable in guidance for purposes of the end of the year, but the effect is fairly insignificant.

Andrew Babin -- Robert W. Baird -- Analyst

Okay. And I guess a related question, just on leverage, I guess as implied by the '20 guidance expectations, where do you see your net debt to EBITDA ratio by year-end?

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Well, it came down about 0.5 turn in 2019 and we would expect it to have the same effect in 2020.

Andrew Babin -- Robert W. Baird -- Analyst

Okay, great. That's all from me. Thank you.

Farrell M. Ender -- President

Thanks, Drew.

Operator

Your next question comes from the line of Austin Wurschmidt from KeyBanc Capital. You may ask your question.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Hi, good morning. Just wanted to touch on same-store revenue guidance, which implies deceleration versus the 4Q growth rate you achieved. Given sort of the pickup in unit renovations in the value-add program, the earn-in from last year's renovation work, I guess can you give us a sense what you're assuming for lease rate growth for non-renovated units as well as occupancy for 2020?

James J. Sebra -- Chief Financial Officer

Yes. Hey, Austin. This is Jim. For occupancy for 2020 for the non value-add communities, we pretty much held that kind of flat in that mid-94% range. For rent growth we've assumed depending on newer renewal about a blended 3% to 3.5% rental rate growth.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Appreciate the detail there. And then with the acquisition you made in Dallas earlier this year, a bit of a different ilk or not necessarily the Class B product that you've been acquiring in the last couple of years. So I'm curious how we should think about the composition of future acquisitions between Class A and Class B?

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

We're still focused on acquiring and operating a Class B predominantly -- excuse me Class B portfolio. This Dallas acquisition for us was just an opportunity and that it is directly adjacent to an existing community that we own, built by the same builder, actually Phase 3 of this called the Master Development. And we felt that that it was best for us to acquire it, notwithstanding the fact that it's new construction, just because we'll get great synergies out of operating two properties together, but also because it will reduce as Farrell mentioned, will reduce the competition and we'd rather not have someone else owning a brand new property across the street from us. So that's why. But we are still focussed to be an owner and operator of predominantly B Class assets.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

And what do you see in terms of pricing differential between value-add assets and the Class A assets that are in lease-up today?

Farrell M. Ender -- President

Austin, it's Farrell. I mean we've seen it shrink considerably as you can see by the cap rate that was represented on our Austin deal. We have no idea obviously what the seller was underwriting in their value-add. But we're definitely seeing the compression between the Class A and Class B cap rates across all markets.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Thank you.

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Austin, let me just address one of the comment at the beginning of your question regarding the deceleration. Last year we guided 4% to 6% of revenue growth at the beginning of the year and then we increased it later in the year and ended up I think at 5.7%. This year, we're guiding 4.6% again at this time, it's early in the year. We want to be prudent, and just make sure that we're delivering and executing on the value-add, but didn't want to get too far ahead of ourselves relative to guidance.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

I appreciate the comment and the level of potential conservatism in there as it is early in the year. So thank you.

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of John Guinee of Stifel. You may ask your question.

John Guinee -- Stifel -- Analyst

Great. Thank you. Just wanted -- one curiosity question. It looks like you paid about $200,000 a unit for Dallas, Texas.

James J. Sebra -- Chief Financial Officer

Yes, $204,000 a unit.

John Guinee -- Stifel -- Analyst

Yes. What's it -- OK. I might have got the answer. Hey, Scott. You guys are trading at a 4.8% implied cap $15 looks to us like a 4.8% implied cap. People obviously like the strategy and you're delivering stabilized acquisitions at a 5.5% to 6%. Why not turbocharge this investment strategy as opposed to doing $50 million or $100 million a year?

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Well, it's, one assets are -- they are in high demand today. Again we've been patient and I've stated before, I don't want to grow just for the sake of growth. I want to do it when we can do it accretively and where we're building out a portfolio that makes sense for the long term. I hear you, but at the same time, we were laser focused as we mentioned before of covering the dividend at the end of last year and continued to have it covered this year and to grow into a more normalized payout ratio. So we're going to opportunistically acquire assets that makes sense for us, but only do it when we can do it accretively and at the same time have continued to correct the leverage ratio and bring that down.

