Earnings Call Transcript - IRT Q1 2026

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Independence Realty Trust First Quarter 2026 Earnings Conference Call. As a reminder, today's call is being recorded, and a replay will be made available on the Investors section of the company's website shortly after this concludes. At this time, I will turn the call over to Stephanie Krewson-Kelly, Senior Vice President of Investor Relations and Capital Markets. Ms. Krewson-Kelly, you may go ahead.

Stephanie Krewson-Kelly, Senior Vice President, Investor Relations and Capital Markets

Thank you. Good morning, and welcome to Independence Realty Trust conference call to discuss first quarter 2026 results. On the call with me today are Scott Schaeffer, Chief Executive Officer; Jim Sebra, President and Chief Financial Officer; Janice Richards, Executive Vice President; and Jason Lynch, Senior Vice President of Investments. Before we begin, please note that any forward-looking statements made during this call are based on our current expectations and beliefs as to future events and financial performance. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially. Such statements are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation 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 for further information about these risks. A copy of IRT's earnings press release and supplemental information is attached to IRT's current report on the Form 8-K that is available in the Investors section of our website. They contain reconciliations of non-GAAP financial measures referenced on this call to the most direct comparable GAAP financial measure. With that, it's my pleasure to turn the call over to Scott Schaeffer.

Scott Schaeffer, Chief Executive Officer

Thanks, Stephanie, and thank you all for joining us this morning. First quarter results were in line with our expectations and represented a solid start to the year. Same-store revenue and NOI increased, reflecting stable year-over-year occupancy and a 40 basis point increase in effective rents. Our performance this quarter reinforces three themes: portfolio stability, improving market fundamentals, and disciplined capital allocation. While certain markets are still working through late cycle supply, the trajectory we are seeing in asking rents, along with the stability of demand, supports our outlook for sequential improvement in revenue as we move through the leasing season. On the supply front, new deliveries in our markets continue to decrease and are trending well below the long-term average. On a macro level, job growth, population growth and household formation in our markets are forecasted to meaningfully outpace the national average. First quarter operating results reflect these improving market fundamentals. Average occupancy was stable at 95.2% and resident retention of 60.5% remained high, both consistent with our expectations. Asking rents in our markets have increased an average of 2.8% this year, and every one of our markets has seen asking rents increase since January 1. Our recent strategy of prioritizing occupancy now positions us to prioritize rental rate growth during the upcoming leasing season. Concession activity has started to moderate, but is still elevated compared to historical levels. The combination of normalizing concessions and the trajectory of market rent growth against our known lease expirations supports our confidence that new lease trade-outs will reach breakeven this leasing season. Turning to capital allocation. Value-add renovations continue to be our most attractive investment opportunity. During the quarter, we completed 426 units, generating an average unlevered return of 15.4%. First quarter volume supports our full year assumption of completing 2,000 to 2,500 units in 2026. On the capital recycling front, we continue to make progress on the two assets held for sale and our joint venture in the Las Colinas submarket of Dallas, known as The Mustang, is currently marketed for sale. The proceeds from these recycling efforts will be redeployed based on the best risk-adjusted return opportunities at that time, including stock repurchases, deleveraging and/or new investments. Finally, during the quarter, we took advantage of the ongoing dislocation in the public markets by repurchasing 1.8 million of our shares at a cost of $30 million, bringing total repurchases since the fourth quarter of last year to 3.7 million shares and $60 million. With that, I'll turn the call over to Jim.

