Independence Realty Trust Inc

NYSE:IRT

Earnings Call Transcript 2021-Q2

[Lauren Torres, Investor Relations]

Thank you for joining us to review Independence Realty Trust Second Quarter 2021 Financial Results and Recent Merger Announcement. On the call with me today are Scott Schaeffer, our Chief Executive Officer; Jim Sebra, our Chief Financial Officer; and Farrell Ender, our President. Today's call is being webcast on our website at www.irtliving.com.

Please note that given today's announcement, there will be no Q&A session following management's remarks on this call. There will be a replay of the call available via webcast on our Investor Relations' website 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. These forward-looking statements reflect IRT's current views with respect to future events, financial performance and the recently announced merger. Actual results could differ substantially and materially from what IRT has projected, and there can be no assurance that IRT will consummate the merger within the expected time frame or at all.

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 releases, 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 8-K 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 as may be required by law.

With that, it's my pleasure to turn the call over to Scott Schaeffer.

[Scott Schaeffer, Chairman and Chief Executive Officer]

Thank you, Lauren. First, let me thank all of you for joining us on short notice to participate in today's call. We are excited to share with you the announcement of our proposed merger with Steadfast Apartment REIT, which joins together two very similar, high-quality portfolios with complementary geographic footprints in the highly desirable Sun Belt region of United States.

On a pro forma basis, the combined company will be a top three publicly-traded multifamily REIT focused on the Sun Belt region and will own a portfolio of 131 apartment communities with over 38,000 units across 16 states. Upon completion of the proposed merger, we will have a combined equity market capitalization of approximately $4 billion and a total enterprise value of approximately $7 billion. It's important to highlight that this transaction will be immediately accretive to core FFO per share by approximately 11%.

Before I go into greater detail on this transaction, including deal rationale and expected benefits, we would first like to touch upon our second quarter results and why we remain incredibly optimistic about the future of IRT. Strong momentum continues year-to-date as we benefit from our proven portfolio of assets in non-gateway markets. In particular, our presence in the Sun Belt is a driving force behind our performance as this region continues to experience a notable lift from favorable population employment growth trends.

With more than half of 2021 now behind us and good momentum going into the second half of this year, we remain highly encouraged and are meaningfully increasing our earnings guidance for 2021 without taking into account any impact of the pending merger with Steadfast. Jim will cover this later on today's call.

I'd now like to highlight some key points from the second quarter. Our same-store NOI increased 9.6%, and our core FFO improved 22.7% compared to a year-ago. Our same-store average occupancy increased to 96.1%, a 300 basis point increase on a year-over-year basis. Our lease-over-lease rental rate growth in the second quarter was 7.3%. We collected 98.4% of second quarter rents and have now collected over 99% of first quarter 2021 rent. And with favorable demand trends continuing, we are seeing strong results so far in July.

Our total portfolio average occupancy is 96.1%, a 230 basis point improvement compared to July of last year. We have collected almost 96% of July rents, which is consistent with collections at this point in prior months. And given our high occupancy in the second quarter, we continue to drive rent growth, averaging 6.7% for leases signed so far in the third quarter on a blended basis.

I am also excited to announce that we've closed on our first joint venture transaction on a community under development in Richmond, Virginia, and we expect to close on our second joint venture within 30 days.

And I would now like to turn the call over to Farrell for an operational update, followed by Jim with the financial update, and then I'll return to provide more details on our merger announcement.

[Farrell Ender, President]

Thanks, Scott. We are incredibly pleased with our results. In the second quarter, our same-store occupancy grew 300 basis points to 96.1% from 93.1% a year-ago. This has continued in July with total portfolio average occupancy at 96.1%, up 230 basis points year-over-year. On a lease-over-lease basis for the same-store portfolio, new lease rates increased 11.4% and renewals were up 3.7% during the second quarter, yielding a combined lease-over-lease rental rate increase of 7.3%.

Strong trends continue in the third quarter-to-date, with new leases having increased 17.5% led by our value-add communities, while renewed leases are up 4.6% with a blended lease-over-lease rental rate increase of 6.7% for our same-store portfolio. We continue to see strong resident retention with a second quarter retention rate of 54.8%, consistent with the second quarter of 2021 and this rate has improved to 64.1% in July, up from 59.1% a year-ago.

