Q3 2021 Independence Realty Trust Inc Earnings Call

Good day and thank you for standing by welcome to the Independence Realty trusts, it's third fourth or 2021 <unk>.

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I wouldn't know like to hand, the conference over at your host D D. Lauren Torres <unk>.

<unk> go ahead ma'am.

Thank you and good morning, everyone. Thank you for joining us to review Independence Realty Trust third quarter 2021 financial results.

On the call with me today are Scott Shaffer, our Chief Executive Officer, Jim Zebra, Our Chief Financial Officer, and Farrell Ender President of IRT.

Today's call is being webcast on our website at www Dot I R T living dot com.

There will be a replay of the call available via webcast honor Investor Relations website, and telephonic Lee beginning at approximately 12 P M Eastern time today.

Before I turn the call over to Scott I'd like to remind everyone that there may be forward looking statements made on this call. These forward looking statements reflect irt's current views with respect to future events financial performance and the proposed merger with steadfast apartment, REIT, which will be.

Referenced herein as star.

Actual results could differ substantially and materially <unk> from what IRT has projected and there can be no assurance that IRT will consummate the merger within the expected time frame or at all.

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.

They discuss non-GAAP financial measures during this call.

A copy of Irt's earnings press release, and supplemental information containing financial information other statistical information and the reconciliation of non-GAAP financial measures to the most direct comparable GAAP financial measure is attached to Irt's current report on the form 8-K available.

And cheese website under Investor Relations.

Irt's other SEC filings are also available through this link.

<unk> 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 Schaefer.

Thank you Lord and thank you all for joining us today.

We're excited to review, our third quarter results, which reflect the striped our business and the opportunities that lie ahead, what today's call I'd first like to provide some quarterly highlights and then update you on our proposed merger with store.

And the third quarter, we experienced continued momentum due to the execution of our strategic plan and strong resident demand supported by positive migration trends as well as favorable population and employment growth in our markets.

This is a world of to achieve high occupancy levels at our community and drive significant rental rate growth, which was clearly reflected in our third quarter results.

Specifically, our same store NOI increased 14.7% in the quarter Court F F O improve more than 25% compared to a year ago. Our same store average occupancy increased to 96% of 220 basis point increase on a year over year basis, our app.

Average effective monthly rent per unit grew seven 3% in the quarter and we collected over 98% of third quarter rents and have now COVID-19, 94% of second quarter inch.

We are very pleased with these results, especially given that we generated positive in N y growth and each quarter throughout the entire the entirety of the pandemic.

And with favourable demand trends continuing to you're seeing strong results. So far in October are total portfolio average occupancy is $96, 2% and 130 basis point improvement compared to October of last year. We have collected nearly 96% of October rents, which is consistent with collections at this point in part of months and given our high occupancy in the third.

<unk>, we continue to drive rent growth, averaging 14, 2% for Lisa sign so far in the fourth quarter, one a blended basis.

We also continue to execute on our proven value at program in the third quarter, we completed renovations on 330 units and since the commencement of our values program. We have now completed 4419 units at an average cost of $12783 per unit and generated average rent premiums of $188 per month, resulting.

And and Unlevered Ryu of approximately 18%.

As mentioned on our West earnings call. After the combination of Irt's and stars portfolio. We will have a pipeline of approximately 20000 units available for future renovation.

In addition to our value added program by your tea will continue to assess markets, where we see long term growth opportunities and reevaluate those that may not be attractive long term investments, while engaging and joint venture relationships focused on new multifamily development.

Most recently, we entered into a joint venture with a partner to developed three new communities in Nashville, and exciting market that will be entering it scale post merger Farrell will provide more details on this shortly.

But before I handed over to federal I would like to provide you with an update on our proposed merger with star last quarter, we announced our intent to join together to very similar high quality businesses with complementary geographic footprints, creating a 38000 unit portfolio focused in the highly desirable sunbelt region of the United States.

I'm pleased to note that integration on the plan merger with stories progressing well, we continue to have good visibility on realizing our projected annual synergies of $28 million and expect the transaction to be immediately accretive to court F. S O for sure by approximately 11%.

Expect to close the transaction and the second half of December sending shareholder approval at our special shareholders' meeting on December 13th.

