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spk09: Hello and welcome to Independence Realty Trust's fourth quarter 2021 earnings release. My name is Emily and I'll be coordinating the call today. During the presentation you will have the opportunity to ask a question by pressing start followed by one on your telephone keypads. I will now hand the call over to our host Lauren Torres. Please go ahead Lauren.
spk08: Thank you and good morning everyone. Thank you for joining us to review Independence Realty Trust fourth quarter and full year 2021 financial results. On the call with me today are Scott Schaefer, Chief Executive Officer, Ellen Nalen, Chief Operating Officer, Farrell Ender, President of IRT, and Jim Sebra, Chief Financial Officer. Today's call is being webcast on our website at www.irtliving.com. There will be a replay of the call available via webcast on our Investor Relations website and telephonically beginning at approximately 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 merger with Steadfast Apartment REIT which will be referenced herein as star. 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 filing for 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 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 available at IRT's website under Investor Relations. IRT's other SEC filings are also available through this link. IRT does not undertake to update forward-looking statements made 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.
spk12: Thank you, Lauren, and thank you all for joining us today. 2021 was an exceptional year for IRT, not only due to our strong results, but also due to the December completion of our merger with Steadfast Department REIT, or STAR. The combination of IRT and STAR created a leading multifamily REIT with an equity market capitalization of approximately $5.9 billion and total enterprise value of $8.6 billion at year end. We are incredibly excited about the opportunities that lie ahead and look forward to discussing them with you in more detail on today's call. Before we do that, I'd first like to provide some quarterly and full year 2021 highlights. In the fourth quarter, positive trends and performance continued, building upon the momentum experienced in the first nine months of 2021. IRT's success has stemmed from our ability to execute a strategic plan which focuses on non-gateway communities in the Sunbelt region where there is strong resident demand. This has allowed us to benefit from positive trends such as population and employment growth, as well as new household formation. And as we've highlighted on recent calls, our selective approach, along with the housing shortage in our markets, has led us to achieve high and stable occupancy levels and significant rental rate growth, which was clearly reflected in our fourth quarter and full year results. Specifically, we delivered an industry-leading same-store NOI growth of 15.1% in the quarter and 11.4% for the full year. And our quarterly core FFO improved 58% compared to a year ago, while our annual core FFO grew 34% year over year. Since the merger closed on December 16th, these results include only two weeks of star property operations. The full benefit of the merger will be realized in 2022 and beyond. We are very pleased with our results, particularly in light of the challenges which have impacted our industry during the pandemic. Our team's efforts have enabled us to deliver attractive growth on a same-store basis while realizing additional opportunities through our long-standing value-add program and our more recent joint venture investments in new multi-family developments. And now, as a result of our merger with Star, we have doubled our portfolio to 119 communities, increasing our presence in attractive markets like Atlanta and Dallas and entering new markets like Denver and Nashville. Our exposure to the Sun Belt represents approximately 70% of our NOI, and we expect strong growth fundamentals to persist in this region, with people continuing to migrate to cities with a lower cost of living, a better tax policy, and more economic opportunities. With our larger footprint in these desired U.S. markets, we are confident in our ability to implement our strategic initiatives, capture incremental growth, particularly through our redevelopment efforts, and to strengthen our total company platform with increased economies of scale. One thing that won't change at IRT is our simple capital structure and strong balance sheet. We will maintain our conservative financial and credit policies and further de-lever the balance sheet through organic NOI growth, value-add renovations, and non-core asset sales. Our larger portfolio was well positioned to generate increasing NOI, which will allow us to fund future growth opportunities in markets where we expect to see continued strong residential demand while continuing to improve our net debt to EBITDA ratio. We finished 2021 with a net debt to adjusted EBITDA ratio of 7.7 times, reaching this target a full year earlier than projected due to the strong operating results and the significant value received from our properties recently sold. We have now completed the sale of all nine properties previously identified for sale and with the corresponding debt repayments now have a net debt to EBITDA ratio of 7.5 times. Overall, we exited 2021 from a position of strength and scale and are excited about the future growth potential of IRT. We are also confident that we have the right team in the right place to execute our strategy. And with that said, I'd like to turn the call over to Ella Nayland, IRT's Chief Operating Officer. Ella joined us from STAR and is an experienced multifamily executive. We welcome her and look forward to her valued contribution to our team. Ella?
