Q2 2023 Independence Realty Trust Inc Earnings Call
Okay.
Thank you for standing by my name is Brianna and I'll be your conference operator today.
At this time I would like to welcome everyone to the Independence Realty Trust second quarter 2023 conference call.
All lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session.
If you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad.
I will now turn the call over to Lauren Torres you May begin your conference.
Thank you and good morning, everyone. Thank you for joining us to review Independence Realty Trust's second quarter 2023 financial results on the call with me today are Scott Shafer, Chief Executive Officer, Mike Daly EVP of operations and people didn't see Brown chief.
Financial Officer, and Janice Richard <unk> SVP of operations.
This call is being webcast on our website at IR to living dotcom, there will be a replay of the call available via webcast on our Investor Relations website, and Telefonica <unk> beginning at approximately 12 P M Eastern time today.
Before I turn the call over just thought I'd like to remind everyone that there may be forward looking statements made on this call.
Forward looking statements reflect Iot, it's heard views with respect to future events and financial performance.
Actual results could differ substantially and materially from what IRT has projected.
Statements are made in good faith pursuant to the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995. Please.
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.
<unk> earnings 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 current report on the form 8-K available at IR team.
Website under Investor Relations.
<unk> other SEC filings are also available through this lake.
<unk> does not undertake to update forward looking statements on this call or with respect to matters described herein, except as maybe required by law with that it's my pleasure to turn the call over to Scott Shafer.
Yeah.
Thank you Lauren and thank you all for joining us this morning.
It's now been two years since we announced our merger with steadfast apartment REIT in 18 months since the merger transaction closed.
After a number of changes during the integration process. We are confident that we have the right team in place to lead IRT into the future.
Before getting into the second quarter operating results I want to share that IRT has delivered the best <unk> per share growth across the large public apartment peer group with a 106% cumulative growth over the last five years this growth and improvement in our business can also be seen in various other metrics that we will cover throughout this call.
We are proud of the business that we built in the shareholder returns we have delivered.
Not done and we continue to execute on our business plan in a disciplined manner.
Now onto the quarterly results.
In the second quarter, we delivered a six 3% same store portfolio NOI growth and eight 7% core <unk> growth on a year over year basis, reflecting the strength and resiliency of our portfolio across key sunbelt and Midwest markets. We delivered operational improvements that drove increased same store occupancy of 94, 2% in the second quarter.
Reflecting a sequential 110 basis point improvement compared to last quarter.
As of July 24th our same store occupancy reached 94, 8% with our same store non value add portfolio at 95, 3%. We expect continued occupancy growth in the second half of this year lead volume and conversion from leases remained strong and the sustainable occupancy enables us to drive rental rate increases in many of our sub markets.
Our key performance metrics in the second quarter include average rental rate increased 8% year over year supporting a six 2% increase in revenue.
NOI margin improved to 62, 1% year over year up from 61% three years ago, we continue to invest in our communities, particularly through our value add renovation program, where we renovated 625 units in the second quarter and 1260 in the first half of 2023, achieving an unlevered return on investment of <unk>.
17%.
With the first half of the year behind us and a higher resident retention rate than anticipated. We now expect to deliver between 2500 2700 renovated units in 2023.
As we entered the third quarter our team remains confident that we will deliver on our full year operational and leverage targets through the continuation of our thoughtful and paced approach demand fundamentals in our key markets remained favorable and we continue to benefit from positive migration demographic and appointment trends.
In a recent report by Bank of America titled The Great Migration continues they note that pandemic migration trends are not reversing data as of the first quarter of 2023 suggest that cities that saw a large influx of people during the pandemic continue to grow faster than other cities in recent quarters, a number of these cities, including Dallas Tampa Houston Sharp.
Orlando and Austin, So the largest that inflow of population during 2020 through 2022.
<unk> has a notable presence in these markets and we are currently seeing this dynamic play out across our portfolio, having achieved mid teen NOI growth. During the first half of 2023 in key markets, such as Dallas, Raleigh, Durham, Tampa, Charlotte and Myrtle Beach.
This strength is it limited to the sunbelt as our Midwest markets, including Indianapolis and Columbus also continued to deliver strong NOI growth and.
In total these markets have shown double digit increases in average monthly rent benefiting from job growth and increasing wages. We remain focused on increasing scale in these attractive markets. While also recycling capital out of less attractive markets when conditions warrant.