To give you an update on our value-add program, we completed renovations on 228 units in the second quarter. We are currently performing renovations at 21 of our communities, having added Thornhill in Raleigh, Walnut Hill in Memphis in the second quarter and Meadows in Louisville in July. The renovation program at six of our communities is nearing completion as we have renovated 85% or more of the units. Since the inception of our value-add program in January 2018 through the end of the second quarter, we have completed renovations on 4,089 units, achieving a weighted average return on investment of 19.3% on interior renovation costs.

Lastly, we continue to evaluate our current portfolio for value-add opportunities and believe that we can engage in future redevelopment efforts at approximately 5,000 additional units. The economics of these incremental initiatives, which are in addition to our current 21 communities is consistent with our current ROI run rate of 15% to 20%. The redevelopment of these units will not start until next year, but we plan to share further details later this year as we finalize our plans.

With regard to capital recycling, we acquired two new constructive communities in the second quarter. On May 18, we added Solis City Park in Charlotte to our portfolio, a 272-unit community for a purchase price of $66.5 million. Charlotte is a market we have targeted for expansion, given its favorable population and job growth dynamics. And on June 8, we acquired Cyan Craig Ranch for $73.4 million, a 322-unit community, which expanded our footprint in Dallas. These two new additions to our portfolio have already reached 95% occupancy, which is well ahead of our underwritten lease-up schedule, confirming strong resident demand in these markets.

As Scott mentioned, we closed on a joint venture on June 8 in Richmond, Virginia to develop a 402-unit community with a joint venture partner. This property is expected to take 18 months to complete, with IRT investing a total of $16 million and having the right to purchase the community upon completion.

Lastly, we expect to close on the sale of Kings Landing, our only mixed-use property located in St. Louis later this week with a projected gain on disposition of $11.5 million. The economic cap rate on this disposition is expected to be 4.5%.

I'd now like to turn the call over to Jim.

[James Sebra, Chief Financial Officer and Treasurer]

Thanks, Farrell, and good afternoon, everyone. Beginning with our second quarter performance update, net income available to common shareholders was $3.4 million, up from $800,000 in the second quarter of 2020. During the second quarter, core FFO grew to $20.2 million, up 22.7% from $16.4 million in Q2 2020. Core FFO per share during Q2 was $0.20, 17.6% higher than the second quarter of last year at $0.17 per share.

Turning to our same-store property operating results. NOI growth in the second quarter was 9.6%, driven by revenue growth of 8.5%. This growth was led by 300 basis points of higher occupancy and a 3.9% increase in average rental rates. While this NOI growth includes value-add communities, we did see NOI growth of 4.6% at our same-store, non-value-add communities. This growth was primarily driven by 210 basis points of incremental occupancy during the quarter as compared to last year. To-date, we have collected 98.4% of our second quarter billings. Consistent with last year, we evaluated uncollectible amounts for collectibility and recorded a reserve for bad debt for those amounts we deem as uncollectible.

As of today, including collections subsequent to quarter end, we maintained a bad debt reserve of $1.1 million associated with the $1.5 million of gross receivables. As a result, we have a net receivable balance of $400,000 and believe that these receivables will be collected in the near-term. From an earnings perspective, our bad debt expense, which is a deduction when arriving at revenue, was 1% in the second quarter.

On the property operating expense side, same-store operating expenses grew 6.8% in the second quarter, primarily driven by repairs and maintenance expenses that were significantly higher than last year as work was delayed in Q2 2020 due to COVID. This timing issue also affects advertising and other expenses as we actively reduced costs when COVID first occurred and reinstated various activities once the pandemic's impact was known.

You also noticed that the increase in real estate taxes was relatively low at only 80 basis points in Q2 and 3.9% year-to-date. We received initial assessments on several properties, including our properties in Memphis, where we were expecting large increases due to their four-year reassessment cycle. These assessments came in lower than we expected, and we've updated our accruals for taxes and our full-year guidance as a result.

Turning to our balance sheet. As of June 30, our liquidity position was $238.1 million. We had approximately $8 million of unrestricted cash and $230 million of additional capacity through our unsecured credit facility. At quarter end, we closed out our forward sale agreements on 2.9 million common shares to fund a portion of the equity required on our two acquisitions this quarter. As of quarter end, we have no outstanding forward sale agreements on our common shares.