spk06: Thanks, Scott. and I'm really excited to be joining my first IRT earnings call. Most of my experience has been working with great multifamily companies, including Steadfast Department Reads Star for the past 10 years. The merger of Star and IRT has been an incredible journey. Very seldom does the combination of two public companies come with the opportunity that this presented to our combined shareholder base and dedicated team members. The investment thesis for both companies was absolutely aligned. invest in well-located and well-maintained non-gateway communities and high job growth markets. And not only is demand continuing to grow for apartment homes, but supply is still lagging demand. The National Multifamily Housing Council estimates that we will need another 4.6 million apartments by 2030 to meet this estimated demand. We believe the future is bright for owning and running multifamily apartments, supported not just by a supply-demand imbalance, but also by the changing lifestyles and finances of most of America. And so to echo Scott's comments, I'm also incredibly excited about what lies ahead and believe as a combined company, we have a very long runway of growth. We closed out 2021 with strong operating results. In particular, in the fourth quarter, IRT's same-store occupancy grew 90 basis points to 95.7% from a year ago. and improved 230 basis points to 95.7% for the full year. And similarly, when you consider IRT and Star combined, same store average occupancy was 95.9% during Q4, reflecting the strength of our total combined portfolio in non-gateway markets. On a lease-over-lease basis for the IRT same store portfolio, new lease rates increased 22.3% and renewals were up 8% during the fourth quarter, yielding a combined lease-over-lease rental rate increase of 15.2%. On a combined same-store basis with STAR, we achieved double-digit growth across each metric in the fourth quarter with new lease rates up 18.8% and renewals up 10.2%, delivering 14.2% year-over-year growth on a blended basis. Strong trends continue in the first quarter to date, with new leases for our combined same-store portfolio having increased 16.4% led by our value-add communities, while renewed leases are up 10.2%, with a blended lease-over-lease rental rate increase of 12.4% for our same-store portfolio. Since the merger was completed in December, our team has been identifying opportunities within the combined company, Most notably, our property management and revenue management system integration is complete, and we are on track to deliver $8 million of property management synergies that we've previously disclosed as we implement the best practices both companies brought to the merger. So with that said, I'd like to turn the call over to Farrell to provide you with an update on our investment opportunities.
spk04: Thanks, Ella. A highlight of the past year is the successful execution of our Value Add program. We closed out 2021 having completed renovations on 253 units in the fourth quarter and 953 units for the full year, delivering a return on investment of nearly 30%. Since the inception of our Value Act program in January 2018, we've completed renovations on 4,672 units, achieving a return on investment of 18% and an average monthly rental rate increase of 19.6%. Eleven of our communities are currently undergoing renovations, and we've identified five communities that we will be adding to the pipeline in 2022, two of which commenced renovations already. In addition, we designated eight communities as completed, having renovated on average in excess of 90% of their combined units, and will continue to work towards completing 100% as unrenovated unit leases expire. Now that the merger with STAR is complete, we have a pipeline of approximately 20,000 value-add units, which includes about 12,000 former star units. This year, we expect to renovate 2,000 units from the combined portfolio and ramp up to 4,000 units per year thereafter. Consistent with IRT's prior value-add results, we expect to generate 15 to 20% ROI on renovations. We're also excited about our joint venture relationships, which were established last year and focus on new multifamily development. To recall, we closed on a joint venture in Nashville during the third quarter of 2021 to develop three communities totaling 504 units with a joint venture development plan. We have committed $14.4 million to this joint venture with a total capitalization of $83 million. Similar to our other joint venture transactions, we maintain our rights but not the obligation to purchase the communities upon completion. The first community