John Guinee -- Stifel -- Analyst

And then the next question is CBRE, who seems to be pretty good at this. Just changed their expected delivery number in 2020 from about 270,000 units to about 340,000 units, a huge uptick. Where do you see new product getting built and what are they building? Are they building -- still building at Surface Park at $180,000 a unit or in your markets? Are they building Texas doughnuts or podiums at a much higher number?

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

It's mostly -- obvioulsy the rents, you need to build have to be pretty significant. Now, especially with the cost of labor. So we're seeing most of it in urban centers, I mean talking around there still some suburban sites like the one that we bought. But in Atlanta it's mostly Midtown Buckhead, where you can achieve the rents you need to justify the cost of the construction.

John Guinee -- Stifel -- Analyst

Great, thank you.

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Thanks, John.

James J. Sebra -- Chief Financial Officer

Thanks, John.

Operator

Your next question comes from the line of Nick Joseph from Citi. You may ask your question.

Michael Griffin -- Citi -- Analyst

Hey, this is Michael Griffin on for Nick. Just curious, you mentioned the Vale trash earlier. What other ancillary revenue opportunities, if any still exists in the portfolio today?

Farrell M. Ender -- President

Yes. We're always looking at options. As Scott mentioned, we're exploring smart home technology, which a lot of people have been talking about. We're launching an ability for our residents to report their rent payments to create better credit. So we're constantly looking for avenues to generate additional revenue.

Michael Griffin -- Citi -- Analyst

Thanks. And I noticed in your sub here, you have three market -- sorry six markets where you have one asset. Does that make sense in any of those to sell in those markets? And would you look to recycle it into current markets within your portfolio or are there any new markets that might be attractive?

Farrell M. Ender -- President

Lots to digest there. So we're always looking at the portfolio, and as Scott uses we're prune where we think that the specific markets may not have the long-term fundamentals we look at, where we need and we also look to add. The Huntsville is a market where we're actively looking to add because of the population and job growth and the muted supply is generating really, really good fundamentals. Right now, we're really focused on building out the markets that we're in. In the future we'll probably -- we'll look to expand into additional markets. But right now, we're really focused on the markets that we're in.

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

But let me add to that. For example, Orlando, we have one asset and Orlando is a very attractive market, but we have four assets in Tampa, which is very, very close. So we can really run them almost as a region. And it's the same thing with Charlotte where we have one asset, but we have many other assets in and around North Carolina. But again make that more of a region and not so much of a one-off market.

Michael Griffin -- Citi -- Analyst

Got you. Sounds good. That's it for me. Thanks.

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Neil Malkin from Capital One Securities. You may ask your question.

Neil Malkin -- Capital One Securities -- Analyst

Hey guys, good morning. I just wanted to dive in a little bit more of the operating expenses. Do you bake in any successful appeals in real estate taxing or taxes during the year?

James J. Sebra -- Chief Financial Officer

Yes. We -- so, this is Jim. Thanks for the question. We do get obviously, we do have tax consultants that help us kind of look at tax assessments and what's going to happen in 2020. We do look at the ability to appeal and the ability to be successful on appeal. And we do factor that into the guidance.

Neil Malkin -- Capital One Securities -- Analyst

Okay, great. I'm just wondering, what's the current cap rate or NOI yield on that, on the McKinney lease-up that you bought? Imagine it would be dilutive near-term, right.

James J. Sebra -- Chief Financial Officer

Not quite -- probably breakeven. I think it's a 5.1% currently.

Neil Malkin -- Capital One Securities -- Analyst

Okay. Awesome. And then last from me would be, how you think about, I guess revenue management from the leasing angle. What do you think you're stabilized occupancy would be, just for example, the non value-add portfolio. Can you get it to 95%, 96% like it seems like where the rest of the REIT peers are going. Are you still trying to optimize lease expirations? Any color or insight into how you're thinking about that would be great?