To that point, we have one property held for sale, our only asset in Illinois, which we expect the sale to close early in the fourth quarter of 2023 with an anticipated economic cap rate of 5% dislocation isn't a fit for Iot footprint and makes economic and strategic sense to exit our primary use of sale proceeds will be to reduce debt.
Lastly on the development side, we have made advancements with our properties under development in Denver, our destination at Arista community is now 44% complete and those completed units or 42% leased we expect this development to be stabilized by the first quarter of 2025.
These results are ahead of our original plan and we now expect a six 9% unlevered yield on cost.
We are pleased to increase the mid points of our full year 2023, EPS and core <unk> guidance ranges, we will remain focused on driving occupancy delivering planned value add improvements further managing our cost structure through technology initiatives and further reducing leverage I would like to now turn the call over to Mike. Thanks, Scott as.
As Scott mentioned, we've made significant improvements in our operations over the past seven months, which have led to increased overall performance as well as sustainable occupancy gains. These improvements have included completing the implementation of a 24 seven call center to capture close to 100% of fleets.
Spanning and enhancing our sales training program and improving the communication and information exchange between our onsite teams and our revenue management group.
As of July 24th performance improvements have led to our same store non value add occupancy rate of 95, 3%.
Which is a 60 basis point increase compared to the second quarter average and in line with our targeted goal.
Looking ahead, our focus remains on driving occupancy across the portfolio with Q2 and Q3 to date results validating the success of these efforts.
Through today, our lead to lease conversion has improved 110 basis points from seven 9% last year to 9% year to date in 2023.
For all of these new leases signed the average rent to income ratio was 22% and lease over lease effective rent growth was two 8% in Q2.
From a resident retention standpoint, our retention rate was 54, 2% in Q2 and has increased to 54, 4% for Q3 to date. This strong performance is attributable to enhancements made to our renewal process as part of our comprehensive sales and leasing improvements.
Sales excellence has been and will continue to be a critical driver of robust and sustainable occupancy at IRT.
Lease over lease rent growth for renewals in Q2 2023 was two 3% as we prioritize driving occupancy based on that foundation, our renewal rent growth increased in Q3 2023 to date to four 5% reflecting increased pricing.
We are optimistic about our operational performance for the remainder of 2023 and expect to continue to benefit from overall high demand for our middle market communities. We are confident in our ability to deliver sustainable operating performance and create long term value.
With that I will now turn the call over to Jim.
Thanks, Mike and good morning, everyone.
Beginning with our second quarter 2023 performance update net income available to common shareholders was $10 7 million.
Compared to a loss of $7 2 million in the second quarter of 2022, the latter of which was reflective of higher depreciation and amortization expense related to the Saar merger.
During the second quarter core <unk> increased eight 7% to $63 7 million.
And core <unk> per share grew seven 7% to <unk> 28 per share from a year ago.
This growth reflects the organic rent and NOI growth that we experienced in the quarter on a year over year basis.
<unk> same store NOI growth in the second quarter was six 3% driven by revenue growth of six 2%. This growth was led by an 8% increase in average monthly rental rates to $1531 per month.
On the operating expense side Iot same store operating expenses increased five 9% during the second quarter led by higher property insurance and contract services as well as advertising expenses inflationary pressures continue to have an impact on operating costs, causing higher than normal increases we continue to use our procurement teams to rebid contract.
And technology solutions to help reduce costs wherever possible.
Particular over the past year, we generated approximately $2 $5 million in annual savings associated with the centralization of resident services and sales performance management teams. This effort has reduced complexity consolidated support responsibilities empowered Archimedes community teams and includes our response times to better service existing and.
New residents.
On the technology front, we continue to invest in and advance our initiatives across the business, helping us improve operational effectiveness and resident services. This has included implementing a value add ERP platform mobile apps for our maintenance teams and an improved procurement and vendor corridor.
Going forward, we are actively evaluating new technology to help drive better bottom line growth.
We view technology innovation as more than just automation, our movement of roles to centralized and specialized teams, but rather a driver to improve the day to day lives of our team members and our residents all while driving shareowner value.
Our commitment to continuing to work to optimize our cost structure and reduce costs, where possible. There are two key metrics that we closely benchmarks against one metric that is the ratio of total employees to units managed which currently stands at two six employees per 100 units for Iot and ranked Iot third.
