Independence Realty Trust, Inc. Q1 FY2022 Earnings Call

Hello everyone, and a warm welcome to the Independence Realty Trust’s First Quarter 2022 Earnings Release. My name is Emily and I will be coordinating your call today. And now, I have the pleasure of turning the call over to our host, Lauren Torres. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust’s first quarter 2022 financial results. On the call today are Scott Schaeffer, Chief Executive Officer; Ella Neyland, Chief Operating Officer; Farrell Ender, President of IRT; and Jim Sebra, Chief Financial Officer. Today’s call is being webcast on our website. There will be a replay of the call available via webcast and telephonically. 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 that could differ materially from what IRT has projected. Participants may discuss non-GAAP financial measures during this call. A copy of IRT’s earnings press release and supplemental information is available at IRT's Investor Relations.

Thank you, Lauren, and thank you all for joining us today. After an unexceptional 2021, when we more than doubled the size of our portfolio and accelerated our deleveraging efforts, we are pleased to report that our momentum continues as we delivered 16.2% combined same-store NOI growth and almost 40% core FFO per share growth in the first quarter of 2022. Our merger with STAR resulted in the combination of two high-quality portfolios in non-gateway markets with outsized growth fundamentals. More than two years since the pandemic onset, we continue to deliver strong results that reflect the resiliency of our markets and the success of our strategic initiatives. We have increased our exposure to non-gateway markets in the Sunbelt region, which currently represents approximately 71% of our NOI. Our markets continue to see high residential demand as population growth exceeds new supply. These trends are expected to continue, benefitting from outsize job creation and increasing wages as people seek a lower cost of living and better economic opportunity. We believe IRT has a long runway for growth, whether through investing in our existing communities or expanding our presence in current IRT markets. We have a sizable renovation pipeline, and we'll continue to invest in our redevelopment efforts through our long-standing value-add program, which has historically generated unlevered ROI of approximately 20% and should provide over $800 million of incremental growth and shareholder value. Additionally, we will explore new investment opportunities and look to advance our joint venture relationships. We have been exploring single-family home rental development opportunities, and recently closed on a joint venture that acquires development in Huntsville, Alabama. This JV marks our entrance into the single-family home rental space. In April, we acquired our first multifamily property in Nashville through our Joint Venture Development Program. Looking ahead, we are confident in our ability to implement our strategic initiatives, capturing incremental growth and strengthening our total company platform with increased economies of scale. This is reflected in our increased guidance for the full year 2022, targeting 12.5% combined same-store NOI growth and 25% core FFO per share growth. While we continue to be mindful of economic headwinds, we have strong visibility on delivering these results as we head into peak leasing season. I'd now like to turn the call over to Ella Neyland.

Thanks, Scott. As Scott touched upon, we kicked off 2022 with strong operating results, led by our ability to maintain high occupancy levels at our communities and drive rent growth. In the first quarter, our average occupancy rate was 95.4%, up 10 basis points compared to a year ago. We delivered a 10.4% increase in our average effective rental rate, both on combined same-store property basis. New lease rates increased 15.7% and renewals were up 10.2% during the first quarter, yielding a blended lease-over-lease rental rate increase of 12.8% for leases expiring in Q1, 2022. Strong trends continue in the second quarter, with new leases for our combined same-store portfolio having increased 15.8%, while renewed leases are up 9.5%. Our resident retention rate is 54.6%, up about 370 basis points from Q1, 2022. As mentioned last quarter, our property management and revenue management system integration is complete, and we are on track to deliver $31 million in synergies as we implement best practices from both companies, including $8 million of annual operating synergies and $23 million of annual corporate expense savings. I would now like to turn the call over to Farrell for an update on our investment opportunities.

Thanks, Ella. Since the inception of our value-add program in 2018, we've focused on renovating our existing properties where we see the potential for outsized rent growth. This continued in the first quarter as we completed renovations on 143 units, achieving an average of $331 increase in monthly rents for these units, yielding an unlevered return on investment of 32%. Our value-add program currently has 12 communities undergoing renovations. We expect to renovate 2,000 units from the combined portfolio this year, ramping up to 4,000 units per year thereafter. We're excited about the progress of our joint venture program, focusing on new multifamily development and single-family rentals. Recently, we invested in a joint venture developing three communities in the national market and acquired the first of those communities for $25.4 million, which translates into a 5.47% effective economic cap rate. As our first investment in the single-family rental space, we entered a joint venture in Huntsville, Alabama, consisting of a two-phase development with 400 single-family home rental units. The development of 178 homes in phase one was completed in late 2021 and is 85% occupied today. IRT's investment is expected to total $37.1 million, with $16.4 million funded. Construction efforts are progressing well across our joint ventures, and we're pursuing several other opportunities in our existing markets. We provide updates on our joint ventures on the investment and development activity page of our supplements. As of the end of Q1, we have identified two properties as held for sale, expecting a blended economic tax rate of 3.9% with an expected close in Q3 2022.