James Sebra, President and Chief Financial Officer

Thank you, Scott, and good morning, everyone. Core FFO per share for the quarter was $0.26, in line with our expectations. Same-store NOI grew 1% during the quarter, driven by revenue growth that was consistent with expectations and modest outperformance on operating expenses. Same-store revenues grew 1.4% year-over-year, supported by stable occupancy of 95.2%, higher average rental rates, growth in other income and bad debt that is 60 basis points lower than Q1 of last year. On the expense side, lower property insurance and repairs and maintenance partially offset higher personnel and utility costs, resulting in same-store expense growth of 2%. The leasing environment remains competitive but continues to improve as new supply is absorbed. Asking rents across our same-store portfolio have increased 2.8% since the beginning of the year, up significantly from the 73 basis points we cited on our February call. Within our top 10 markets, those with the largest asking rent increases to date are Raleigh, which is up 5.7%; Indianapolis, up 5.2%; Oklahoma City, up 4.8%; Columbus, up 4.6%; and Nashville, up 4.5%. In our two largest markets, Atlanta is up 80 basis points this year and Dallas asking rents are up 2.1% year-to-date. Concession activity increased materially late last year and continued into the first quarter. In the first quarter, approximately 27% of our short-term leases had a concession that averaged $1,241. Early second quarter trends are directionally encouraging as leasing activity accelerates in the peak leasing season. Blended rent growth of 70 basis points for the first quarter was in line with the trajectory of our full year guidance assumption of 1.7%. Renewal rate growth of 3.2% and resident retention of 60.5% were also in line with our expectations. April and May renewal trade-outs are tracking modestly ahead of plan at approximately 4% and retention has remained steady. New lease trade-outs of negative 4% in the quarter were in line with our previous commentary and our expectations. Given the rise in asking rents, our gross lease trade-outs are at breakeven levels with almost all of the negative trade-out on new leases due to the higher-than-normal concession activity in the first quarter. As mentioned previously, we are seeing an improvement in concessions early in Q2 and expect them to continue trending lower during leasing season. Before moving on to our balance sheet, let me give you an update on our property WiFi initiative. As mentioned previously, we are installing property WiFi across 19,000 units this year with an expectation that all will be done and operating on July 1. I'm pleased to announce that we are slightly ahead of schedule with residents excited about the new gig-speed WiFi and halfway converting over to the program. I look forward to updating you further on our Q2 call later this year. Our investment-grade balance sheet remains strong with ample liquidity and no debt maturities to refinance until 2028. Net debt to adjusted EBITDA was 6.5x at quarter end, reflecting seasonally lower first quarter EBITDA and the impact of consolidating our Austin joint venture asset in January. We expect leverage to trend lower towards the mid-5s over the course of the year. As Scott mentioned, we expect to use some of the proceeds from pending asset sales to reduce leverage. And longer term, we will further reduce leverage organically through EBITDA growth. Based on the results to date, we are affirming our full year core FFO per share range of $1.12 to $1.16 and are comfortable with the major assumptions that support that range. Scott, back to you.

Scott Schaeffer, Chief Executive Officer

Thanks, Jim. We are firmly on track to achieve our 2026 plan. Portfolio performance remains in line with our expectations and market fundamentals are improving. While select markets continue to work through elevated concessions, demand in our submarkets remains durable and continues to be supported by population inflows into the Sunbelt and Midwest for quality of life, employment opportunities and long-term affordability trends. We are encouraged by the increase in market rents to date and our ability to capture market pricing without meaningfully sacrificing occupancy. Early signs of improvement in new lease trade-outs during April represent a constructive start to the leasing season, and we believe we are well positioned to benefit as conditions continue to normalize. We thank you for joining us today. And operator, you can now open the call for questions.

Operator, Operator

Your first question is from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt, Analyst, KeyBanc Capital Markets

Scott, you highlighted in your prepared remarks about prioritizing lease rate growth over occupancy. Just wondering if this is a change in the operating strategy or consistent with what was assumed in initial guidance? And can you share where you're sending out renewals for the months ahead, what you expect to achieve and how aggressive you really think you can be on renewals given the competitive landscape?

Scott Schaeffer, Chief Executive Officer

Thanks, Austin. It is clearly consistent with our original guidance. This was the plan that we put in place towards the end of last year as we saw the pressure of new supply starting to subside. So during that period of excess deliveries, we really were focused on keeping our occupancy high. Now we feel that we're well positioned with that stable occupancy and the supply-demand equation flipping better for landlords so that we can now start pushing rents while still keeping occupancy stable. I'm going to let Jim talk about what we're doing with renewal trade-outs.