Out of our eight larger public apartment peers.
A second metric, we benchmark our annual G&A as compared to a gross assets, which is approximately 34 basis points and puts us in line with our large public peers, which have an average of 33 basis points.
Turning to our balance sheet as of June 30, our liquidity position was $303 million.
Approximately $14 million of unrestricted cash and $289 million of additional capacity through our unsecured credit facility.
Today, our exposure to floating interest rates to only 4% of our total indebtedness and the weighted average maturity of our hedges is nearly four five years. It is also important to note that we only have $7 million of debt maturities in 2023 and $69 million of maturities in 2024, and our maturity exposure through year end 2025.
The lowest of our public peers, and only nine 7% of our debt.
We ended the second quarter at seven two times net debt to EBITDA down from seven four times, a year ago with the improvement in occupancy in our forward expectations for the remainder of the year, we still expect to achieve our leverage target of mid sixes by year end 2023. We also have a clear line of sight to achieve a mid five times net debt to EBITDA target by <unk>.
Year end 2025.
With respect to our full year 2023 outlook, we are raising the midpoint of our EPS and <unk> per share guidance.
Our EPS guidance is now a range of 25 to <unk> 27 per diluted share and for of course also a range of $1 14 to $1 16 per share an increase of <unk> at the midpoint.
We are narrowing the range of our same store operational guidance with the midpoint of revenue growth and NOI growth unchanged at 635% and six 5% respectively.
This same store revenue growth of 635% reflects the following assumptions for the second half of 2023 average occupancy of 95, 1% and a blended net effective rental rate increase of four 2%.
On the expense side, our guidance for full year 2023 total operating expense growth is unchanged at six 1% at the midpoint of our range with controllable operating expenses up five 1% in real estate tax and insurance expense up seven 8% each also at the midpoint.
With more clarity now on our expenses for the full year. We are now factoring in lower growth in real estate taxes.
Increased insurance expense now that we renewed our policies and higher inflationary pressure on certain operating expenses, including contract services repairs and maintenance.
We are taking down the high end of our previously guided G&A and property management expense range to a midpoint of $51 million versus $52 $5 million previously to reflect the savings from our reorganization earlier this year.
We're also reducing the range in midpoint for full year interest expense to $103 million down from $105 5 million as a result of the new seven year interest rate swap we put in place in March 2023.
Whilst we are still not assuming any acquisition volume for this year, we are increasing our disposition volumes grew 37 $5 million up to $124 $5 million at the midpoint to reflect the additional Illinois property sale in Q4, as Scott mentioned earlier.
And lastly regarding Capex, we expect $21 million in recurring maintenance capex at the midpoint up from $20 million previously due to inflationary pressures, we still expect $80 million in value added nonrecurring spend and $85 million and development Capex in 2023, each at the midpoint of our guided ranges these capital expenditures.
We have funded primarily through our excess cash flow of $133 million that we expect to generate during 2023. This is after paying our current dividend of <unk> 16 per quarter, which we raised earlier this year by 14% beginning in the second quarter of 2023, now I will turn the call back to Scott Scott.
Thanks, Jim.
As we look ahead to the second half of 2023 and beyond we're excited for the opportunities that lie ahead for Iot, we will remain patient and disciplined in our capital allocation efforts, which will be focused on continued debt reduction and investments in our value add program.
We're also committed to driving shareholder value and returning capital to our shareholders, while delivering outsized growth rates as real estate fundamentals remain strong and are well positioned markets.
We thank you for joining us today and look forward to speaking with you again.
Later, we can now open the call to questions.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from Eric Wolfe with Citi. Your line is open.
Hi, good morning, Thanks for taking my questions.
You mentioned in your remarks that you're expecting blended growth to accelerate to four 2% in the back half of the year.
Based on your recent trends I would assume that the spreads probably what's taken fits in to the fourth quarter, even though you normally see a seasonal decline there. So what gives you the confidence I guess this year that youre not going to see that decline in spreads can actually accelerated with telecom.
Yeah, Hey, Eric Thanks for the question appreciate it our.
Our guidance does include an average net effective rent growth of four 2% in the second half of this year that effective rent growth kind of has a base case blended so just base rental rate growth of roughly three 5%.
Plus an additional 75 basis points coming from the impact of the additional roughly 3500 value add units that.
That will deliver in the second half of 2023.