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

We -- yes, to answer your question, yes. We are always looking to optimize revenue through both occupancy and rent growth. So, and that's the benefit of the LRO process that we have in place. Our non value-add portfolio last year was 94% -- mid-94% range of occupancy for the year. I've always been a believer of 95% being full occupancy. You'll hear other people say 96%. But we've also been pushing rents healthy amount. So the fact that we were at 94.5%, I attribute that to the fact that we have been pushing rents so much. But I think what it does is it gives us some comfort that there is room in the occupancy to grow going forward, especially as number of these Phase 1 value-add property renovations are completed. We'll be able to bring them back up to a more normalized 95% give or take occupancy.

Neil Malkin -- Capital One Securities -- Analyst

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of John Massocca from Ladenburg Thalmann. You may ask your question.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Good morning John.

James J. Sebra -- Chief Financial Officer

Hi, John.

John Massocca -- Ladenburg Thalmann -- Analyst

Just specifically on kind of the real estate tax, you mentioned the reassessments, they were kind of lower than what you were kind of guiding to and quite drove the 4Q number, but what were the specific markets where you kind of saw better-than-expected tax outcomes?

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Really, the biggest one was in Ohio. We continue to just be pragmatic and be thoughtful about it, but that was the one that had the lower-than-expected tax increase.

John Massocca -- Ladenburg Thalmann -- Analyst

Was it just really specifically with that one market?

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

That was the biggest one of the top of my head. And I can give you further details off the call.

John Massocca -- Ladenburg Thalmann -- Analyst

No worries. And then as we kind of think about the redevelopment renovation kind of pipeline. It potentially maybe, I know it's still very early days on Phase 3. So this is a little unfair. But as we go to Phase 4, maybe in your kind of thought process, I mean, is that primarily going to be stuff that you need to acquire to kind of create that Phase 4 pipeline. I noticed that some of the additions to Phase 3 were recent acquisitions? Or is there stuff within the existing portfolio that makes sense. And I guess what drives the timing of waiting on that stuff within the existing portfolio in terms of doing the redevelopments?

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

We think there are still opportunities within the existing portfolio. So if there is a Phase 4, much of it will come from properties that we already own. As far as some of the Phase 3 being newly acquired, it just so happened that we acquired an asset that was perfect for the renovation program in a market where we already had a renovation team in place. So it just made sense to begin those renovation sooner or rather than later as part of the Phase 3 process. And one of the things that we're very cognizant of is the pressure that this renovation process puts on occupancy in the near term. So that's why we're doing the Phase 1 and Phase 2 and Phase 3, and not just rolling it all out at the same time, because we're trying to manage the portfolio and continue to grow NOI overall in core FFO and bring down leverage and do all of the things that are beneficial in the long-term.

Farrell M. Ender -- President

And just to add, John, as Scott mentioned, we -- this is more market-specific. So we build out teams and we are self-performing on this work. So you'll notice, we've built out teams in Atlanta and Tampa and Louisville. So we still have Indianapolis, we still have Dallas with properties in our portfolio that we can expand into new markets and do the value-add.

John Massocca -- Ladenburg Thalmann -- Analyst

How transferable is that kind of expertise from market to market? I know you guys obviously pick up a lot of kind of the intellectual capital as you do these projects, but when you think about building these teams, I mean is any of that transferable if you were to say, do a whole program in Indianapolis.

Farrell M. Ender -- President

It's very transferable. I mean obviously you need the people at the property level, but the process is the same in Indi as it is in Columbus, and it's really just the people on the ground and the vendors that are different.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. That's it from me. Thank you very much.

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Thanks, John.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Anna Pienkos -- Investor Relations

Scott F. Schaeffer -- Chairman of the Board and Chief Executive Officer

Farrell M. Ender -- President

James J. Sebra -- Chief Financial Officer

Andrew Babin -- Robert W. Baird -- Analyst

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

John Guinee -- Stifel -- Analyst

Michael Griffin -- Citi -- Analyst

Neil Malkin -- Capital One Securities -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

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