This is an exciting time for both IRT and star stakeholders as our business combination will create a leading publicly traded multifamily reed and markets, where we see substantial room for growth.

And now I'd like to turn the call over to federal for an operational update so.

Thanks, Scott and good morning, everyone.

I also share in Scott's excitement and optimism for our business.

Our year to date results are strong do the dedication of our team that is focused on servicing and retaining existing residents in attracting new residents to our communities.

And the third quarter, our same store occupancy grew 220 basis points to 96% from 93, 8% a year ago.

This is continued in October with total portfolio average occupancy at 96.2% of 130 basis points year over year.

We've been able to achieve these levels, while increasing our average effective monthly rent by 7.3% in the quarter.

On a lease over these basis for the same store portfolio, new lease rates increased 19.8% in renewables were up 5% during the third quarter.

During the combined lease over lease rental rate increase of 10, 5%.

Strong trends continue in the fourth quarter to date with new leases, having increased 24.1% led by our value add communities, while renew leases are up nine 4%.

With a blended resale or at least rental rate increase of 14.2% for our same store portfolio.

We are also seeing strong resident retention with a third quarter retention rate of 63%.

So far in October retention is $52, 7% up from 47.5% a year ago.

To give you an update on our value add program, we completed renovations of 330 units in the third quarter.

We are currently performing renovations at 20 of our properties, having added R meadows community in Louisville to our ongoing renovation program.

As detailed on the value at summary in our supplement we are now, adding 1200 and 95 units at communities that we will begin renovating in 2022.

We have designated seven communities completed as we've renovated 85% or more of their units.

We will continue to work towards completing 100% of their units at least it expire.

Year to date 700 units have been completed and we now expect to complete renovations on a thousand units in total diuretic.

This is less than our initial projections due to the higher than expected retention rates, we saw throughout the year.

Scott mentioned after the merger stars complete we will have a portfolio of approximately 20000 value add units.

In 2022, we expect to renovate 2000 units from the combined portfolio and ramp up to 4000 units per year thereafter.

During the third quarter, we closed on the joint venture in Nashville to develop three communities totalling 504 units with a joint venture partner.

We are investing a total of $14.4 million into the joint venture and have the right, but not the obligation to purchase the community upon their completion.

The first community will be delivered in the first quarter of 2022 and with the star merger will enhance our exposure to this desirable market.

Touching on our plan dispositions, we closed on the sale of change landing property in Saint Louis This quarter, recognizing again on disposition of 11 $5 million.

In conjunction with the plan merger Wistar, we've identified six assets to sell as we manage market concentrations.

Two are expected to sell this year and four during the first quarter of 2022.

We expect that blended economic cap rates on the disposition to be 4%.

Once completed proceeds will be used to repay debt of the combined companies.

Now I'll turn the call over to Jim.

Thanks, and good morning, everyone, beginning with the third quarter performance update net income available to common shareholders was $11.5 million up from $1.1 million in the third quarter of 2020.

During the third quarter quarter, faux grew to $22.7 million up 25% from $18 $2 million in Q3 2020.

<unk> per share during Q3 was 21.

10, 5% higher than Q3 last year at 19 cents per share.

Turning to our same store property operating results NOI growth in the third quarter was 14.7% driven by revenue growth of nine 4%.

This growth was driven by a seven 3% increase in average rental rate and a 220 basis points of higher average occupancy.

While this NOI growth includes value add community, we did see NOI growth of 12.8% at our same store nine value added community again. This growth was driven by six 3% increase in our average rental rate and 230 basis points of incremental occupancy in the third quarter, both as compared to last year.

Today, we have collected 98.4% of our third quarter billings consistent with past quarters, we evaluated uncollected amounts for Collectability and we maintain a reserve for bad that as of today, including collection subsequent the quarter and we maintain a bad debt reserve of $1.2 million associated with the one.

$6 million of gross receivables.

As a result, we have a net receivable balance of $410000 and believe that these receivables will be collected in the near term.

From an earnings perspective are bad that expense was one 1% of total revenue in the third quarter.

On the property operating expense side Same-store operating expenses grew a modest 1.7% in the third quarter as real estate taxes and advertising expenses declined on a year over year basis.