James Sebra, President and Chief Financial Officer

On the renewal growth and what we're sending renewals out at for the future, April is done and May is almost done. We're right in the low 4% range for those two months. June is still a little early, but it's approximately a little bit ahead of that 4% and then July is even a little ahead of that. So again, we expect to secure those rates. We see a lot of opportunity to capture rate during peak leasing season.

Austin Wurschmidt, Analyst, KeyBanc Capital Markets

Sticking with lease rate growth, you underwrite an improvement through the year in new lease rate growth as well. Scott, you even mentioned that hitting positive territory in the months ahead. How confident are you that the trajectory is consistent with what you originally underwrote, given the competitiveness you highlighted earlier in the call?

James Sebra, President and Chief Financial Officer

Good question. From a new lease perspective, we commented that the first quarter was pretty much in line with what we expected. We see new lease pricing improving as you move into April and certainly May. In April and May, it's roughly 130 basis points better than in the first quarter. The asking rents have improved and concessions are beginning to come down a little, which gives us confidence around hitting that breakeven level during this leasing season. Looking into May, June and July, our expiring rents are all lower than our current asking rents, meaning we are clearly moving into positive territory. It comes down to concessions ebbing and flowing in the market dynamics, which we remain positive on and which are developing as we expected.

Operator, Operator

Your next question is from the line of Eric Wolfe with Citigroup.

Eric Wolfe, Analyst, Citigroup

You mentioned that asking rents were up 2.8% year-to-date, and you're seeing improved new leases in April and lower concessions. Can you put that in context for us? Is that normal seasonality? Did the same thing on concessions happen last year? I'm trying to understand what's normal seasonality versus signs that supply impact is easing.

James Sebra, President and Chief Financial Officer

The 2.8% asking rent growth is a bit ahead of what we would call normal growth at the beginning of the year. This is driven by supply ebbing and flowing. Concessions in the first quarter and in April were higher than historical periods, but we expect them to continue to wane. So the asking rent increase is slightly ahead of a typical seasonal pattern.

Eric Wolfe, Analyst, Citigroup

Based on your prior answer, June and July expirations are a bit lower. You're expecting a big ramp in the back half of the year. When do you think we'll see signs of that happening? Is it June or July that you'll see a plus-2% blended growth? At some point, you'd expect asking rents to be better than normal seasonality or maybe the comp is so easy. When will we see the 2% blend you're expecting?

James Sebra, President and Chief Financial Officer

You will start seeing that more in September and the months forward, because concessions in 2025 were heavier, so the comp is easier. Renewal growth in the back half of the year is expected to be sizably better than the first part of the year.

Operator, Operator

Your next question is from the line of Jamie Feldman with Wells Fargo.

Jamie Feldman, Analyst, Wells Fargo

Can you talk more about your blended rent growth across your key markets and how this compares to your expectations? And then, you've kept your outlook for the year, but are any markets trending better or worse than you thought on both blended rent and concessions?

James Sebra, President and Chief Financial Officer

Broadly speaking, the trajectory of blended rents for this year is very much aligned with what we expected. Concessions are a little heavier, but we're getting better asking rent growth. Janice will go through it market by market.

