Independence Realty Trust Inc. Q1 2023 Earnings Call
Speaker 1: The.
Speaker 1: I.
Speaker 2: Hello everybody and welcome to the Independent Royalty Trust Q1 2023 conference call. My name is Sam. I will be coordinating your call today.
Speaker 2: If you would like to ask a question during the presentation, you may do so by pressing star followed by 1 on your telephone keypad.
Speaker 2: I'd now like to hand you over to your host, Lauren Torres. To begin, Lauren, please go ahead.
Speaker 3: Thank you and good morning everyone. Thank you for joining us to review Independence Realty Trust's first quarter 2023 financial results. On the call with me today are Scott Schafer, Chief Executive Officer, Mike Daley, EVP of Operations and People.
Speaker 3: Jim Sebreth, Chief Financial Officer, and Janice Richards, SVP of Operations.
Speaker 3: 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 p.m. Eastern Time today.
Speaker 3: 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 and financial performance. Financial results could differ substantially and materially from what IRT has projected.
Speaker 3: 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.
Speaker 3: 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 earnings press release and supplemental information containing financial information, other statistical information, and a reconciliation of non-GAAP financial measures.
Speaker 3: to the most direct comparable GAAP financial measure is attached to IRT's current report on the Form 8K available at IRT's website under Investor Relations. IRT's other FCC filings are also available through this link.
Speaker 3: IRT does not undertake to update forward-looking statements on 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 Shafer.
Speaker 2: Thank you, Lauren, and thank you all for joining us this morning.
Speaker 2: We delivered strong same store NOI growth of 8.2% during the first quarter. As discussed on our last earnings call, we focused on implementing operational changes and have since seen significant improvement in our processes and resulting occupancy. I'm pleased to announce that our occupancy has increased approximately 130 basis points since our operating update in early March.
Speaker 2: Today, our same store portfolio is 94.3% occupied, with our same store non-value ad portfolio at 94.7%, and our same store value ad portfolio at 92.3%. These occupancy gains are broad-based and across all communities.
Speaker 2: Also of note, our same store portfolio is 96.7% lease as of today, which puts us in a position of strength heading into leasing season.
Speaker 2: Regarding first quarter results, here are some highlights. Our average rental rate increased 10.8% year over year, supporting a 7.5% increase in revenue. Our SAME store NOI increased 8.2% and our core FFO increased 8.3% in the quarter, both compared to last year.
Speaker 2: And we renovated 635 units in our value-added renovation program, generating a 19.1% return on investment based on interior renovation costs and a 17.8% total return on investment, including common area improvements.
Speaker 2: These results continue to reflect the many strengths of IRT's portfolio, from our strong rental rate growth to the effective way we execute on our value-add renovation program.
Speaker 2: We continue to prudently manage leverage and monitor both our interest rate risk and maturity ladder to ensure that IRT does not have any undue exposure. As we sit here today, 97% of our debt is either fixed or hedged, and we have only 9.8% of our debt maturing through the end of 2025. This exposure is the lowest among our public peers.
Speaker 2: During the first quarter, we continue to advance our value-add program, which reinforces our expectation to deliver between 2,500 and 3,000 renovated units that we previously guided for in 2023.
Speaker 2: Currently, we have one going value-add renovations at 20 properties in 10 markets.
Speaker 2: Over the course of 2023, we plan to add another five properties and markets where we already have renovation teams in place.
Speaker 2: We expect to continue to achieve an approximate return on investment of 20% on these new starts, which is consistent with returns that we have achieved to date. Our value-add program has been designed to be flexible allowing us to increase or decrease volumes as market conditions warrant.
Speaker 2: Despite continued economic volatility and uncertainty, our portfolio continues to demonstrate resilience driven by our presence across key Sunbelt markets that position as well at all points of market cycles.
Speaker 2: We see no real signs of stress in our markets as we achieve double-digit NOI growth during the first quarter in key markets such as Raleigh-Dorham, Tampa, Charlotte, Myrtle Beach, Denver, and Charleston among others.