will be delivered within the first quarter of 2022 and is expected to provide additional scale in this very desirable market. The same holds true for our joint venture in Richmond, Virginia, where we are investing $16.4 million into a 402-unit community. This project is expected to be completed in the second quarter of 2023 with the right to purchase this property upon completion. We are continuing to evaluate additional joint venture opportunities and expect them to provide solid risk-adjusted returns with the added benefit of growing our portfolio. As a result of the merger with Star, we also inherited three development projects in various stages. Garrison Station is a recently completed 176-unit community located in Nashville with occupancy stabilized at 94%. Destination Arista, located in Denver, has broken ground and is expected to begin leasing in mid-2023. Flatirons, also located in Denver, is in the final planning stages with construction beginning later this year with a mid-2024 delivery date. All three of these developments will be delivered substantially below current market values. These company-owned projects are attractive and increase our exposure to markets experiencing above-average population and employment growth. Touching on our dispositions, we sold two communities in Atlanta in the fourth quarter and then sold an additional four properties in Indianapolis, Oklahoma City, and Louisville in the first quarter. The total combined sale price for these six properties was $297 million. We realized the total gain on disposition of $172 million with a blended economic cap rate of 3.8%. In addition, in anticipation of the merger, STAR sold three communities in the fourth quarter for a total sale price of $106.5 million, with a blended economic cap rate of 3.7%. While these recent dispositions were focused on managing our market concentrations post-merger, going forward, IRT will continue to assess markets where we see long-term growth opportunities and reevaluate those that may not be attractive long-term investments. Now I'd like to turn the call over to Jim.
spk02: Thanks, Val, and good morning, everyone. Beginning with our 2021 performance update, for the fourth quarter of 2021, net income available to common shareholders was $28.6 million, up from $13.3 million in the fourth quarter of 2020. For full year 2021, net income available to common shareholders was $44.6 million, up from $14.8 million from the full year 2020. Please keep in mind that changes in gap net income from year to year are significantly impacted by the size and timing of gains on the sale of real estate assets. During the fourth quarter, core FFO grew 57.9% to $31 million, and core FFO per share grew 14.3% to 24 cents per share. For the full year, core FFO grew 33.6% to $92 million, and core FFO per share grew 15.1% to 84 cents per share. As Scott mentioned, we completed our merger with STAR on December 16th, and we consolidated their results from then on. We provided an additional supplemental disclosure in Appendix A of our earnings supplement that depicts the impact of STAR for those two weeks on both our fourth quarter and full year 2021 results. From a fourth quarter perspective, just for those two weeks, Star added one cent accretion to our core FFO per share, which is in line with the accretion we've highlighted since we announced the merger. Turning to our same store property operating results, we are going to focus all of our same store results on IRT's historical definition of same store property this quarter. Therefore, my comments will only reflect IRT's properties. I'll discuss later how we will intend to report the impact of Star on our future same store results. IOT same-store NOI growth in the fourth quarter was 15.1%, driven by revenue growth of 10.2%. This growth was driven by a 9.7% increase in average rental rates and 90 basis points of higher average occupancy. While this NOI growth includes value-added communities, we did see NOI growth of 10.4% at our same-store non-value-added communities, which reinforces the fundamental strength of our core markets. Again, this growth was driven by an 8.4% increase in our average rental rate and 80 basis points of incremental occupancy in the fourth quarter, both as compared to last year. For the full year of 2021, IRT same-store revenue grew 8.4%, driven by the 5.9% increase in average rental rate and a 230 basis point increase in average occupancy. On the property operating expense side, IRT same-store operating results grew a modest 1.8% in the fourth quarter, as non-controllable expenses for real estate taxes and insurance declined on