Independence Realty Trust, Inc.

Thank you and good morning, everyone. Thank you for joining us to review Independence Realty Trust Third Quarter 2024 Financial Results. On the call with me today are Scott Schaefer, Chief Executive Officer, Jim Zebra, Chief Financial Officer, and Janice Richards, SVP of Operations. 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. Before I turn the call over to Scott, I'd like to remind everyone that there may be forelooking statements made on this call. These forelooking statements reflect IRT's current views with respect to future events and financial performance. Actual results could differ substantially and materially from what IRT has projected. Such statements are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to IRT's press release, supplemental information, and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations. Participants may discuss non-GAAP financial measures during this call. A copy of IRT's 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 8K 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 on this call or with respect to matters described herein, except if may be required by law. With that, it's my pleasure to turn the call over to Scott Schaeffer.

Thanks, Maddie, and thank you all for joining us this morning. I would like to begin the call today by thanking our onsite teams for their integral role in ensuring the safety of our residents and communities affected by hurricanes Helene and Milton. I'm happy to report that all of our residents and employees are safe. We did not experience any significant damage from the storms and there are no down apartment units. And now onto the results. We delivered solid third quarter results with same store NOI growth of .2% and core FFL of 29 cents per share. We continue to operate in an uneven macroeconomic environment characterized by new supply and the effects of inflation on controllable expenses. Despite these conditions, we remain focused on driving occupancy gains while executing on our strategic initiatives. In the third quarter, our average occupancy was 95.4%, 90 basis points higher than the third quarter of last year. This was driven by our resident renewal rate of 66% and our resident retention rate was 57% in the quarter. As we've stated throughout this year, we have been focused on growing occupancy while balancing rental rate growth and targeted concessions to maximize leasing economics in this environment. During the third quarter, we continue to experience pressure from new supply, which is impacting new lease rent growth. Our blended rental rate growth was .8% with new leases down .6% and renewals up 3.8%. We expect continued strong renewal rate growth in the fourth quarter as we have signed approximately 91% of expected renewals for October and November and have achieved an effective rental rate increase of .3% on signed renewals. And our occupancy momentum continues as same store occupancy was .7% as of October 29th at 30 basis point improvement over our third quarter average with October lease renewal trade-outs at 5%. Same store occupancy at our non-value at communities as of October 29th was 96%. In the quarter, we completed renovations on 578 units, achieving a weighted average return on investment of 14.9%. This brings our total renovations for the first nine months of 2024 to 1,276 units, resulting in a weighted average return on investment of 15.9%. These efforts drove an increase in average monthly rent per unit of $242, exhibiting a significant premium compared to unrenovated comps. While we have historically talked about cash on cash returns for our value add projects, we do track the longer term benefits and IRRs for each community. Generally speaking, the IRRs on our projects range from 20 to 30% with some even higher. When you compare these IRRs with our cost of equity, you can see how beneficial these projects are from an NAB perspective over time. Looking to the fourth quarter, we expect to renovate approximately 400 units, which will bring us to our updated four-year target of 1,700 units. As we've noted in the past, the number of units renovated will vary due to the resident retention levels and the timing of new renovation starts. We also continued with our capital recycling initiatives, which include the sale of a property in Birmingham and the purchase of a property in Tampa. Also, after raising equity in September, we are under contract to acquire three properties, one each in Charlotte, Orlando, and Columbus. This will be done at an aggregate purchase price of approximately $184 million and add 776 units to our portfolio. We expect a stabilized economic cap rate on these three assets to be 6%. These transactions reflect IRRT's ongoing efforts to increase our exposure in attractive markets where we have a strong presence and reduce our ownership potential. In addition, one of our JV investments in Nashville, known as the Crockett, was paid off in October, with us receiving the 20% annual preferred return, along with the return of all of our capital. Before I hand the call over to Jim, I'd like to share some recent news. Just yesterday, IRRT received a triple B flat investment grade rating from S&P Global Ratings, making this our second investment grade rating since receiving one from Fitch Ratings in early March. Both of these ratings mark a significant milestone for IRRT and reflect our efforts to reset our leverage profile and drive profitable growth. This additional rating will improve our cost of capital and give us access to additional capital sources to implement our business plan and investment on portfolio. To sum up, our performance this quarter showcases our track record of delivering solid results amidst a difficult macroeconomic backdrop. Looking ahead, we remain confident in our ability to continue driving strong results, underpinned by the effective positioning of our portfolio in high-growth markets and continued execution on our value-add renovation strategy. As a result, we are maintaining the midpoint of our full-year 2024 same-store NOI guidance range and now expect to be at the high end of our previous core FFO per share guidance range. We believe we will achieve this by remaining focused on sustaining high levels of occupancy while optimizing rental rate growth and effectively managing our expenses. I'll now turn the call over to Jim.