I'll remind everyone that our current loss of <unk>, 5% and.
And we think that loss to lease will help support that base three 5% blended rent growth and then also to date for Q3 the lease over lease growth is three 9% and we're sending renewals out for October and the 4% to 5% range. So we definitely see progress as we as well as just strength now that occupancy has returned to that.
Normal level that we'll be able to kind of naturally grow rents a little bit, but also maintain them to the best part of this year.
That's helpful.
And then I guess just based on what you said it also sounds like you're expecting around sort of mid three is call. It 363, 7% blended growth for the full year, that's just sort of averaging out on the year.
Given that I mean should you be entering 2024th like the current and around one 7%.
So basically just taking 45% of your blended for the year I'm just curious.
Any thoughts on 2024.
Yes, I mean, it's a little bit early for us to put out an earnings number for next year, but certainly it's just math at this point and you can certainly do it but that would be a rough kind of approximation of it.
Okay. So the $1 seven would be like a rough approximation around around there.
Russ.
Okay. Thank you.
Your next question comes from Brad Heffern with RBC capital markets. Your line is open.
Hey, Thanks, good morning, everybody Youre back above the 95% occupancy level in the non value add bucket I think thats historically been the target, but I know in the prepared comments. You also said the occupancy should continue to rise so I'm curious.
Is there a new sort of occupancy level that you're targeting and at what point will you be satisfied with keeping it flat and maybe a question more on the rent side.
Yeah.
Okay. Thanks for the question Brad.
This is Scott as you know, it's always been a balance for us.
To generate the highest total revenue between.
Occupancy and rent growth.
You've heard me say over the years that for me full occupancy is 95%.
The value add does put a little bit of pressure on that full occupancy, but we're confident with the lead volume that we're seeing and the conversion rate of leads to leases that the non value add.
Occupancy will continue to grow through the third quarter, which will allow the whole occupancy for the combined portfolio to be in that 95% range.
Okay got it and then Jim you mentioned in your prepared comments the mid fives as line of sight on leverage by year end 25, I think that's new but should we take that as a goal and ultimately.
The point they are getting the leverage profile more in line with the larger public peers or are you also.
Choosing that figure in order to maybe go down the investment grade path at some point.
Yes.
It's a number that we've kind of talked about in the past a little bit with individual meeting I think we even talked about it at the NAREIT meetings.
It is something that is on our kind of target as we go down this path of investment grade.
And while certainly we've kind of always comped ourselves against our larger public peers.
It is certainly something that's kind of right now more driven by just the goal of becoming investment grade and we think we have the trajectory to do so.
Okay. Thanks.
Your next question comes from Austin, <unk> with Keybanc capital markets. Your line is open.
Hey, good morning, everybody.
Hoping you could provide some additional detail around how new lease rate growth trended in <unk> and into July .
Specifically across the non value add pool of assets just to remove some of that volatility caused by value add renovations and then.
Should we think about the 4% to 5% asking rate on renewals kind of through.
The balance of the back half of the year to back into I guess, what new lease rate growth assumption is.
From that four 2% back half blended lease rate growth.
Yes, it's a good question.
For July .
We continue to focus on driving occupancy the July data that we presented on new leases in early June .
Whereas you've kind of highlighted was definitely a small sample sizes was kind of still early in July . So early for July to have new leases.
A higher weighting of the value add pieces is generally value add units are pre leased generally four to six weeks before occupancy.
The July new leases are continuing to kind of trend up in the back half of July for the non value add portfolio and as you kind of think about that four 2% blended lease growth.
The news the new lease I'm, sorry, the 4% to 542% of blended lease growth and new lease component of that is in that kind of upper threes percent range, given the October renewals going out at 44% to 5%.
Okay got it no that's helpful detail and then I wasn't sure. If you highlighted what's driving sort of the small downtick in the value add renovation do you expect to complete.
This year and then how are you thinking about.
The.
Size of renovations in 2024 at this time.
Yes quick question for the renovation properties, which as we've just seen higher retention of tenants. Therefore, as you know we only do the renovations on turn.
Folks decide to stay through the renewals and that was obviously less units, we can value add I will so.
Value add the units it will just be kind of next year and right now our expectation for next year is still roughly about 2500 to 3000 units.
Continued volume.
For 2024.
And just a follow up on that piece I guess with occupancy re ramping now.
Lee for value add and non value add I mean should we expect some of the returns in that segment to.