a year-over-year basis. The decline in real estate taxes was due to the finalization of assessments and reductions we received from appeals. For the full year, IRT same-store operating expenses grew 3.8%, primarily due to an increase in repairs and maintenance costs as compared to 2020, when many projects were delayed due to COVID. Turning to our balance sheet, as of December 31st, our liquidity position was $282 million, We had approximately $36 million of understated cash, $223 million of additional capacity through our unsecured credit facility, and $23 million of ATM proceeds available from forward equity sales. In December, we expanded and consolidated our unsecured credit facility, which increased our borrowing capacity to $500 million and extended the maturity date from 2023 to 2026. We are well positioned with the financial flexibility to support our increased portfolio. As part of the closing of our merger with SCAR, our balance sheet now includes $4.8 billion of assets acquired, $1.8 billion of net debt assumed, and the issuance of 106 million shares and OP units. As we highlighted previously, we are very focused on delevering the combined balance sheet. Leading up to and after the closing, we've delevered through a combination of our July forward equity raise of $271 million on 16.1 million shares, the disposition of three star properties for a total sales price of $107 million, and as Farrell mentioned, our sale of six IRT properties between December 2021 and early February 2022 for a total sales price of $297 million. We're extremely excited on the progress made on the deleveraging front. As of today, we own 119 assets and have $2.5 billion in debt outstanding, of which 95% is considered fixed rate or hedged with no maturities until 2024. We ended 2021 at 7.7 times net debt to EBITDA. Once we factor in the impact of our property sales in early 2022 and the related deleveraging, our net debt to EBITDA would be 7.5 times. Before moving on to guidance, I'd like to address how we will be presenting same-store results going forward. Starting in Q1 2022, we will be reporting same-store results using both a legacy IRT definition as well as on a combined basis with STARS properties. The newly combined same-store results will become the primary measure that we highlight with the legacy IRT same-store results presented as an appendix. We've added these new definitions of combined same-store to our Q4 earnings supplement, and we would invite investors to review those definitions. To aid in future modeling, we've also added Appendix B, which provides the 2021 quarterly property operating results for the 2022 combined same-store portfolio. With respect to our outlook for 2022, our EPS guidance is a range of $0.32 per share to $0.36 per share, and for core FFO is a range of $1 to $1.04 per share. For 2022, we expect NOI and our combined same-store portfolio to increase 11% at the midpoint. This guidance reflects expected same-store revenue growth of 8.6% at the midpoint. For 2022, we are guiding average occupancy to be 95.7% at the midpoint with an increase of 10% in our average rental rate. Moving on to expenses, our projected growth in combined same-store operating expenses of 4.75% at the midpoint is a result of our expectation that non-controllable expenses for real estate taxes and insurance should increase 7.5% at the midpoint, and our controllable operating expenses should increase 3% at the midpoint. Clearly, we are keeping an eye on near-term pressures that are factoring in inflationary increases on all our expenses. We expect these increases to be partially offset by a rollout of additional technological efficiencies in 2022. Regarding our transaction and investment volume expectations, we are currently not assuming any acquisition volume as we integrate STAR. As for dispositions, we are providing guidance for disposition volume of $157 million. This reflects the assets that were sold in early 2022 and these proceeds were used to deliver. As we formulate further capital recycling opportunities, we expect to reinvest those proceeds into our core markets. We expect these recycling opportunities, should they occur, will only have a positive impact on our 2022 guidance. And regarding CapEx, we expect $20 million in recurring maintenance CapEx, 45 million in value-add and non-recurring spend, and $70 million in development capex in 2022, each at the midpoint of our guided ranges. These incremental development and value-add capex will be funded primarily through the excess cash flow generated during 2022, which at the midpoint of our guidance is approximately $105 million.