Thanks, Scott, and good morning, everyone. Beginning with our third quarter performance update, net income available to common shareholders was $12.4 million, up from $3.9 million in the third quarter of 2023. Fourth FFO was $66.8 million and 29 cents per share, both just below a year ago due to our asset sales, which were completed in connection with our portfolio optimization and deleveraging strategy. As a result of these asset sales and deleveraging, we're also happy to report that our net debt to adjust to debited is now 6.3 times, down from seven times a year ago, and we remain on track to be at the six times net debt to adjust to debited by year end. IRT Savestore NLI growth in the third quarter was 2.2%, driven by revenue growth of 2.5%. This growth was led by a .2% increase in our average monthly rental rates to $1,566 per month and a 90 basis point increase in average occupancy to 95.4%, both as compared to Q3 of 2023. On the operating expense side, IRT Savestore operating expenses increased to .8% during the quarter. This increase was primarily due to higher personnel costs and higher repairs and maintenance and utilities costs, all driven by continued inflationary pressures. These increases in some controllable operating expenses were offset by year over year declines in real estate taxes and property insurance in Q3, reflecting the notable progress we've made in these areas. As noted last quarter, we renewed our main property insurance policy in May and saw a 10% reduction in our premiums without changing our deductible to recover. For real estate taxes, assessed values have come in lower than we anticipated in states like Texas, which is 7% lower, Florida, which is 13% lower, and Indiana, which is 11% lower, and all of those states reassessed annually. The remaining portion of our expenses for property management and GNA are all trending consistent with our prior guidance. On our balance sheet, as of September 30th, our liquidity position was 722 million and was comprised of 18 million of undershifted cash, 308 million available on our line of credit, 150 million available under our private placement bonds, and 246 million available under our forward equity agreements. During Q3, we completed that inaugural private placement and issued 150 million of unsecured notes. The proceeds from these notes will be used to fully repay all of our 2025 debt maturities. These unsecured notes have a weighted average life of 8.5 years and a weighted average coupon of 5.4%. As Scott mentioned earlier, we are also happy to report that we received a Triple B flat investment grade credit rating from S&P yesterday. For some time now, we've indicated our efforts to achieve this rating and are excited to deliver on our promise to our shareholders and employees. This rating will open a new capital source for IRT, the public bond markets, and will reduce the effective cost of all outstanding bank borrowings by approximately 20 basis points or 1.5 million annually. In connection with our capital recycling program, we sold a legacy steadfast asset in Birmingham in July for a gross sales price of $70.8 million with an economic cap rate of 5.8%. We used the proceeds from the sale to acquire a property in Tampa in August for 82 million and an economic cap rate of 5.9%. We are also under contract from three properties in Charlotte, Orlando, and Columbus. The aggregate purchase price of these three properties is approximately 184 million with a blended year one economic cap rate of .7% and a stabilized blended economic cap rate of 6% as two of these communities are new development and currently approximately 87% occupied. We expect to close on these transactions in the fourth quarter using approximately 35% leverage and the rest coming from our outstanding forward equity agreements. With respect to our full year 2024 outlook, we are making some minor adjustments to our guidance based on our performance through Q3 and expectations as we close out this year. In particular, we are increasing the midpoint of our full year core portfolio per share by one penny per share. The guidance updates for our operating metrics are as follows. We now expect full year same store revenue growth of between 3% and 3.2%, which reduces the midpoint by five basis points compared to our prior guidance. This is due to the lower blended rental rate growth we've experienced here today as we focused on supporting occupancy this year. For the fourth quarter of 2024, the midpoint of our revised same store revenue guidance reflects an average occupancy of .6% and a blended rental rate growth of 50 basis points. While we are continuing to see pressure on some categories of controllable operating expenses, that pressure is being offset by further positive outcomes on real estate taxes and insurance expense. Our revised guidance for the full year 2024 total operating expense growth remains at 3% at the midpoint. The midpoint of our same store property rental wide growth for 2024 remains at .2% and is on top of the .7% increase that IRT achieved last year. Regarding other updates to our full year outlook, we are increasing our guidance for acquisition volume and now expect the range of 264 to 268 million for the year. This reflects not only the one property in Tampa we acquired in the third quarter, but also our plans to close on the properties mentioned earlier that are currently under contract in Charlotte, Orlando and Columbus. Our disposition volume guidance remains broadly unchanged. Lastly, we do not provide guidance on income from our unconsolidated joint ventures, but we wanted to highlight that the 20% annual prefer return that we received related to the Crocket joint venture will be recorded in Q4 and will provide approximately $3 million of benefit to core FFO in 2024. Scott, that's it, back