Thanks, Farrell, and good morning everyone. Starting with our Q1 2022 performance, net income available to common shareholders was $74.6 million, up from $1.1 million in Q1 2021. GAAP net income includes $94.7 million of gains from the disposition of four real estate assets and a $29 million one-time amortization expense associated with in-place leases from our STAR merger. Core FFO grew to $57.7 million, up from $80 million a year ago, with core FFO per share growing 39% to $0.25 per share, up from $0.18 per share in Q1 2021. IRT's first-quarter combined same-store NOI growth of 16.2% was driven by revenue growth of 11%, propelled by a 10.4% increase in average rental rates. Operating expenses grew 3.2% in the first quarter, led by higher contract services and personnel expenses. On the balance sheet, as of March 31, our liquidity position was $457 million. Our net debt-to-EBITDA was 7.6 times at quarter end, down from 8.2 times a year ago. We expect to achieve our leverage target of the low seven times by the end of this year, and mid-six times by year-end 2023. Regarding our full-year 2022 guidance, we now expect EPS between $0.50 and $0.52 per diluted share, and core FFO per share range of $1.04 to $1.06. For 2022, we now expect NOI or combined same-store portfolio to increase 12.5%. Our guidance reflects expected combined same-store revenue growth of 9.6%. We are also providing updates on transaction and investment volume expectations given the activity we've announced to date.

Thanks, Jim. In closing, I'd like to thank our team for their incredible efforts. The past two years brought unexpected challenges, but IRT emerged as a stronger company in the multifamily sector. We're confident in our strategy, focused on capitalizing on continued macro trends and resident demand, accelerating our organic growth profile through our value-add program, and expanding our presence in core high-growth markets.

Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.

Great. Thank you. And good morning, everybody. Scott, over the last few years, you've added various investment opportunities to the arsenal, and you've now dipped your toe into single-family rentals. Can you just help us understand how long you and the board have considered SFRs as an investment consideration? And then, how do you prioritize your capital uses today?

Sure, Austin, and thanks for the question. Yes, we will remain patient and disciplined. We've been looking at single-family rentals for some time now. Homeownership is becoming increasingly out of reach, which makes this an opportunistic step for us to take advantage of these markets where we have presence. We are looking at some other opportunities, but it's all along with our existing capital allocation strategy.

Are you planning to take operations in-house and what build-out within the ops platform is necessary to take that on?

We don't think there's any build-out necessary. This is multifamily, and yes, we will take it in-house. We have a purchase option where we can buy out our JV partner in the near future, and when we do that, we will take over management. But we think it fits right within our existing operational platform.

Just last one for me. How deep is your investment pipeline in single-family today?

Not a very deep pipeline. It's something we're looking at. Again, this was an opportunity in a market we know well.

Thanks, maybe following up on Austin's questions with single-family. How do you think about the entrance into single-family from a return perspective?

We look at it as returns that are similar to our other JV investments, where we're able to buy completed operating rental housing at higher cap rates than what is available for existing products. This was opportunistic and attractive compared to a very heated acquisition market.

What were the additional factors that contributed to your increased synergies of $31 million?

The $31 million number is likely the final number. There might be small additional amounts, but it's not going to be materially different.

Are you seeing opportunities to come in on re-trades or will the market perhaps back up a little bit?

Yes, we are seeing that leveraged buyers are being impacted. We're not seeing the opportunity yet but expect it to show in the next two to three months.

Can you elaborate on the depth of the JV development pipeline and the markets you're looking at?

The markets we're looking at are old markets that we currently operate in the Sunbelt region. We limit our exposure by investing when the building is shovel-ready, which reduces our development timeframe.

We're seeing inbound migration in our targeted markets where we're experiencing significant household formation. Our market selections are strategically positioned for business growth.

Are you seeing trends that indicate a determination for move-ins from comparable apartments in your new markets?

We're seeing demand increase significantly, particularly for moderate-income B-class apartments, as they tend to be very stable in various economic conditions.

In the single-family rental space, the demand is expected to far exceed supply. We believe there's a good opportunity for growth.

Can you quantify some of the return metrics you're looking at between assets you're considering calling from the portfolio and those being acquired?

We aim to match capital recycling with better growth prospects by trading out of older assets into those with superior potential for growth.