Speaker 2: We continue to see positive job and migration growth in our markets leading to residential demand. Also, our value-added communities provide renters with a real alternative to new construction, but at a much lower price point and with inflationary pressures driving residents to Class B living, we are well positioned in cost-effective, well maintained, highly defensive middle market communities.
Speaker 2: I'd now like to turn the call over to Mike Daly, our EVP of Operations and People, for an operational update.
Speaker 2: quarter results, we delivered an 8.2% increase in NOI, supported by double-digit NOI increases in several markets and our accretive value-add program. We continue to remain laser-focused on achieving sustainable operating gains across the entire portfolio. As discussed last quarter, we have added senior leaders to the team who have a proven track record in operating large.
Speaker 2: diverse portfolios of apartment communities.
Speaker 2: In addition, we continue to improve our leasing and sales processes. Specifically, we have enhanced the speed of local market pricing feedback from our communities to the revenue management team. This allows us to augment our technical pricing tools and make any needed real-time adjustments to price.
Speaker 2: We have fully established our 24-7 call center to capture 100% of leads, significantly expanded our sales training program, and continued to leverage technology to support process changes and maximize lead-to-lease conversion.
Speaker 2: These changes collectively increased occupancy to 94.3% as of today, up 130 basis points when compared to our operational update in early March.
Speaker 2: We will continue to enhance and streamline our operational processes to maximize our performance and efficiency.
Speaker 2: seeing good demand for rental housing as we enter leasing season.
Speaker 2: Through today, lead volumes year to date are up 6% over 2022, and our lead to lease conversion has improved 290 basis points, from 5.5% last year to 8.4% year to date in 2023.
Speaker 2: For all of these new leases signed, the average rent to income ratio was 22% and had lease over lease effective rent growth of 3.1% in Q1.
Speaker 2: So far in Q2 2023, we have seen an improvement in new leasing spreads to 4.2%. From the resident retention perspective, the retention rate in Q1 was 48.2% and has increased in Q2 to date to 56.7%.
Speaker 2: This has been driven by the enhancements of our renewal process as part of our sales and leasing improvements we discussed earlier and is a key component of our plan to drive occupancy gains.
Speaker 2: Lease over lease rent growth for renewals was 4.8% in Q1 2023 and is 1.7% in Q2 2023 to date.
Speaker 2: These lower second quarter quarter date renewal rates were a result of us prioritizing occupancy.
Speaker 2: As we monitor submarket fluctuations in occupancy and revenue growth, we take a balanced approach to optimize new lease growth while retaining residents through normalized renewal tradeouts and our improved retention program.
Speaker 2: We are already seeing this in pricing power with June and July renewal rates, currently at 2.6% and 4.2% respectively.
Speaker 2: I'd now like to turn the call over to Jim.
Speaker 2: I'd now like to turn the call over to Jim. Thanks, Mike, and good morning, everyone.
Speaker 2: Beginning with our first quarter of 2023 performance update, net income available to common shareholders was $8.6 million compared to $74.6 million in the first quarter of 2022.
Speaker 2: During the first quarter, Corefofo increased 8.3% to $62.5 million and Corefofo per share grew 8% to $0.27 per share from a year ago. This growth reflects the organic, rent, and NOI growth that we experienced in the quarter.
Speaker 2: IRT same store NOI growth in the first quarter was 8.2% driven by revenue growth of 7.5%. This growth was led by a 10.8% increase in average monthly rental rates to $1,530 per month. This growth was led by a 10.8% increase in average monthly rental rates to $1,530 per month.
Speaker 2: On the operating expense side, IRT same store operating expenses increased 6.4% during the first quarter, led by higher repairs and maintenance costs, contract services, and property insurance. Inflationary pressures are certainly having an impact on operating costs and causing higher than normal increases.
Speaker 2: We continue to use our peer procurement teams to rebid contracts and technology solutions to help reduce costs wherever possible.
Regarding the increase in repairs and maintenance costs, several factors have caused this increase. First, during Q1 2023, we had a higher volume of units to turn due to the lower resident retention rate.