To improve or has the slowdown in returns.
Has that been just a function of what's happening in your markets today.
No we definitely expect the returns and the rent premiums to improve as occupancy is now stabilized or stabilizing yes.
Okay. Thank you.
Yes.
Your next question comes from John Kim with BMO capital markets. Your line is open.
Thank you Scott and you mentioned the strong net migration trends that are continuing in your markets.
I was wondering how you plan on addressing new supply as far as being more aggressive with consensus concessions potentially are offering longer term leases or.
Any other practices that you may use.
Thanks, John .
We've used some targeted concessions, where we feel that we need a little bit of.
More of an occupancy push.
But it's been it's been relatively rare.
As I've said in the past the new supply really doesn't.
Affect us.
And not nearly to the level as you might.
I think it would and as you read about.
Our units generally speaking our B class, we're at a much different price point on rent.
And since we're on average 12 to 15 years old and our communities. We are in a better more infill locations that a lot of the new the new construction that everyone is focused on so.
Ltd.
Range, we again, we've used targeted concessions.
But generally speaking the new supply has not really affected us even in the renovated units are renovated units with the premium that we're that we're receiving we're still a good 300, maybe even $400 below.
The new the new class a rents that are being delivered so we have.
Just a benefit from the pricing point.
Okay and this market sorry, this period you exited Chicago.
When can we expect.
<unk>.
All other markets out of other markets rail only own one asset.
And Conversely, what are you seeing redeploying capital.
We're constantly looking at the portfolio and determining when it is appropriate to dispose of assets. There are some limitations for example in the Saar portfolio.
Was was financed with fixed rate loans first mortgages and they have prepayment penalties. So we have to throw that into the equation as to when is it appropriate to sell a property. We don't want to just give away some of our value through large prepayments.
But we're constantly looking at the portfolio, we do recognize that it should be more concentrated than it is and we have some single markets that we're going to want to exit.
But at this point I don't have an answer that I can give you on a specific timeframe.
And then okay, great win when we do as far as use of proceeds it will be determined again at that time is it better to just continue to delever or would it be more accretive and better in the long term to redeploy again, depending on where cap rates are at the time.
Got it thanks, a lot Scott.
Thank you.
Your next question comes from Anthony Powell with Barclays. Your line is open.
Hi, Good morning, I guess, a quick question on the on the lease.
Lease spreads going up to 4% to 5% in October .
What gives you the confidence that you'll be able to achieve those higher.
Maybe spreads later in the year Westwood traffic economic uncertainty I guess, what are you looking at that gives you that confidence to go after that pricing.
Yes, so good question.
4% to 5% in October is what we're sending renewals out four currently.
Yes, the blended rent growth is that kind of went through in one of my earlier questions.
The base blended rent growth that we've assumed for the entire second half of the year is at three 5%.
Plus an additional 75 basis points coming from that incremental value add units that will deliver a 1300 value add units that will deliver.
And our loss to lease today is 5%. So when you really kind of think about okay. Youre, achieving this 4% to 5% of renewals you've got baked in for two.
So you really only need to kind of achieve that three 5% if not a little upper threes and our loss to lease supports that we feel quite confident given the occupancy push we've done year to date and kind of having that strength heading into the back part of the year the shoulder to shoulder season post these post leasing season.
Got it thanks, and maybe one more on just transaction activity it can be.
Selling assets Chicago some of your peers are doing some acquisitions what are you seeing out there in terms of assets out for sale.
Sellers being motivated motivated by at this point have cap rate is going to trend in the past.
A few months.
So.
It appears to us that there still is a gap between the bid and the ask on transactions.
When for our Chicago transaction or the Chicago property.
We had a number of bids they were from generally speaking more local smaller type.
Investors not not the public REIT.
We are seeing more transactions come to market.
I am not confident yet that those additional transactions will actually make it full circle and close.
Cause of that bid ask spread and still the volatility in interest rates.
Cap rates.
Seem to have stabilized a little bit for the moment and I would tell you in the five and a quarter to five 5% range generally speaking.
We were very very happy with our Chicago transaction.
Great. Thank you.
Thank you.
There are no further questions at this time I will now turn the call back to Scott Schaeffer for closing remarks.
Thank you all for joining us this morning, and we look forward to speaking with you again next quarter.
Okay.
This concludes today's conference call you may now disconnect.
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