to you. Thanks, Jim. Our performance in the third quarter gives us a great foundation to continue driving growth across the business and to achieve our 2024 guidance. In the fourth quarter and into next year, we will remain focused on solidifying our position in attractive markets, driving high occupancy and rental rate growth, executing our value add renovations and our capital recycling strategy and delivering shareholder value by returning capital to our shareholders and further strengthening our balance sheet. I would like to close my remarks by thanking the IRT team for their hard work and dedication that made these strong results possible. They continue to remain focused on driving forward our strategic initiatives and delivering value for our residents and shareholders. We remain confident in our ability to achieve a solid performance throughout the rest of 2024 and beyond. We thank you for joining us today and we look forward to speaking with many of you at NAE REACH Reap World Conference in the coming weeks. Operator, you can now open the call for question.

We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star

one to join the queue.

Our

first question

comes from the line of Austin Werschmitt with KeyBank Capital Markets. Your line is open.

Austin? Austin, you may want to unmute your line. Let's go to the next one, Operator.

Our next question comes from the line of Brad Heffern with RBC Capital Markets. Your line is open.

Hey, good morning. Can you guys hear me? Yep, good morning. Yes, Brad. Okay, good. So obviously you've firmed up the use of proceeds for a lot of the equity deal at this point. I'm curious just at the current time, the current cost of capital and the opportunity set that you see right now, are you interested in re-upping and pursuing more acquisitions in 2025 or was there something unique about the opportunities that you were seeing when you did that deal?

Nothing unique other than we felt that there were good assets in markets where we wanted to expand that could be bought, at cap rates that were accretive relative to our cost of capital. And that's why we set out to raise the capital. We didn't have anything under contract at the time, but we're quickly able to put together a pipeline and identify these three communities, again, that we think will be additive to the portfolio and got them under contract. And they're working through due diligence now and we expect them to all to close in the fourth quarter.

Okay, but is the opportunity set more broad than this or was this just like three sort of unique deals that fit in?

There's opportunities out there and we're seeing a lot of them. We wanna be judicious on our use of capital and make sure that everything that we do is accretive to both an NAV and an earnings point of view. So, we're being patient and we're working through we'll transact when it makes sense, but there are transactions out there today.

Okay, got it. The September renewal spreads are the highest of the year, but the newly spread is the lowest. It does seem like you have confidence in that renewal rate continuing to be above five through November, but how do you feel about the ability to maintain that spread of close to 10% between new and renewal?

We're seeing that also for December in the renewal rate, even a little bit higher in December. Now it's early and we only have, I think, 40% of our December renewals. We have about 40% of expiring leases have renewed in December and that will end up in the low 50s. So, there are a good chunk of the December renewals are already in and there, as I said, they're in the high fives to 6%. So, we feel good about it.

Okay, thank you. And

our next question comes from the line of Austin, Bushmeet, the KeyBank Capital Markets. Your line is open.

Hey everybody, can you hear me now? We got you.

Morning.

All right, perfect. Sorry about that. A little bit of a technical issue on our end. Just wanted to hit on if you didn't ask this, if somebody didn't ask this already, but last quarter you had estimated the earn-in around 90 basis points, expectations obviously for the latter half have shifted a bit. Can you just share what the updated thoughts are of where you expect the earn-in to shake out heading into next year?

Yeah, based on where we are today and kind of what we think will continue to happen, as Scott just mentioned, for November and December, we think the earn-in for next year will be approximately 50 basis points.

Thanks for that. And then just with respect to the operating strategy, you know, where would you guys like to grow occupancy to? And I guess to the extent conditions do improve on the ground, at what point does it really make sense for you to switch back to pushing right again?

We're basically there, Austin. I'm happy at 95 and a half to 96% occupancy. That's where we are. So our strategy going forward will be to maintain that and to have then a more balanced approach to rent growth going forward.

And just last one for me, I guess, based on what you see from a supply perspective in front of you, when do you think you could start to see new lease rate growth turn positive?