Second, we've performed a number of seasonal maintenance projects in Q1 ahead of leasing season as compared to last year when we started most of these projects in April or May.
And finally, inflationary pressures continue to cause an increase in prices for services.
As Scott and Mike both mentioned, during Q1, we executed on our reorganization of our operations and revenue management teams. These efforts are positively impacting our operations by providing a sustainable improvement in occupancy.
While we incurred a one-time cost for severance from the reorganization, we do expect our annual G&A expenses will be lower over the remainder of 2023.
Turning to our balance sheet, as of March 31st, our liquidity position was $327 million. We had approximately $12 million of unrestricted cash and $315 million of additional capacity through our unsecured credit facility.
During Q1, we entered into a new SOFR swap that immediately reduces our floating rate borrowing exposure and provides an immediately lower interest rate by approximately 140 basis points today. This new swap is expected to reduce our interest expense by $1 million for 2023. Regarding leverage, we ended the first quarter at 7.3 times net debt to EBITDA,
and our forward expectations for the remainder of the year, we still expect to achieve our leverage target of mid-sixes by year-end 2023.
While we continue to anticipate macroeconomic uncertainty in the coming months, I wanted to reiterate that we have no debt maturity in 2023 and only 70 million of maturity in 2024. Today, our exposure to floating interest rates is only 3% of our total indebtedness and our maturity exposure through year end 2025.
is the lowest of our public peers at only 9.8% of our debt. With respect to our 2023 outlook, we are reaffirming our initial guidance that we provided on our year-end conference call in February . Our EPS guidance remains at a range of 23 cents to 27 cents per diluted share, and for Core for a range of $1.12 to $1.16 per share.
Our same store operational guidance remains unchanged with growth of 6.4% in revenue, 6.1% in operating expenses, and 6.5% in NOI, all at the midpoint of the guided ranges.
Our previous guidance on transaction and investment expectations also remains unchanged.
We are currently not assuming any acquisition volume but did close on the sale of our community in Indianapolis at a price of $37.3 million. This disposition was at an economic cap rate of 4.8%. No additional dispositions are currently expected.
Now I'll turn the call back to Scott. Scott. Thanks Jim. So, to sum up, we are off to a strong start in 2023 and remain on track to achieve our 2023 guidance. Our portfolio of properties and attractive markets in the Sunbelt region continues to perform well supported by solid renter demand fundamentals. Our efforts to improve occupancy are materializing and our value add program is contributing high return.
please press star followed by one on your telephone keypad now. If you change your mind please press star followed by two
When preparing to ask your question, please ensure your line is unmuted. Our first question comes from Austin Werschmidt from Key Bank Capital Markets. Austin, your line is now open. Please go ahead. Hey, good morning everybody. Jim, maybe kicking off with you, given how the operating results have played out heretofore in the transition to the operating system, how has the operating system changed since the beginning?
assumptions in our guidance, 94.5% occupancy. Obviously, we have the earnings from last year and then plus another 3% blended rent growth for all of 2023. We still feel quite good about that occupancy assumption. The blended rent growth, we're just above 3% so far a year today.
the same store revenue kind of growth trajectory will almost be dependent on that occupancy growth and will be at kind of the low 95% range in third quarter. So we're feeling quite confident and good about our overall assumptions around the occupancy and the revenue forecast will be baked into time.
That's helpful. And then how does that 96.7% lease percentage compare versus periods where maybe occupancy was more stable and you know, you've clearly started, you know, begun pushing rental rates, it sounds like, into June and July . Is it sort of data dependent or, you know, how much room do you think you have to run on sort of the renewal rate growth shot?
continued ability to kind of now that we're, you know, that that non-value ads same store pool is 94.7 and approaching that 95 percent occupancy, we feel quite good about being able to now have this pricing power as we had in the leasing season. The, you know, the difference is really kind of on the lease percentage, you know, in a period of time when the occupancy is more stable, you know, you'll see a little bit less gap between the lease percentage and the actual...
you can chime in here, but can you just share what you've done differently, you know, sort of interacting with the revenue management system? You highlighted some different, you know, protocols within the operations team, but, you know, do you think those specifically are what driving this inflection occupancy or seasonality having, you know, some impact as well? And what's the confidence level you think you've...