The decline in real estate taxes was due to one time assessments in the third quarter of last year, while advertising expenses were down and spend with higher last year to recall the pandemic started to wane last summer and leasing velocity increased and as a result, our advertising cost increase last year.

In addition, we experienced higher repairs and maintenance costs during the third quarter of this year compared to last year. When many projects were delayed due COVID-19.

Turning to our balance sheet as of September 30th or liquidity position was $221 million, we had approximately eight $7 million of unrestricted cash in $212 million of additional capacity through our unsecured credit facility.

In addition, we have $273 million proceeds that we will receive upon settlement of our outstanding equity for sale agreement covering $16 1 million shares of our common stock we expect to bring down the associated forward sale agreements during December 2021 in connection with the closing of our merger with Star.

On the dividend Irt's Board of directors declared a quarterly cash dividend 12 cents per share which was paid on October 22nd. This represents a payout ratio of 63% on 19.

Of <unk> during Q3 2021.

With respect to our outlook, we are updating our 2021 guidance based on our third quarter result in favorable view of our portfolio performance for the remainder of the year are updated guidance does not take into account any impact of the pending merger Woodstock.

Our advice guidance for 2021, EPS has a range of 18 to 23 cents per diluted share and for core for <unk> has a range of 80 to 82 cents per share up from our previously guided range of 76% to 78 cents per share our core episodes per share guidance adjust for depreciate.

<unk>, an amortization as well as gains of the sale real estate assets.

And nurture and integration costs.

For 2021, we now expect NOI at our Seamster communities to increased 10.25% at the midpoint up from our previous guided mid point of 7%. This updated guidance reflects expected same store revenue growth of seven 5% at the midpoint given higher average occupancy rates.

Rental rates that have increased more than expected and bad that expensive as trended lower than anticipated.

Moving on to expenses are new projected growth in total Same-store real estate operating expenses of $2, 75% at the midpoint as a result of our expectation that controllable operating expenses should increase 4% to 5% at the midpoint and our Noncontrollable expenses should increase only 50 basis points at the.

Midpoint generally our original expectation for more for a more notable increase in real estate taxes portfolio wide did not materialize this year.

Regarding our transaction and investment volume expectations for 2021 with a few updates with respect to acquisitions other than our pending merger wistar, we're not projecting any additional acquisitions this year.

As of now are pending merger star is expected to close in mid December this year as the special shareholder meeting to approve the merger scheduled for December 13.

As for dispositions, we are now projecting a disposition volume of between 170 and $180 million. This increase from our previously guided range as a result of the assets. We've currently identified is held for sale.

In connection with the pending mergers Dar we identified nine nine assets for sale six from IRT and three from Star.

The proceeds from the sales of these nine assets would be used to delever. The combined balance sheet at for shortly after the closing of the merger our original estimate of value for these nine assets was $340 million.

Given the strength in the market. We're now estimating the value of these nine assets to be between 375 and $385 million.

Before I turn the call back to Scott I wanted to briefly touch upon some preliminary thoughts looking into next year Rhys.

Recently, there has been a lot of press and discussion about the potential impact of inflation labor shortages in supply chain disruptions were clearly evaluating all of these factors on a business as we work through our budgeting process for 2022, we are expecting to see more than an inflationary uptick in wages, but expected our investment in prop tech.

Automation will help to alleviate some of these potential increased expenses.

We are also anticipating an increase in the cost for material is used in a value added renovation program. We do expect that demand and rental premiums for these upgraded units will continue to be robust in 2022 explicit rois, even after the cost increases will remain in the 15% to 20% range.

Lastly.

As we think about the interplay between rental rates and Occupancies. Some of the market data. We read suggests that double digit blended rent growth will continue during 2022.

For 2022, our plan will be to continue to manage both rental rate growth and occupancies to generate the highest possible revenue.

Thank you for your time today as we head into the final months of 2021, and we look forward to closing our merger Star and we'll plan to provide full year 2022 guidance during our year end earnings Conference call February.

Now I'll turn the call back to Scott Scott.

Thanks, Jim in closing I want to once again highlight how encouraged dianne by our strong year to date performance supported by favorable market trends and irt's commitment to driving growth from our proven portfolio of assets.