spk12: Now, I'll turn the call back to Scott. Scott? Thanks, Jim. In closing, I'd like to highlight the incredible strength of our now expanded portfolio and the high-growth Sunbelt markets. We have a clear roadmap ahead that will enable us to continue to deliver exceptional results. Our strategy is focused on completing the star integration and achieving at least $28 million in annual synergies, capitalizing on continued macro trends and resonant demand to sustain occupancy levels and drive rent growth, accelerating our organic growth profile through our value-add program, which is now even more robust with the addition of the star properties. And lastly, continuing to refine the portfolio and expand our presence in core high-growth markets through our capital recycling and JV development initiatives. We are confident that the output of this strategy will translate into greater shareholder return, including approximately 21% core FFO growth at the midpoint for our fiscal 2022 guidance, as well as significant cash flow creation that will be used to fuel future growth and maintain an optimal leverage position. We thank you for joining us today and we look forward to speaking with many of you at Citi's Global Property Conference in early March. Operator, we would now like to open the call for questions.
spk09: Thank you very much. If you have a question, please register this now by pressing Start followed by 1 on your telephone keypads. If you change your mind and would like to withdraw your question from the queue, please press Start followed by 2. When preparing to ask your question, please ensure that your device is unmuted locally. Our first question today comes from Nick Joseph from Citibank. Nick, please go ahead.
spk05: Thank you. I was hoping you could talk and walk us through the process of transitioning the star assets onto the IRT operating system and how that has gone so far. And I recognize occupancy is still very high, but it looks like it's come down a bit quarter to date. So just where it is today as well. Thanks.
spk02: Yeah, Nick, hey, thanks. This is Jim. Ella may chime in with additional insight. The process for us to migrate from what STAR used to run with Yardi onto our property management system called Entrata, we did half of their portfolio in the last two weeks of December, the other half of the portfolio in the first two weeks of January. And that migration was also inclusive of moving from their revenue management platform, which was EOSAR, onto our revenue management platform, which was LRO. And it was all done in an effort to make sure it was done ahead of the beginning part of leasing season. So that way, you know, any of this kind of interim friction that we would see from migrating would be, you know, through the system and ready for leasing season where that friction would be gone. From a standpoint of occupancy, as you saw in the release, you know, the start occupancy did trend down slightly here in the first quarter. You know, it's at that level today and it's beginning to build, you know, slowly back upward. So it's, you know, very short term in our view and nothing to be overly cautious about.
spk05: Thanks. That's helpful. And then I was wondering if you had – sorry, go ahead.
spk06: That's all right. I was going to echo what Jim said. This is Ellen Aylund. And I will say that that friction, that transition onto those new systems and that timeframe went so smoothly because of the experience that IRT had on migrating their systems over to Entrata. and the ability to walk us through and have the training associated with it. And as Jim mentioned, any impact on occupancy we see as temporary as a result of that transition.
spk05: Thank you. And then I was wondering if you have any insight or color on shareholder turnover since the close of the merger and then on index inclusion as well.
spk02: Yeah, that's great. So, another great question. We have, you know, there's this variety of indexes that will beginning to increase positions in IRT, you know, on their rebalance dates. The three most significant are the S&P 600, the MSCI family of indexes, and some Russell family of indexes. The S&P index will rebalance in the middle part of March. I think the date is March 22nd. And the other two will rebalance in the middle part of May. We believe, based on our estimates, that the incremental purchasing demand from just those three are in the $750 million range. Again, it's an estimate. It's hard to exactly know until they put out their disclosure, but that's what our kind of bankers and our internal estimates compute. As for the star legacy retail shareholders selling out, it's been something that we've been obviously focused on and communicating around for quite some time. The intelligence that we have considering how hard it is to see the actual retail trading volume is that the estimate is that somewhere around 15, 16 million incremental retail volume has increased since the merger closing, which would kind of align with kind of our expectation around you know, plus or minus, you know, 25 to 30% of IRT shareholders will eventually exit. I'm sorry, star shareholders will eventually exit. So we're, you know, plus or minus halfway through what we think is the total expectation.
spk05: Thank you very much.
spk09: Our next question comes from the line of Brad Hepburn from RBC Capital Markets. Brad, your line is open.