We consolidated asset management, revenue management, and marketing under one unified leadership team and also really stressed improving the training of our sales and marketing. It is some seasonality, of course, but we think that these changes that we've made to the operations platform.
is what is really driving the occupancy growth that we're seeing. And that renewal rate was by design and giving us now pricing power with this higher occupancy and with higher leads and higher conversion rate going into leasing season. But Janice, do you wanna add anything? Absolutely, Scott, thank you.
So we joined IRT a little bit over 90 days, and during that time we implemented a few key components that have improved operational performance and will allow us to continue to sustain this performance through 2023.
On the revenue side, we implemented a real-time communication where the teams and the revenue management are interacting on a daily, minimally a weekly basis to ensure that we are maximizing blended rent growth as well as driving occupancy. So we're continuing that balanced approach that we've had in the past.
and just making sure that we're improving the efficiency and the timeliness of it. We implemented a focused renewal program immediately while implementing sales training and support for the team.
Also during this time, we rolled out the call center to all of our communities, which has helped greatly with our lead volume.
One of the sales trainings that we implemented was a six-week sales training that was a series of workshops with our community sales professionals where we really dove into improving the sales process as well as follow-up and creating value within the rents as well as our community. We rolled out a sales performance team. This team is specialized.
trainers that are focused on sales performance for a signed area. So they really dive into those KPIs, ensure our teams are maximizing every point of contact and working those leads all the way through to the process of the sale. Specialized coach and development,
sales teams will continue to monitor lead management. They'll work on the sales performance of the teams and they will work concurrently with the VPs of operations and the entire marketing and revenue team to ensure that we are able to sustain the performance throughout 2023. To finish up, Austin, we're very confident that this is sticky and that you'll continue to see a stable occupancy at that full occupancy level into the future.
Thank you. Thanks, Austin. And our next question comes from Eric Wolf of Citi. Eric, your line is now open. Please go ahead.
Thank you. It's actually Nick Joseph here with Eric. I was hoping you could walk through kind of the relationship between the value add within the same store, how those returns that you're getting, call it near high teens, near 20%, plays into both renewal and new lease rate growth within that portfolio. And I recognize you usually do it on the term. But if you could just kind of walk through that relationship and how that should trend forward.
of how we rent that unit to an unrenovated comp that's either in the building or presumably outside of the building that we were actually competing with as part of the competitive set properties. The data that you see in the same store operational metrics that we provided kind of breaks out the new lease growth and that renewal rent growth.
And as you mentioned, the value add units are value added on term. The new lease growth of I think just a little over 5% doesn't show that 20% rent growth because it's got a mixture of other new leases that are happening in the portfolio because the entire property.
as part of that same store value-add component. The new leases are in there. There are new leases on existing value-added units, such that you don't see that 20% top on those other new leases that are, you know, again, on second turns, if you will. But what we're seeing, you know, we're continuing to see great demand for the value-add units.
all of you and the business plan going forward.
business plan going forward. And I think an important thing to add.
Nick, is that when we look at the value add communities and the units that are being improved over the next 30 days, every unit that is being improved and delivered is already pre-leased. So that gives us great confidence that the demand is ongoing and that we'll be able even to increase those returns as we move further into leasing season. Thanks. That's very helpful. And then just maybe on supply.
I'm curious to get your thoughts on how kind of recent deliveries or expected deliveries play into the pricing strategy and then what you're seeing or expecting in terms of new starts given kind of a contraction on the construction lending side, how you would expect those to trend throughout 2023.
Well, you know, new supply has been a headline for 2023 for some time now, and we are seeing it. You know, we are not seeing any real effect in our portfolio as we've stated our dh
our lead volume is up, our conversion rate is up, occupancy is increasing. So, you know, it really, when you look at CoStar, they talk about markets such as, you know, in Atlanta, Dallas, or Raleigh-Durham, they're big markets. So we break it down into the sub-markets.