Independence Realty Trust, Inc. (IRT) Q3 2026 Earnings Call Transcript

Such statements are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation and Reform Act of 1995, and IRT does not undertake to update them, except as may be required by law. Please refer to IRT's press release, supplemental information, and filings with the SEC, including the definitive joint proxy prospectus, for further information about these risks. A copy of IRT's third quarter earnings, press release, and supplemental information is attached to IRT's current report on Form 8K, which is available in the Investors section of our website. They contain reconciliations of non-GAAP financial measures referenced on this call to the most directly comparable GAAP financial measures. With that, it is my pleasure to turn the call over to Scott Schaefer.

Thanks, Stephanie, and thank you all for joining us this morning. I am pleased to report another solid quarter. Four FFO for share of $0.29 and same-store NOI growth of 1.6 percent were both in line with our expectations, and we are reaffirming the midpoint of full-year guidance for both metrics. Our rate-over-occupancy strategy this leasing season worked as intended. During the third quarter, asking rents held firm, and we cut concession use on new leases nearly in half from second-quarter levels. As a result, new lease tradeouts on like-term leases accelerated by 210 basis points sequentially and increased 310 basis points year-over-year. The recovery is now broad-based. Over the past year, new lease spreads on like-term leases improved in nine of our 10 largest markets, led by Atlanta, and lead volume is up 11%. Renewal rents improved 200 basis points year-over-year. Average occupancy of 95% was flat sequentially, and resident retention improved. Taken together, blended rents on light-term leases grew 2.8% in the quarter, our best result in five quarters. During the quarter, we continued to recycle capital, selling the property in Memphis, and subsequent to quarter end, acquired our joint venture partner's interest in the Mustang, a 275-unit newly constructed community, on the last lakefront multifamily development parcel in the Las Colinas submarket in Dallas. As we close out 2026, favorable market tailwinds and company-specific growth initiatives position IRT for meaningful earnings growth in 2027. First, supply-to-demand fundamentals continue to improve and support higher effective rents. New deliveries in our markets have fallen by more than half since peaking in 2024 to about 2.5% of inventory this year, and COSTAR projects a further decline in 2027. Demand continues to outpace national averages, and absorption remains strong. Second, with sticky inflation and higher interest rates, the cost of home ownership continues to favor renting over ownership, generating more demand for rental apartments. Third, people continue to migrate to our non-gateway markets motivated by employment opportunities and are seeking a better quality of life, which includes overall affordability. IRT's portfolio offers residents the attractive solution of high-quality housing at monthly rents that are materially below new construction rents. Fourth, we completed our initial rollout of community Wi-Fi ahead of planning, and it will contribute a full year of revenue and NOI to 2027 results. Finally, our value-add program remains an important low-risk way to capture higher market rents and drive core FFO growth. During the first nine months of this year, we completed nearly 1,800 value-add renovations and an average unlevered return on investment of approximately 15%, and we remain on track to complete 2,200 renovations for the year. We are always refining our renovation processes and have further reduced the average unit turn time from approximately 25 days to now 17 days. This shortened turn time allows us to complete more renovations without meaningfully impacting occupancy. Accordingly, we expect to increase the number of units renovated during 2027, which will further drive NOI and earnings growth. Turning to center space, the pending merger builds on the momentum I just outlined and amplifies it across three dimensions, growth, value, and scale. First is growth. We expect the transaction to be approximately 5% accretive to 2027 core FFO per share on a leverage-neutral basis, and accretive to day one NAV, driven largely by the operating synergies of IRT's more cost-efficient platform. More importantly, it enhances our longer-term earnings profile. Beyond the $24 million identified synergies, approximately 3,200 of Center Space's apartment units are ripe for our value-add program, and 10,000 units will be added to our community Wi-Fi program, Extending these two revenue-enhancing initiatives across a larger combined portfolio. Second is value. After accounting for synergies and one-time costs, we are acquiring Center Space at a 7.3% nominal cap rate, a meaningful discount to its net asset value, and at a price per door that is well below replacement cost. Third is scale. Center Space's 10,500 units will increase our unit count by more than 30% to approximately 44,400 apartment homes in markets that are demand-rich and supply-constrained. The merger also brings our G&A load in line with our larger-cap peers. As a final note, since the merger announcement, both Fitch and S&P have reaffirmed our investment-grade ratings, and I am pleased to report that multiple independent proxy advisory firms have recommended that IRT stockholders vote in favor of the merger. Our special meeting is November 10th, and we encourage all stockholders to vote for their shares. With that, I'll turn the call over to Jim.