Janice Richards, Executive Vice President

From a market perspective, Atlanta, Raleigh and Nashville are showing positive momentum supported by moderating supply and improved pricing power year-to-date. Atlanta achieved an 80 basis point rent buildup on top of what we saw at the tail end of last year. Raleigh is leading with 5.7% growth and Nashville is at 4.5%. Looking ahead, both Raleigh and Atlanta are expected to benefit from meaningful declines in supply as a percentage of inventory, down 31% and 69%, respectively, compared to prior periods. That further supports continued rent growth and stabilization of occupancy. We have some markets we're keeping a close eye on. All of our markets are generally in line with expectations. Denver and Austin remain supply-driven and will continue to feel pressure from elevated new deliveries. However, Austin continues to stand out with the highest household formation across all our markets at 2.3%, which should support absorption as supply moderates. Orlando, Tampa and Houston showed some softness in Q1. In Houston, we believe the softness is temporary as the second half of the year will benefit from continued strength in oil production. Anecdotally, in Orlando, we're seeing movement tied to return-to-office activity while still working through late cycle supply pressures. In Tampa, we're seeing impact from hurricane-related displacement that followed in Q4 of 2024. However, as someone local to Tampa, I remain encouraged with the growth coming into the market and optimistic about the back half of 2026.

Jamie Feldman, Analyst, Wells Fargo

Any other markets to call out?

Janice Richards, Executive Vice President

We are keeping an eye on the markets I mentioned, but again, relative to expectations, all markets are generally in line. Denver and Austin will remain under pressure from new deliveries, though Austin's household formation is supportive of future absorption. Orlando, Tampa and Houston had softness in Q1 for the reasons I discussed, and we expect improvement later in the year.

Jamie Feldman, Analyst, Wells Fargo

Thinking about other income contribution to same-store revenue in the back half of the year, how are you trending on that part of the earnings model? Anything we should be thinking about regarding your ability to hit those numbers?

James Sebra, President and Chief Financial Officer

Other income grew about 5% year-over-year through the first part of the year. We expected a significant ramp with the property WiFi program. As I mentioned, we're ahead of schedule on WiFi. We're not prepared to give a significant update to that assumption today, but we do see a little potential upside to that assumption as it relates to guidance.

Operator, Operator

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

Brad Heffern, Analyst, RBC Capital Markets

On Atlanta, you called it out as having positive momentum, but you also quoted the lowest asking rent change of the numbers you cited. Can you give a broader perspective on that market given it is your largest and reconcile those things?

James Sebra, President and Chief Financial Officer

If you look at the asking rent growth we talked about on our third quarter call in Atlanta, that was one of the biggest in 2025 by almost 5%. Janice's prepared remarks added another 80 basis points on top of that. So a lot of positive things are happening. For blends in the first quarter, Atlanta was roughly 1.5% blended rent growth, which is double what it was in the fourth quarter. That's the positive trajectory we're seeing there. Janice, feel free to add.

Janice Richards, Executive Vice President

In Atlanta, we're also seeing a decrease in concession activity in some submarkets where we'll be able to optimize and grow revenue without using concessions.

Brad Heffern, Analyst, RBC Capital Markets

Jim, I wanted to clarify your comments on reaching breakeven on the new lease side. When you say that expiring rents are below asking rents, is that including the impact of concessions? If concessions are flat year-over-year, would you get to positive leasing spreads in the summer months? Or do concessions need to go away? Basically, what do you mean by asking rents and expiring rents and how do those incorporate concessions?

James Sebra, President and Chief Financial Officer

Great question. If concessions stay at the current level, we should still reach breakeven.

Operator, Operator

Your next question is from the line of Ami Probandt with UBS.

Ami Probandt, Analyst, UBS

How much of an impact, if any, do you think the winter storms had on your blended rent growth, which decelerated in the first quarter?

Janice Richards, Executive Vice President

We saw some slowness in demand in January and February, but it picked back up and came back within expectations. We actually exceeded our demand expectations by about 10% for Q1 overall. So we are in good shape going into leasing season with demand back in place.

Ami Probandt, Analyst, UBS

There have been some soft results in some of the smaller markets like Huntsville. Could you highlight what's happening in those markets? Is it competitive supply or demand challenges?

Janice Richards, Executive Vice President

Huntsville is still working through supply pressures. We were recently in Huntsville on a town hall with the team and saw great opportunity there and remain bullish on the market. There are no demand challenges as we work through lingering supply.