We're also excited about our future as we look forward to partnering with star and expanding our high quality portfolio in markets, where we see high growth potential. We thank you for joining us today and we look forward to speaking with many of you. It may reach virtual World conference at the beginning of November operator, we would not like to open the call for questions.

And thank you Sir you will now begin our question and answer session to ask a question you would need to press star one on your telephone.

We draw your question you May press the button.

Please stand by while we compiled the Q&A roster.

And our first question from the line of Neil Malkin from capital One Securities You May now ask you a question.

Thank you good morning, guys great quarter.

First question after me relates to the merger.

Yeah, I think just in general when you're when you're dealing with these types of things.

Integration of the various things.

And maybe get can take dropped the ball or things might have been that unexpected I think something like that happened with the larger sunbelt here a few years ago.

Took them I think a year longer to sort of get the revenue management system up and running so.

Just wondering what you guys are doing proactively to.

Eliminate any.

Potential hiccups with either regarding the synergies or getting all the color.

Culture.

On boarded.

The very things that can potentially again throw a wrench in the system.

Otherwise smooth process.

Thanks.

Thanks, Neil and obviously, it's a great question and it's on all of our minds everyday.

The integration is progressing well.

Fortunately for us and for Star, we have very similar operating systems and culture, so putting the companies together.

While there will always be bumps in the road, we think we are well on our way to having a smooth integration process.

We've just gone through the conversion of our operating system from you already to <unk>.

Star is on you already so we now have great experience behind us because we did it for all of the IRT properties. So moving this the star properties onto <unk>. We think we have a very very good handle on that.

We've been very focused on not just the technology, but on people, we're keeping all of the on site star people.

Most of their I think all of the regionals.

And many many many of their operating people are coming along.

We all have within both companies good history of the different systems that we Jews, so working together and getting it onto one platform. We think will be very doable within the state of time frame that we've laid out and so far I can tell you that we've had.

Very good all hands integration meetings every week, we have a committee that's been formed.

To put this.

To monitor and to oversee the processes and.

Again, we do expect obviously do there to be some some bumps, but we're working very hard to minimize those and so far so good.

Great appreciate your.

Your commentary.

The other question I have relates to the.

Value add platform, obviously very successful very accretive.

And he commented about materials.

Supply chain issue then.

I've heard we've heard that.

Some some companies are saying look you can order any more.

Drywall or lumber for some sorts of things and so I'm just wondering given that you're planning on ramping up your pipeline.

Next year and these issues appear to not be abating R U.

Preordering are what sorts of things are you doing to ensure that.

You have enough materials to actually.

Execute on your on your plan among turn.

Yes. This is farrell of the questions that I remember, we're not doing any real ground up so we're not experiencing any issues with lumber drywall, but we're doing appliances and countertops flooring and.

<unk> two years ago built out of procurement supply chain team that is working tirelessly to mitigate any of those shortages, we do experienced them.

We have some clients issues until last year.

We expect material prices to rise in the future and it's their job to.

Leverage the scale of the platform to get the best.

Prices that we can all materials.

Okay, Great and then maybe just one quick one real quick.

You are seeing such strong demand and I'm just wondering.

Can you attribute that to.

Historically strong levels here I mean is it is it just the sheer number of people coming in to the markets like in migration from a lot of these.

Higher cost legislatively.

Troubled market or is it just more jobs higher wages like like what is driving it.

All time level of pricing power.

Well, we talked about the supply demand and balance a lot and I think.

Overall, the market fundamentals in the markets were in our outpacing and National average you add on that pound packs of Covid and then the majority of our markets you are seeing demand basically.

At twice the amount of supply.

That we've probably got a decent amount of time that we're going to experience that again because of COVID-19 and market fundamentals yet supply you construction has which slowed during that period. So we're just seeing a tremendous amount of demand for our product and the majority of our markets.

We've always had this philosophy that.

People need a place to live and that's why we left multifamily.

Again, what Farrell said, our markets have have had a supply and demand imbalance for some time growing population and job creation.

Higher than in any other parts of the country.

And that just creates a need for housing and again, there's a housing shortage. So we've always had this philosophy. If you if you're providing a good clean well located asset and you maintain it and you manage it professionally you will keep good strong occupancy and be able to push rents and now with rising wages.