Thank you, Scott, and good morning, everyone. I'll start with a brief update on our integration with CenterSpace. While we are still in the early stages, the overall process is on schedule. Lender consents for the assumption of approximately $500 million of CenterSpace's secure debt, with an average interest rate of approximately 3.5%, are progressing as planned. On the people side, we have identified the go-forward and transition teams and executed employment letters accordingly. Our technology integration is planned and ready to launch shortly after closing. Additionally, the 140 million of dispositions that we identified to keep the center space merger leverage neutral are progressing and expected to close in the first quarter of next year. All this is pointing to a successful integration post-closing and securing the synergies We've identified. Turning to our third quarter results, the core FIPO per share of $0.29 was in line with our expectations. Same-store NOI grew 1.6 percent, also in line with expectations, as a 2 percent increase in same-store revenue was partially offset by a 2.5 percent increase in operating expenses. SAMSER revenue growth reflected a 60-basis point increase in average effective monthly rents, a 16% increase in other property revenue driven by $2.3 million of Wi-Fi revenue, and stable debt of approximately 90 basis points. As Scott mentioned, we prioritized rate over occupancy for the duration of our peak leasing fees. Stable asking rents, which are up approximately 3% since the start of the year, and a demand environment that required fewer concessions, drove our effective rents higher during the third quarter. We maintained stabilized occupancy of 95% during the quarter, and resident retention increased 240 basis points sequentially to 60.5%. Improving fundamentals continue to support better pricing power in the quarter. For like-term leases, new lease tradeouts were negative 60 basis points in the quarter, improving 210 basis points sequentially and 310 basis points year-over-year. Looking at like-term new leases by market, Atlanta, our largest market, registered the biggest improvement year-over-year with new lease tradeouts of positive 2.1%. A 755 basis point improvement over the third quarter of 2025. Oklahoma City delivered positive 2.9%, and Raleigh, Dorm, and Columbus saw a new lease spread of positive 2.5% and 1.5% respectively. In Denver, new lease tradeouts were break-even, up 360 basis points year-over-year. In Dallas, new lease tradeouts were negative at 3.5%, improving, albeit, by 70 basis points over last year. Renewal lease spreads remain strong, reflecting solid demand, high resident satisfaction, and our data-driven approach to maximizing revenue growth. Renewal spreads on light-term leases were 4.6% in the quarter, up 50 basis points from the second quarter, and 200 basis points year over year. As a result, light-term blended rank growth of 2.8% was 150 basis points higher sequentially and 270 basis points higher than a year ago. For same-store operating expenses, the 4% increase in controllable expenses was driven primarily by higher contract service costs associated with the Wi-Fi rollout. Without the Wi-Fi service fees, the increase in controllable expenses would have been 3% year-over-year. Recall that our Wi-Fi program requires no capital from IRT. Non-controllable expenses were flat year-over-year as a 17% decrease in insurance, also a 3% increase in real estate taxes. Please note that 2025 real estate taxes were low due to real estate and franchise tax refunds in the prior year. Turning to capital allocation, during the first nine months of the year, we completed 1,707 unit renovations at an average ROI of approximately 15%. Value-added activity continues to be an attractive investment opportunity to support long-term earnings growth. We expect to increase future renovation volumes to capture higher rent premiums as market rents continue to recover. As Scott mentioned, subsequent to quarter-end, we acquired a joint venture partner's interest in the Mustang and began consolidating this 275-year-old community on our balance sheet. Our basis represents a 5.9% economic cap rate on stabilized NLY. We did borrow $79 million on our line of credit to repay the in-place construction loan, which improves the earnings profile of the property for the remainder of 2026 and beyond. The previous construction loan was bearing interest at SOFR plus 275 basis points, whereas our line of credit bears interest at SOFR plus 77 basis points. The consolidation is reflected in our updated acquisition guidance of $266 million. Other than our pending merger with Center Space, we do not forecast any additional acquisitions this year. On the capital recycling front, in September, we sold a property in Memphis for $55.8 million. We used the proceeds to delever the balance sheet ahead of the Mustang closing in October. Our balance sheet remains flexible with strong liquidity. As of September 30th, our net debt to annualized adjusted EBITDA was 6.2 times, down from 6.5 times last quarter. We had approximately $492 million of liquidity, 86.5% of our debt was fixed or hedged at a weighted average effective interest rate of 4.3%, and we have no significant debt maturities until 2028. Heading into the fourth quarter, leasing is following its normal seasonal pattern with demand still better than in prior years. Without getting into monthly detail, gasping rents are remaining flat with blended lease spreads continuing their year-over-year improvement. Like the third quarter, double-digit growth and other property revenue led by Wi-Fi will continue to drive fourth quarter revenue growth. With respect to our Wi-Fi program, we plan to expand it to at least another 7,000 units in 2027, consisting of 4,000 IRT units and 3,000 units from Center Space. With exploration seasonally late, we're building occupancy now, which positions us well to push rate in 2027. Turning to guidance, our EPS and FFO per share guidance now reflect merger-related costs incurred to date, consisting primarily of fairness, pending legal, and filing fees. Otherwise, our guidance did not incorporate the pending merger with CenterSpace. We are reaffirming our core-fulfilled per share range of $1.13 to $1.15. We are also narrowing our same-store revenue and our wide-growth ranges around unchanged look points. Overall, we are on track to deliver on our full-year 2026 guidance, and we look forward to completing the merger with Center Space. We will provide full-year 2027 guidance with our fourth quarter results in February 2027. Scott, that's it. Back to you. Thanks, Jim.