Operator, Operator

Your next question is from the line of John Kim with BMO Capital Markets.

John Kim, Analyst, BMO Capital Markets

Your value-add performance underperformed your non-value-add portfolio in terms of blends and occupancy. How do you see that trending for the remainder of the year? How much of a driver is the value-add portfolio to the improvement in blended lease growth in the second half of the year?

Scott Schaeffer, Chief Executive Officer

From an occupancy perspective, the value-add portfolio will inherently run at a lower occupancy because units are vacant for about 20 to 30 days during renovations, while a typical turn in our non-value-add portfolio is 7 to 10 days. So occupancy will be structurally lower for value-add. In the first quarter, retention was emphasized to keep occupancy higher, which led to softer blended renewal growth in the value-add portfolio versus non-value-add. However, from an NOI perspective, the value-add portfolio generated about 3.2% NOI growth in the first quarter versus about 50 basis points of NOI growth in the non-value-add portfolio. We remain very bullish on value-add. For the rest of the year, our guidance reflects the benefits of value-add and we expect it to deliver the returns we forecasted.

John Kim, Analyst, BMO Capital Markets

Did you provide the blended that you've seen in April and what you're seeing for the rest of the quarter?

Scott Schaeffer, Chief Executive Officer

We mentioned earlier: April and May renewal rates are around the low 4% range. June looks a little higher, but it's still early. For new lease trade-outs, April and early May are about 130 basis points better than the first quarter.

Operator, Operator

Your next question is from the line of Jason Wayne with Barclays.

Jason Wayne, Analyst, Barclays

Thinking about capital allocation from here. You said you wanted to pay down debt, but how are you thinking about additional share repurchases from here?

James Sebra, President and Chief Financial Officer

Capital allocation is important. We are analyzing the portfolio to recycle capital out of properties where capital can be better used long term. As recycling happens, we'll determine the best use of proceeds. Our stock price will help determine whether share buybacks are better than deleveraging and/or new investments. It's hard to say today what the use will be until capital is available and we determine the best use at that time.

Jason Wayne, Analyst, Barclays

On value-add completions, you gave a guidance range last quarter of 2,000 to 2,500 completions this year. Is that still the assumption, and how are you trending on that so far?

James Sebra, President and Chief Financial Officer

Yes, that is still the expectation. We completed 426 units in the first quarter, which is in line with that goal for the year.

Operator, Operator

Your next question is from the line of Mason Guell with Baird.

Mason P. Guell, Analyst, Robert W. Baird & Co.

How are the developments performing so far versus expectations?

James Sebra, President and Chief Financial Officer

Regarding the two on-balance sheet developments in Broomfield, Colorado: Arista is fully occupied and stabilized and is in our same-store pool and performing fine. Flatirons is in lease-up; it is 82% leased and about 66% occupied. It should hit stabilization in the low 90% in June or early July. Rental rates there are a little behind initial underwriting expectations, but it's a great market and a good long-term investment and we expect to push rates once stabilized. We added a joint venture asset, the Tisdale at Lakeline Station in Austin, to our in-development disclosure. That deal is in lease-up and still very early: about 37% leased and 33% occupied, up from roughly 25% when we took it over. It is leasing up as we would expect now that we are managing it and consolidating it.

Mason P. Guell, Analyst, Robert W. Baird & Co.

Is the anticipated timing for the two consolidated held-for-sale properties still around midyear?

James Sebra, President and Chief Financial Officer

Jason will answer on timing of disposition for the two held-for-sale assets.

Jason Lynch, Senior Vice President, Investments

Yes, we're still aiming towards midyear. We are actively marketing those and working towards a sale.

Operator, Operator

At this time, there are no further questions. I will now hand the call back over to presenters for any closing remarks.

Scott Schaeffer, Chief Executive Officer

Well, thank you all for joining us this morning, and we look forward to seeing many of you at NAREIT and then speaking with you again next quarter.

Operator, Operator

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