spk07: Hey, good morning, everyone. I was just curious if you could talk about the main risks that are still present for the integration.
spk02: Yeah, I mean, I think the main parts of the integration are pretty much behind us. I think we have one leftover kind of integration effort that's just combining the two payroll systems, but that will be happening here the next few weeks. Again, not really a huge risk. It's just one of the last things we have to do as part of the integration effort. But we think largely the major part of the integration, and that's policies, processes, system, all that's through the process and moving forward.
spk07: Okay. And then on the synergies, can you talk about how much of that you've realized on a run rate basis? And is there anything that you've seen that maybe represent potential sources of upside that weren't in the initial numbers?
spk02: Yeah, it's a great question. As Ella mentioned, of the synergies, you know, the original property management expense synergies, we saw originally 8 million. We've already locked in 6 million of the 8 million for all fiscal year 2022. There's a few leftover things that we're just kind of nailing down, but we, you know, fully expect to achieve the 8 million. There's some additional upside to the 8 million around kind of renter insurance programs that we're beginning to implement, but, you know, that is still, you know, being finalized. On the G&A front, We promised $20 million of G&A synergies. I think we originally told everybody that for 2022 we anticipated that number to be $17 or $18 million as things kind of took hold. We're happy to announce that all $20 million has been locked in already, heading in, and we think there's probably another $2 to $3 million of additional upside as we finalize the remaining aspects of the integration efforts.
spk07: Okay. Thank you.
spk09: Our next question today comes from Neil Malkin from Capital One Securities. Neil, please go ahead.
spk14: Thanks. Good morning, guys. Another great quarter. Nice to meet you. Look forward to working with you in the future. Yeah, I guess first question, you know, rates obviously expected to rise on the short end of the curve. Just, you know, curious, I know it might be too early, but Given the nature of the people who compete for some of your types of assets, do you think you might see some pressure alleviated or reduced competition as the year progresses, as the short end of the curve moves up and people that sort of leverage, the high leverage variable rate debt financing becomes a little less accretive? Do you think that's going to be a benefit or is there just too much capital chasing everything in multifamily?
spk12: Thanks, Neil. It's Scott. Our view is that there's a lot of capital chasing multifamily assets specifically in our location and our vintage property. We don't see that changing. We all saw what's happened with Resource and BlueRock and APTS over the last you know, probably two months, this is a space where people want to be invested and they see the long-term benefit for it. So, you know, typically we, you know, cap rates lag movements in interest rates, but there's so much capital chasing this that if there is any correlation in the cap rate movements with interest rates, I think it's going to be sometime down the road.
spk14: Yeah, it makes sense. Thanks for that. Another one for me is, can you just talk about strategy and priorities in terms of growth, capital allocation? How do things change in your mind with the addition of Star and the scale you have as well? Thinking about newer or existing market acquisitions to increase exposure, particularly in some of the newer markets you got from Star and And then can you also talk about your priorities in terms of the JV, you know, development stuff versus acquisitions versus, you know, preferred you'd mentioned before. If you can just kind of outline that for us, that'd be great.
spk12: Sure. Well, you know, we've always been focused on capital allocation and trying to, you know, make sure that we were, you know, putting our capital to work in the best possible way to generate shareholder returns. So The value-add for the last few years has been a big component of that and will continue to be. Star merger, as we've reported, added 12,000 units to our value-add pipeline, which means that we own within our portfolio, if you will, an inventory of value-add units for the next value add units available for renovation. We have basically a four to five year runway now without having to add any more units to the portfolio. So that will continue to be a priority and a big focus. Secondly, about a year ago, we started the JV program because we saw the benefit of development. I have been resistant over the years to have IRT jump into development because I felt that our balance sheet was a little too small and a little too highly levered. Those two things have changed. We have a much bigger balance sheet, and our leverage is, as Jim referenced, we're down today at 7.5 times EBITDA and declining. So we feel a little bit better about development. We're going to continue with the JV program. We have the three communities. Well, actually, one has been completed. So we have the two communities that we inherited from STAR that are in the development process. And we're going to look for more opportunities. But we're going to do it in a measured way where we, you know, manage the risk versus any potential benefit.