In closing, our year-to-date results are solid, and we are reaffirming our 2026 guidance. Lease rates are improving as fundamentals strengthen across our markets, And IRT is building earnings momentum heading into 2027. We expect the proposed Centrespace merger to amplify that momentum, creating a larger IRT with more runway for low-risk internal growth through value-added community Wi-Fi, backed by our disciplined operating platform. On behalf of IRT's management team, I want to thank our stockholders for their support and every IRT and Centrespace team member for their hard work and dedication. Operator, please open up the call for questions.

Thank you. If you would like to ask a question, please click on the raise hand button at the bottom of your Zoom screen. When called upon, please unmute and ask your question. In the interest of time, we ask that you please limit yourself to one question and one related follow-up. We'll pause a moment to allow the queue to form. Our first question comes from Austin Werschmidt with KeyBank Capital Markets. Please unmute your line and ask your question.

Thanks. Good morning, everybody. Just given the improvement in leasing spreads versus last year that you talked about in your prepared remarks, I think you said that continued into the fourth quarter. Can you share how you expect your 2027 earn-in to shake out and just how that compares versus last year?

Yeah, good question. Awesome. Thank you. You know, I think, you know, we continue to see, you know, good trajectory. As I said in our prepared remarks, we're really getting away from trying to give monthly, you know, details on these calls. We continue to see great trajectory in the blended spreads, you know, kind of that 220 basic points improvement year over year. They're in third quarter and certainly, you know, continue to kind of perform in Q4. And when it comes to our earning, you know, that estimates and earnings kind of give and take about 80 basis points today. That earning last year was about either anywhere between zero and minus 10 basis points.

That's helpful. And then just second question, you know, recognizing you're a little bit limited in what you can say about the centers-based transaction. But first, can you just provide some thoughts about how maybe the results last night stacked up relative to what you had underwritten and anything that would change that 5% accretion? And then can you also just share when those synergies are expected to kick in? Thanks.