Gives us the ability to continue to push rents. If you think about it only 20 cents of every dollar that our residents are on average goes towards red with with the rising wages does.

Give us again, the tailwind to continue to.

Generate higher risk.

And you guys.

And the speaker.

Our next question from.

And then Victor.

To update us on what the implied.

Blended rates right and guidance.

Yes for the first of all.

Or 75%.

The rent growth that we've been seeing today.

Call us 24% in the fourth quarter nine per cent of renewals in the fourth quarter, It's got a renegade.

The growth in the fourth quarter, 14% for the year to date, it's about 9% blended record.

We've got a network talked with the.

Blended rate growth that we have heading into the fourth quarter and the whole full year guidance.

Okay. That's helpful.

And then following I find it the integration aspect as you enter that in fact portfolio a bit more give any update unexpected capex investments either in terms of the RLI, you'll be able to achieve on that portfolio in particular or any potential deferred maintenance issues that you've seen.

Yes, we've suddenly obviously done our due diligence as part of the merger there's no deferred maintenance.

Their recurring Capex spend it's going to be very consistent with our retarded capex spending roughly 550, a door plus or minus annually.

And then as we mentioned is file mentioned there is a large pipeline a value add potential in the portfolio that we think will be able to continue to achieve roughly the same rois that we've achieved.

Okay makes sense and then last one for me.

Given the strong fundamental performance as well as the accretion you expect from steadfast any updates of how you and the board or thinking about the dividend today.

[laughter].

Yes.

The only update is that we want to get through and again. This is this is Scott.

Chairman of the board.

I have some insight, but I can't speak for the whole board.

We want to get through the merger, we want to get through the integration, we recognize that our payout ratio has declined.

Adequate with.

The bottom line.

So it's something that will be looking at but but not until merger.

Makes sense I appreciate your time thanks.

Thank you Matt.

And speakers. Our next question from the line of Joe Staff from City, you May ask you a question.

Thanks, maybe just continuing on integration how quickly do you expect to be able to add the star assets to the redevelopment program and actually begin work on them.

So pretty quickly I mean, we're going to start with markets that were already in the anticipate being able to add a handful next year to the renovation platform and really.

2023, really going full steam into their portfolio.

Thanks, and then just on the same start.

Guidance change obviously pulled.

No I think about six properties out of the pool what was the impact.

If those assets remained in the pool was there any impact from the removal of the properties or was it just pure change for the portfolio overall.

Yeah, I know the the same store growth in the third quarter with 47 was 14.7%. If you included the six.

Positions in the same store call would have been $14, 2%. So.

A fairly consistent and.

The the guidance that we have on the disposition standpoint is that two of those successes will sell probably in the second half of December so from journey standpoint, very very small sense of this year.

And is there any change to the full year guidance based off of the removal.

There is not enough.

Hey, guys, it's Michael Boylan here with Nick.

One question and it sounds like you're trying to minimise.

Many of the risks as possible.

[noise] terms of systems and people that typically arrives coming out of M&A.

Given the fact that stars a non traded read a lot of individual shareholders. What are you starting to do to sort of deal with the potential flowback of.

Sales from that can you can you setup.

Buyback program or are you trying to get other institutional shareholders to come in.

So just walk me through how you're thinking about dealing with that gives us a significant of an equity base.

Well thanks, Mike. It's a question that we have thought a lot about.

Pre pre.

Agreement to to merge and since.

I don't know that there's a whole lot. We can do what we're not going to do a buyback.

Especially with where the stock is trading we don't we don't think that's appropriate.

But we've been we've.

Been advised that there will be give or take 20% to 25% of the retail shareholders will look to exit over the first six months post merger, but that the index buying because of the larger size.

The combined company should more than offset that so we really don't believe that there will be any any real pressure.

From.

The non treated read shareholders getting liquidity for the first time I'm also if you think about it they have many of them have.

A negative basis or a very very low basis, so they're going to have a big tax problem if they sell the shares.

And the fact that they're getting liquidity forever not for just a short period of time or a short window.

Also gives us some comfort that they will not all look to sell immediately but they'll look to sell when it makes sense as a manager on portfolio.

And then just in terms of.

I know they had lowered their dividend a number of times where.