spk14: Okay, great. Thanks very much. Sure.
spk09: Our next question comes from Anthony Powell from Barclays. Anthony, please go ahead.
spk10: Hi, good morning. A question on rent growth that's been very strong obviously for you in the fourth quarter and so far this year. How are rent-to-income ratios trending throughout your portfolio and what's your view on the ability of tenants to take further price increases given the overall inflationary environment we're seeing across the economy?
spk06: This is Ella, and actually that's one of the great strengths of the IRT investment thesis. It's not just investing in gateway markets, but it's the fact that we target moderate rate income for working America. So when you look at the strength of our residents, especially in an inflationary period, our rent to income across our portfolio is 19%. And so what that means is that they have the ability to work through this inflationary environment, and it also gives us the ability to have a big spread on the ability to increase those rents and deliver value to our residents as part of that.
spk10: Got it. Thanks. Another inflation question. Obviously, the returns on the renovations have been pretty strong. How are costs trending for your renovations? How does that impact expected ROI? Just an update there will be super helpful.
spk03: We saw some pressure when COVID started when the supply chain had some issues. We've diversified both our vendor and our supply chain providers. So we've seen a little bit of increase in the cost to perform the unit renovations, but it's been offset. As you can see, our returns are growing quarter over quarter as we try to rein in and get more efficient on the renovation side and push rents. a little bit more, our returns are actually improving.
spk10: All right. That's it for me. Thank you. Thank you.
spk09: Our next question comes from the line of Austin Werschmitt from KeyBank. Austin, your line is open.
spk11: Hey, good morning and thank you. I was hoping you could discuss, you know, you kind of highlighted you've got no additional dispositions and presumably any equity assumed in guidance. So could you discuss how you plan to fund? I think you've got a $150 million commitment remaining for the development projects you acquired from Star. You've obviously got the ramping redevelopment. And then, you know, you also mentioned, you know, you've got a right of first refusal on the Nashville JV asset. So what are sort of the plans to fund those commitments today?
spk02: Yeah, it's great. A great question, Austin. You know, obviously, the commitment on the development deals is obviously a multi-year spend, right, as we develop, you know, we've got one under development today and the other one will start later this year. You know, we, at the midpoint of our guidance and given our current dividend, we're, you know, our operating cash flow is in excess of $100 million. I think it's like $105 million this year. And, you know, that will continue to repeat next year. So I think, you know, our anticipated use of pro se or funding today is effectively operating cash flow. And we're just excited about kind of where the business is and be able to kind of fund all that operating cash flow and not have to increase leverage.
spk11: Understood. And maybe, you know, along similar lines then, how does that change or affect the decision or your recommendation, I should say, to the board with respect to the dividend fund? and, you know, your target payout.
spk12: Thanks, Austin. It's Scott. So, you know, obviously we discuss this every quarter and the board will ultimately make the decision. We're well aware of, you know, our payout ratio and how it relates to the peer group. And we're also very well aware of, you know, retained earnings are, you know, the most efficient form of capital. So the board will be weighing all of that and, you know, we'll make a decision on dividend down the road.
spk11: Got it. And then just I guess the last one for me, you know, star assets are up and running. It sounds like the synergies are identified or already achieved. What's sort of the consideration for, you know, future large transactions or should we expect that, you know, from here on you'll stick mostly with sort of the capital recycling and some of the internal opportunities?