Sure. Yeah. You know, Center's Base's third quarter results was very consistent with what we underwrote, and obviously within their guidance range. You know, the pressure for them is concentrated in Colorado, where competitive supply is certainly weighed on occupancy and pricing. Every other region grew revenue, and since we're analyzed, it's not a one-quarter thesis for us. Obviously, we're acquiring what we believe is a well-located portfolio on an attractive basis. And it's exactly where our operating platform and value-add programs will really make a difference over time. I think on the synergy side, we underwrote the synergies to be 5%, and everything is within our control. As I mentioned in our prepared remarks, the G&A stuff and the people is certainly the big driver of it, And all the operating synergies associated with property insurance and other kind of things are all things that will just kind of start to happen as the portfolio comes onto our platform. You know, obviously, like renters insurance programs, the synergies is assuming that that kind of happens and gets billed through time. It's not all day one. So we think the synergy number is still very conservative, relative, but run already.

Thank you. Our next question comes from Eric Wolfe with City Research.

Hey, thanks. For the fourth quarter, can you just talk about your strategy on the rate and occupancy side? So how much occupancy do you want to build going into next year's peak leasing season? And why do you think that specific level is the right level going into next year?

Yeah, obviously, the right level is obviously in the eye of the beholder. I would say you look at kind of the strategy that we communicated around last year by building occupancy in Q4 so we can attract or achieve rate growth in the first half of 27 and be able to maintain it. That certainly worked. It really benefited us. You know, as you know, the seasonal kind of expiration curve for leases in the Q4 is the lowest that it generally is throughout the year. So it's the right time to prioritize occupancy and not focus so much on rate growth. I think, you know, for us, you know, our goal is to try to build it, you know, 30, 40 basis points of occupancy into the end of the year. And we think that's a good level. I mean, we'll obviously continue to try to grow it as much as we possibly can. You've heard Scott certainly say over the years, you know, occupancy between 95 and 96 was probably the right level. And if we start seeing our occupancy building over 96, we'll certainly move back to a rate priority. Got it.

That's helpful. And then you talked about the earn-in, I think you said 80 basis points. I guess any other thoughts? I know it's still early on, sort of the more predictable pieces of growth for next year, whether that's, you know, the other income, the Wi-Fi income, How that should trend or bad debt to the extent that, you know, there's a certain amount of bad debt improvement you think is predictable or the contribution from the value-add program. Just any thoughts on some of the other pieces that are going to be contributing to growth next year?

Yeah, we'll obviously give guidance in February 27, so I don't want to get too far ahead of myself. I would say that, you know, the other things that are currently being planned out is obviously the incremental Wi-Fi program of about 7,000 units and 4,000 IRT units and 3,000 center space units. Obviously, you will have good revenue growth coming from this year's Wi-Fi program in the first half of next year, and we expect those kind of 4,000 or 7,000 total units will start to hit in the kind of late second quarter next year, Maybe a little bit earlier, depending on how fast we get it moving, but that will certainly provide a lot of revenue growth to backhandles next year. As for the rest of it, occupancy trajectory, rental rate growth, and bad debt, we'll leave all that for the February guidance update. Thank you.

Thank you. Our next question comes from Jason Wayne with Barclays. Please unmute your line and ask your question. Jason, to unmute, please press star six on your keypad.

Hello, can you hear me now?

Yeah, hey, Jason.

Hey. Hey, good morning. So, just with the occupancy-led strategy you're leaning into next quarter, should we expect concession usage to remain elevated versus recent quarters? And which markets are you seeing the heaviest concession usage in still today?

Good morning. Yeah, I think seasonal ... We'll continue to follow seasonal patterns and leverage concessions. We were able to minimize concession uses during our peak season, and we'll follow those seasonal patterns throughout the rest of the year. I think we're still seeing some concessions in the Tampa, Dallas, and Denver market as we're working through supply challenges, and we'll continue to optimize where we can. And continue to pull back when demand is stable.

Got it. And then, so as those concessions burn off, could that be a tailwind to same-store revenue growth, kind of, I guess, in the second half next year?

For sure. You know, certainly, you know, as concessions burn off, depending on the size and amount, obviously, you never know who's going to renew and who's going to move out, and if you need to give a new concession on somebody who moves out. But yes, the expectation would be, just like we're experiencing this year, you know, a nice renewal growth that's coming from just that concession burning loss. Got it. Thank you.

Thank you. Our next question comes from Jamie Feldman with Wells Fargo. Please unmute your line and ask your question.