Yeah, I mean, I think, you know, the supply growth that I think we all widely believe based on the data that's been costarred in the early matrix, you know, for 2025 will be significantly lower than 2024. So I think you're gonna start seeing, you know, that new lease kind of trade out improved quite rapidly, you know, throughout the beginning part of 2025. I don't know, Janice, feel free to, if you wanna add anything else, but I think generally speaking, we were quite bullish on the ability for that supply to benefit the new lease growth going forward.

Absolutely, we're seeing, you know, signs of that already within kind of the asking rent starting to creep up. So we're looking for that flow of new supply to diminish and we're ready to take advantage of it.

That's helpful, thanks everybody. Thank you, Laura.

Next question comes from the line of Eric Walf with CD. Your line is open.

Hey, thanks. Looking at your sequential, thanks to revenue increase, it was .2% this quarter. It looks like 70 bips of that was from increased rate. Occupancy was, I think, slattish quarter of a quarter. So I was just curious what's driving the other sort of 50 bips of that improvement sequentially.

Yeah, it's both a bad debt expense and other income growth.

Got it, okay. So I guess that leads me to the next question, which is, you know, I know it's still early, but if you have any thoughts on some of those items for next year, because I guess at least for bad debt, you're probably ending a little bit over .5% on bad debt. That creates a little bit of embedded growth. I'm just curious if there's other income growth or anything else that you could talk about that we should be thinking about for next year in terms of your same store revenue.

Yeah, I mean, I think we're not ready to give guidance, obviously, for next year just yet. I would say that, you know, largely speaking, sure, we're working on continuing to move bad debt lower. We're looking at additional kind of amenity offerings to increase other income growth, all those great things. I would say the market rent growth is one that, you know, I'm waiting for someone to ask that question. You know, the costars in the Arnie Matrix of the world kind of show market rent growth in the kind of the three to .5% range. So that's probably the only bit of data point that we would say that's out there, because everybody could download that information and get it. But I would say that's probably one of the bigger building blocks for our revenue growth for next year. As Scott mentioned, you know, with a more stable occupancy, we're gonna be able to, you know, have a more balanced approach to rate growth.

Got it. Thank you.

Next question from John Keane with BMO Capico Markets. Your line is open.

Good morning. So your lease rates, renewals were wrong and rebounded well so far this quarter. The new lease rates probably were below expectations, bringing down the total. Were there any markets that surprised you as far as new lease rates not, you know, coming in lower than expected? And how does that compare versus, Jimmy just mentioned, market forecast of three to 3.5%. I mean, do you think there will be a lingering impact of supply on new lease rates going forward?

Sure, I'll take that one. So I don't believe we saw any negative impact. I think we didn't see as much lift as we were hoping for on the new lease rates based on the seasonality and a little bit of a layover from leasing season into October, in which we were able to, you know, push through that additional supply and see that boost in occupancy, which allows for us now to be poised for the pricing power moving forward. Again, on supply, you know, the majority of our supply adds in Q1 in most of our markets, and we're pretty confident with the continued pricing powers through next year in order to get in and around kind of what the market is anticipating.

Okay, and then can I just ask on your recent acquisitions, you mentioned a 6% stabilized. How long does it take to get there? What's the going in yield? And are these, as far as these assets, are they new developments recently completed, or are they potential for value add if you can just provide some characteristics on them?

Sure, so two of the three are new construction delivered in early 2024, the one in Charlotte and the one in Orlando. They're both finishing their lease up, and those are the ones that are about 85% occupied and will be stable in the first quarter of 2025. 87% occupied. 87% occupied, excuse me. The third is a smaller asset adjacent to one of our existing communities in Columbus, Ohio, that's a bit older and will be primed for our value add strategy.

The yield seems a little bit higher than what we'd heard in the market.

Well, I think, well, one, I think, you know, having capital available and moving quickly and knowing the market so that you can shorten the due diligence time is all a benefit and gets you a better execution. And you also, there is always a small benefit, at least we've always been able to achieve a small benefit when you're willing to take some lease up risk. So when we put these under contract, they were, you know, in the lower 80% occupied. That continues to grow, but we're seeing that we get a better price because we're taking that little bit of risk. And again, it's not really a risk for us per se because we know the markets and we know, you

know, we understand the assets. That's great, thank you. You're welcome. Our next question comes from the line of Omotayo

Okusanya with Doshabank. Your line is open.

Yes, good morning, everyone. A couple of quick ones from me. First of all, how should we kind of think about potential new development starts? Again, you have improved liquidity, it sounds like you have better cost of capital, you know, congrats on the S&P investment grade rating, but are you kind of at the point now where you can actually start a new project or does, you know, does the cost of buildings still kind of prohibitively high relative to rent?