Upon exchange when they come into your stock that flat up or down.

Okay. So it's slightly down.

Considering the exchange to 0.9 O five exchange ratio.

So the receive a lower yield upon closing as well.

Small very very small.

Until you will you will have.

That program in place I mean, you don't I mean, I know you don't know where the puck is today and I know that's not what you wanted to pull your capital for but I assure you you'll put the arrow in your quiver, so that I mean, who knows where the market is going to be upon clothes and what could happen.

Index by and then I'll be at the same time as the non trade fell down.

And 25% of total is almost 10.

10% of your share base, so it's not insignificant.

Just wanted to ensure that you have the tools at the ready.

For that.

We don't have a buyback in place. However, it's something that we have been discussing with the board and will continue to think about moving forward.

Yes.

Want to have as many tools in the toolkit.

Deal with situations, so that you're not caught flatfooted, so that would probably be something to have in place.

I appreciate that advice Michael Thank you okay. Thank you.

And speaker is our next question from the.

The line is I stayed very Schmidt from Keybanc, you May I ask you a question.

Great and good morning, everyone in the store merger presentation, you guys did outline what new lease rates.

Or for the stock portfolio and I was just wondering if you could share some high level of thoughts on how that portfolio is performed in to the third quarter.

Versus your existing portfolio. So we can start to think about maybe the earning of star as well and then any thoughts on the performance relative to your initial underwriting yes.

Yeah, No offence great question Star did file their 10-Q last night as well as put out a press release on their earnings as well I would just direct everybody to kind of take a look at that and read that generally speaking their performance is very consistent with ours a lot of their Lisa release growth is very consistent with ours are slightly higher occupancy and.

96.5%, but again very consistent and it just speaks to the fact that the.

Properties are located very close to ours very similar business practices and cultures drive similar operating results.

I appreciate that and then so would send them the NOI growth you're achieving.

You mentioned your comments.

About the disposition proceeds being greater than you had originally anticipated one would think that you are tracking ahead of your pace as far as decreasing leverage.

Closer to your medium term target so I'm just curious.

Your balance that with where the stock trading at all time hides what are sort of the latest thoughts around centrally accelerating deleveraging versus just.

Remaining patient.

So.

As part of this merger we identified.

And I think Farrell mentioned as in his in his prepared remarks, we identified $340 million worth of assets nine communities.

Six of IRT community, six Archie communities and three star communities.

To be sold with the proceeds being used the delever. So our initial estimate of value back in July was $340 million, but now that we're in the process that actually moving towards actual sales. We think that those proceeds will be as high as 380, maybe even $390 million so that additional value.

Along with the fact of the strong growth from both companies.

Now leads us to believe that we will hit are seven and a half or mid sevens.

Net debt to EBITDA target.

In the middle to later part of next year, rather than the end of 2023. So a full maybe 18 months earlier than what was originally projected.

And that deleveraging will continue.

Through organic earnings growth as we move forward.

I appreciate the thought Scott Thank you sure.

Sure. Thank you.

And see here's our last question from the bed.

D from calling you a security you may ask you a question.

Good morning. Thank you gentlemen is there is there any expectation for additional synergies beyond the $28 million in the merger that you're pre announced.

David is a great question and obviously, we are still in the integration process.

We're still.

Very confident of delivering the $28 million synergies and will continue to look to generate even further extend it's available and will provide that for once we get to the get through the merger get it closed.

And then as part of our 2022 guidance.

Okay, great. So that's what I'm moving moving target and then my other question has to do with the dispositions can.

Can you provide a range on those assets. It was it was at a relatively wide range of cap rates implied by the sale prices or was it somewhat homogenous grouping now.

Now, it's pretty tight I mean, all closed between high threes and 4% cap rates.

Okay, and then just lastly, where any of those assets part of the value at pipeline or or they held up previously.

Three of them were in the value at pipeline there, but they were pretty much almost complete from a value at that point.

Thank you. Thank you for the the answers.

That fixed it.

And we don't have a question asked of this time I will now turn the call over to Scott Shaffer closing comments.

Thank you all for joining us today.

Look forward to completing the merger commit December and then speaking with you. After you are in.

Thank you.

This concludes today's conference call. Thank you all for joining you may now disconnect.

[music].