Great. Thanks for taking the question. I appreciate the update on your leverage level. Can you just talk more about target leverage, where you think that's going to go, kind of the roadmap to get there? And then as you just think about uses of capital between, you know, Wi-Fi build-out, acquisitions, development, anything else, share buybacks, how we should think about, you know, A, the target level, and B, getting there.

Sure. Jamie, obviously, you know, our goal was to kind of get to the mid-fives net that you've been in Q4. We'll probably be a little bit higher than that, which is the Mustang that's kind of taken over in early October. You know, but we see certainly a path towards low-fi net debt to EBITDA in the next kind of 12 to 18 months just simply through EBITDA growth, no extraneous kind of events like, you know, selling assets and delevering. So, again, we think that leverage trajectory and path is certainly achievable. In terms of capital allocation, obviously, you've heard it say multiple times, you know, the value add continues to be our best use of capital. So kind of all of our retained earnings or free cash flow that's available has been going into the value-added program, and it continues to produce, you know, really good returns. You know, outside of that, any capital coming back through a joint venture redemption, a desire to sell an asset, we will evaluate it at that time for what, at that time, the best opportunity is. You know, today, where the stock price is, it certainly screams that buybacks are a higher priority than debt re-leveraging. But again, it just depends on the situation that's fact and circumstance at the moment.

Okay, that's helpful. Thank you. And then I guess just thinking about market conditions versus the start of the year or your September update, can you just help us understand which are kind of acting better than you thought they would, which are a little slower? And then, I guess, focusing on Denver specifically, I know you mentioned it as kind of a drag in the CSR portfolio. What are your thoughts on a timeline for recovery there or bottoming out there?

We're seeing strong recovery in the Atlanta market. You know, year over year, we saw a 50 basis point increase in our blended red tradeout on all leases. A new lease tradeout went positive for the first time in two years. An average occupancy increase year over year. So we're excited to, on the Atlanta front, Raleigh following that, blended tradeouts have improved, and we've reduced average concession on new lease by more than half in Q2, and we'll follow seasonal patterns throughout the year, for the rest of the year. And Nashville's also showing some really positive lease trade-out improvement year-over-year driven by new lease trade-outs. For the communities where we're still seeing some headwinds in supply, we've got Dallas. We're still seeing positive trade-outs of 110 basis points year-over-year there. So we're excited to see that continue as it starts to accelerate. And then Tampa, working through the supply as well. Absorption is steady in both markets. And then I'll turn it over to Jason to dive into the Denver market specifically.

Yeah, this is Jason. On Denver, we're seeing it seems absorption really take off the first half of this year and kind of outsize relative to historical forms. That is helping to stabilize the market and to help to raise rental rate growth momentum there. So we're seeing that as a positive trend next year.

Thank you. Our next question comes from Peter Abramowitz with Deutsche Bank. Please unmute your line and ask your question.

Hi, thanks for taking the question. Just wanted to ask first, I guess in terms of the interest rate backdrop, you know, you had a couple of transactions in the quarter. But just from kind of a more macro, higher level perspective, what have you seen in terms of early changes in terms of the private capital markets and any changes that you're seeing on the ground? Just curious for some color there.

Yeah, sure. So we've seen some live yields where the cap rates have obviously buyers have looked and pushed up cap rates as treasuries have pulled back, you know, back around that 5% range. We still haven't seen whether or not that'll translate into actual printed, you know, cap rates moving higher, and we'll continue to follow that.

All right, I appreciate that. And then just as a follow-up, just kind of curious, you know, maybe some high-level thoughts on the demand environment, certainly the supply narrative, and, you know, we can look at the co-stars or the real pages for how much supply is dropping off in your markets, and that's been a big part of sort of the debate for a while now. But just curious from a demand perspective, you know, anything that's kind of surprising you on the ground either way, or just curious for your sort of high-level thoughts on employment growth, household formation, and how you're thinking about that and how it feels as you consider your 2027 budget.

Yeah, we're seeing positive trajectories, our lead volume being up 11% year over year, and that's converting well for us. No surprises, only positive trajectory, and so we're going to continue to optimize on that through 27 as we build occupancy and get ready for that pricing power. Yeah, a little bit of an additional call. I mean, I think, you know, the job growth and the population growth, we're certainly seeing it continue to develop. And there's nothing that we see other than just kind of seasonality that would give us any kind of cause or pause for 2027.