It's, this is Scott, it's still not something that we are looking to do. You know, we, again, we completed the two ground-up construction development deals that we inherited from Steadfast in the merger, but as we continue to look to de-leverage the balance sheet, we like buying stable, we're very, very close to stable. Performing assets and I am not ready to add development risk to our balance sheet at this time.

That's helpful. And then if we could talk about insurance a little bit, again, it's, you know, good year for you guys in regards to insurance, but there's one, was one thought to kind of think about next year, again, it's hopefully it's not too early to start thinking about next year. So it's given everything we've seen with hurricanes and the payouts all the insurance companies have to make. Is there a risk that they kind of ratchet up premiums in 2025?

Teo, great question. We've gotten this a few different times. And obviously the insurers are going to use all these severe weather events as a reason for rates to increase. I would say that over the past few years, as premiums have increased, insurers have come back to the marketplace. So therefore the competitive edge that you have as a purchaser for insurance is beginning to kind of flow back. Obviously still way too early to tell for next year our renewal is not until mid-May. We do have a blanket policy and we have not, we have not had any losses this year that we've put onto our insurers, which will really help us in that, you know, kind of negotiation knock on wood, but we're quite happy with where we sit today. And, you know, obviously next year is still a bit of a question mark, but we're, you know, we think we'll have a good negotiating like next year.

Okay, one more, if you don't mind, the preferred investment that's going to be recorded in 4Q, could you just, do you think it's going to be a one cent impact or a three cent impact? I wasn't sure I heard that, sorry.

Yeah, it's $3 million. It's about a one and a half cents benefit to Core FFO, for sure.

Thank you. Thank you.

Our next question comes from the line of Anne Chan with Green Street. Your line is open.

Hey, good morning. Could you share what you're seeing in terms of sessions from competitors for markets you previously noted with higher supply, competition, Atlanta, Raleigh, Nashville, et cetera, and how that's been trending in recent months?

Absolutely. So we've, as you've noted, we've got the high supply that we're, you know, challenging in Raleigh, Atlanta, Dallas, and Nashville. We've seen a little bit of an ebb in Dallas, which, you know, makes us hopeful next year's growth could be close to and or in line with what Coastal and Yardie are anticipating. Atlantis, pretty much state consistent, especially in our sub markets with concessions. We've had the ability to pull back in some areas. We still are very targeted with our concessions. We review them and adjust them accordingly, you know, on a weekly basis based on how we can optimize net effective rents. And so again, we've not seen much change. We're hoping to see a little bit more change in November, December as we see the supply start to ebb. Deliveries,

again,

sorry, deliveries again, start to, you know, subside more in Q1. And so that's when we're gonna start to see the concessions really start to pull back.

Thank you. And specifically for Atlanta, being one of your largest markets, could you share what you're seeing on the ground there operationally and an update on the eviction progress in recent months, the subsequent to the third quarter?

Yeah, so although Atlanta still is relatively challenging, we've seen a bit of an upswing, you know, on our blended for Q3, we're at a negative .8% increase at 1.1 for October, we're at a positive 1.3 on the right side. So that is definitely going in the right directions for us. Occupancy year over year, we've had a .4% increase, which we will then be able to maintain. And so based in month over month, we were able to get another 50 basis points in growth there. So Atlanta is definitely, you know, on the upswing comparatively, but we will still see challenges with that debt. On the court side, we're still seeing a bit of delay, not as much as we saw maybe coming into 24. And we're hopeful that that will subside even more in 25 as the courts start to catch up and we start to utilize all different aspects in order to

minimize that bad debt. Okay, thank you. And our last question comes from the line of Linda Tai with Jeffery, your line

is open.

Hi, thank you. A follow-up on insurance. Do you see institutional owners taking on higher deductibles to help offset the impact of higher insurance costs? You know, do you think this is a growing trend?

I don't know if it's a growing trend. I have said that, I've said in the past, when we did our renewal back in May, we didn't change our deductible, we did not take that higher deductible. Obviously, you're always willing to look at taking a higher deductible if it saves you that much, if not more in premium dollars. We have heard some people are doing that as a way of managing their premium, but I don't have any real kind of clear anecdotes to what percentage or how much they're doing, but we haven't,

be clear. Thank you. That concludes the question and answer session. I would

like to turn the call back over to Mr. Scott Schaefer.

Thank you all for joining us this morning. Again, we look forward to seeing some of you in Las Vegas at the NAIT Reconference, and otherwise we will speak to you next quarter. Have a good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.