spk12: Well, we're clearly going to stick with the capital recycling and the internal opportunities, but we're always looking for opportunities to grow the portfolio through acquisitions. But it has to be something that makes sense, one, from a portfolio management point of view, but also we want to do transactions that are accretive. You know, the Star transaction was a perfect fit, as Ellen mentioned. It's the same type of assets in the same markets. The company's culture was, the company's, each individual company's cultures were very similar. So it made a lot of sense. And then you add in there that it's going to be, you know, highly accretive from day one. So if that opportunity presents itself again, you know, we will work very hard, you know, to take advantage of it. But we will continue to be open to opportunities, but they have to meet those criteria.
spk11: Understood. Thank you.
spk09: Our next question comes from John Kim from BMO Capital Markets. John, your line is open.
spk13: Thank you. Good morning. Your guidance this year of 21% FFO growth at the midpoint is the highest in the sector. But you did mention when you announced the star merger, it would be 11% accretive to earnings immediately. And I think you basically said your synergies are intact. So, you know, that implies 10% growth for the standalone IRT. Is that the right way to look at it? Or are there other offsetting factors to that star accretion?
spk02: Yeah, it's a good question. I think that's certainly, you know, one way to look at it. I think, you know, there's a variety of factors. But, you know, the rough math you did there certainly aligns with you know, kind of what would be the core of its own growth per share, you know, on the legacy IT business.
spk13: So, Jim, can you update us on your current loss to lease and what you're expecting as far as market rental growth and how that translates into effective lease growth this year?
spk02: Yeah, sure. So, current loss to lease across the portfolio, obviously, it's very property specific. It ranges from from kind of a low of 10% to slightly a high of just in the low 20s. Average across the portfolio is about 15%. Our modeling for purposes of the midpoint of guidance has an occupancy rate of 95.7%, and midpoint of guidance has a blended, throughout the year, rental rate increase of about 10%. And, you know, the way we think about it is that the first half of the year is really, you know, kind of behaving from, you know, consistent with the results you see so far in the first quarter with, you know, cautiousness built into the second half of the year, given the, you know, rent growth that we saw in the second half of 2021. Okay.
spk13: And then also, if you could clarify, last quarter you mentioned that the first Nashville project in the JV would be delivered this quarter. You don't have any acquisitions in your guidance, but what is the likelihood that you will acquire that project? And if you can give any indication on pricing or going in yield.
spk12: Yes, so the first project was in Nashville, a small project, 96 units. It was completed recently. There is a CO, and we're working through the purchase options. process with the developer. It's our intention that we're going to take ownership of it.
spk13: And how would pricing work? Would it be like a market cap rate or a little bit higher?
spk12: So, yeah, we will pay a market price. However, since we're in the development team or we're part of the development stack, you know, part of that, the profit, the development profit, you know, flows back to us. So we'll be buying it effectively at a slightly above a five cap.
spk13: That's great. Thanks, Scott. Thank you.
spk09: Our next question comes from the line of Derek Johnston from Deutsche Bank. Derek, your line is open.
spk01: Hi, thank you. This is Connor Peekson for Derek Johnson. I have one question. Jim, I think you touched on it in your opening comments, but the controllable expense growth guidance of 2.5 to 3.5, any details on the drivers there that you're looking for that bring you to that lower end of the guidance range?
spk02: Yeah, I mean, I think the driver that will help achieve it at the lower end of the guidance range will just be kind of the timing and effectiveness of the technological efficiencies we plan on rolling out to help kind of offset what other, you know, inflationary pressures will persist in the portfolio. Obviously, we've taken an inflationary look and, you know, increased utility costs and contract services for landscaping, blah, blah, blah, as well as, you know, payroll costs. But as we roll out the efficiencies with the Intrada platform and, you know, kind of merging the two portfolios together and kind of executing on the contracts and, you know, the more sizable, more size and scale, you know, help us achieve at that lower end of the range.
spk07: Thank you.
spk09: We have no further questions. I'll now hand back to Scott Schaefer for any concluding remarks.
spk12: Thank you everyone for joining us. We look forward to speaking with you again next quarter. Have a nice day.
spk09: Thank you everyone for joining us today. This concludes our call. Please now disconnect your lines.
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