All right. Thank you.

Thank you. Our next question comes from Ami Prabant with UBS. Please unmute your line and ask your question.

Hi, thanks. Appreciate your commentary on concessions, but I'm wondering how concessions at your competitors are trending and if that could be a pressure point as we move into the slower demand season, the seasonally slower demand season. So, do your competitors have occupancy levels that you think enable them to start focusing on rate as well, or at what point do you think the concessions can be mostly burned off across your MSAs?

Yeah, so overall, we're starting to see some stabilization in our market occupancy over that 90 to 92% average occupancy that allows for pricing power to kick in. You know, can't speak to exactly what they're going to do on their strategy with concessions. However, we continue to monitor on a daily, weekly basis to optimize at that floor plan level and continue to create the value that we saw in Q3. Yeah, I mean, Amy, as I kind of alluded to earlier, you know, our occupancy strategy over rate, you know, kind of heading into this kind of slower expiration period, you know, simply as a goal of, you know, being able to set ourselves up for a stronger 2027, at least the push rate in the first half of 2027. You know, I think the expectation we have and what we see on the ground is, you know, different developers, different owners follow different strategies. You know, right now, we haven't seen a significant increase in concessions. Certainly, one here, one there might be ebbing and flowing. But ultimately, you know, our goal is to continue to kind of, you know, work in and function in the market that we're focused on while still achieving our overall guidance and our overall revenue strategy.

Great. Thanks. And apologies if I missed this. Were there any moving pieces that changed within your maintained Seamster revenue guidance midpoint in terms of blends, occupancies, other income, et cetera?

No, I think, you know, ultimately, they're all pretty much kind of continued and moved forward with what our original kind of guidance was that we updated in early, sorry, early August. I was going to say early July, early August. No, I think, generally speaking, everything is continuing to kind of line up with our expectations. You know, we thought that, you know, Q4 was going to kind of develop as the way we see it developing, and we're excited to finish out the year strong and deliver the diploid of our guidance.

Thank you. Thank you. Our next question comes from Wesley Goloday with Baird. Please unmute your line and ask your question.

Hey, good morning, everyone. Can you talk about what your expectations are for a year one yield at the Mustang and an overall stabilized yield?

Yeah, so the overall stabilized yield that we're expecting at the Mustang is about a 5.9.

That's an economic cap rate.

Economic cap rate, and that's after the burn off of concessions that were used during the lease up of the asset. Year one is probably around a 5.2 or so, based on current concession levels and occupancy.

Thanks for that. And it looks like the Tisdale had a nice increase in the leasing activity in 3Q. Can you talk about how rate is tracking versus your expectation?

I think rates are tracking in line to what our expectations were. Concessions are being used, but we're, like Thomas mentioned, we're working on trying to pull those back as best as we can through the lease up.

Yeah, I would say just a little bit of the call, you know, the Tisdale, we originally anticipated that it would be called stabilized obstinacy by the, I think, end of Q1 of next year. So we certainly see it in that trajectory still.

Thanks for that.

Thank you. Our last question comes from Anne Chan with Green Street. Please unmute your line and ask your question. Anne, your line is unmuted. Please unmute and ask your question.

Hey, sorry about that. Good morning. Thanks for taking the time. So just quickly going back to the bad debt, could you share whether any markets have seen an increase in bad debt in the last few quarters and where Atlanta is currently trending versus pre-COVID?

Good question. I would say that if I'm looking at the data here across our markets, no increases in bad debt in any markets from Q1 to Q2 to Q3. They're all moving down. I don't remember Atlanta pre-COVID. I would tell you, I think a few years ago, Atlanta was plus or minus 5% bad debt. In the third quarter, their bad debt was 1.4%.

Thank you.

Thank you. This concludes our Q&A session. I'll now turn the call back to Scott Schaefer for closing remarks.

Thank you all for joining us this morning. We appreciate your continued support of IRT and look forward to seeing many of you at the upcoming Avery conference in Atlanta. Have a good day, all.

This concludes today's call. Thank you for joining. You may now disconnect.