On the dividend, IRT's Board of Directors declared a quarterly cash dividend of $0.12 per share, which was paid on July 23. This represents a payout ratio of 67% or $0.18 of AFFO during Q2 2021. With respect to our outlook, we are increasing our 2021 guidance based on our second quarter results and favorable view of our portfolio performance for the remainder of the year without taking into account any impact of the pending merger with Steadfast.

Our revised guidance for 2021 EPS is a range of $0.09 to $0.11 per diluted share. And for core FFO, in the range of $0.76 to $0.78 per share, up from $0.72 to $0.75 per share. For 2021, we now expect NOI at our same-store communities to increase by 7% at the midpoint compared to our prior guidance of 4.125% at the midpoint. This updated guidance reflects expected same-store revenue growth of between 5.25% and 6% given higher average occupancy rates, rental rates that have been increasing more than expected and bad debt expense that has been trending lower than expected.

Moving on to expenses. We are now guiding to an increase in total same-store operating expenses during 2021 of 3.5% at the midpoint of our range, down from our previously guided 4.875%. This reduction is driven by lower non-controllable operating expenses, primarily due to lower real estate taxes, as previously mentioned. We now expect total non-controllable operating expenses to increase 4.5% at the midpoint, down from our previous guidance of 7.5% at the midpoint.

Regarding our transaction investment volume expectations, we are projecting a disposition volume of between $40 million and $100 million and an acquisition volume between $100 million and $200 million for the full year 2021. Lastly, this guidance does not assume any impact from our proposed merger with Steadfast, including any planned dispositions following completion of the merger as we expect the closing of the merger to occur late in the fourth quarter.

Now I'll turn the call back to Scott. Scott?

[Scott Schaeffer, Chairman and Chief Executive Officer]

Thanks, Jim. Now I would like to further discuss IRT's announcement to merge with Steadfast. We are excited to share this news with you and believe that this is a natural combination of highly complementary portfolios, which will allow IRT and Steadfast to together strengthen our presence in the multifamily sector, particularly in the Sun Belt markets where we see substantial room for growth.

First, I would like to share with you some details on the transaction. This will be an all-stock merger transaction, where Steadfast stockholders will receive 0.905 shares of IRT stock for each Steadfast share. IRT will retain its corporate name and ticker symbol, and our executive management team will be joined by Ella Neyland from Steadfast as IRT's Chief Operating Officer. Ella is an experienced multifamily executive, and we look forward to adding her experience to our management team.

The combined entity is expected to have an equity market capitalization of approximately $4 billion and a total enterprise value of approximately $7 billion. Expected closing will be in the fourth quarter of 2021, pending IRT and Steadfast stockholder approval. And we expect the transaction to be immediately accretive to key earnings metrics, realizing approximately 11% core FFO accretion with additional earnings enhancement potential.

We see notable near-term benefits associated with this merger of equals as well as significant long-term strategic opportunities through this partnership. We've posted an investor presentation on our website, and we encourage everyone to review it in detail.

In the meantime, let me provide some core reasons for this transaction. The merger of IRT and Steadfast will join together two high-quality portfolios with complementary geographic footprints in the highly desirable Sun Belt region of the United States. On a pro forma basis, the combined company will own a portfolio of 131 apartment communities with over 38,000 units across 16 states. We will increase our exposure to core markets, including Atlanta and Dallas, and diversify our presence by entering attractive new markets such as Denver and Nashville.

The merger is also expected to increase our portfolio's breadth among Class B communities that continue to demonstrate strong resident demand throughout all points of economic and real estate cycles. The combined company will have a pipeline of approximately 20,000 units available for future redevelopment through our proven and robust value-add program.

Our value-add program has generated an unlevered weighted average return on investment in excess of 17% since the program began, and we believe we can continue to achieve these returns across the combined company's value-add pipeline. We expect to realize approximately $28 million in annual synergies. This includes $20 million in general, administrative and property management savings and $8 million in operational synergies.

Once integrated, best practices from both companies will create a stronger and more competitive operating platform. We expect to realize the full integration over the 12-month period following the closing of the merger. We believe that our increased scale will deliver value across the combined portfolio. We will be well positioned to increase cash flow at the property level due to economies of scale, including enhanced pricing with strategic partners and vendors.

Greater scale will also support IRT's ongoing efforts to retain top talent, increase brand recognition in the multifamily industry, realize greater operating efficiencies and more effectively compete for acquisition and development opportunities as we look to expand.

Now let's discuss leverage. Initially, upon closing, our leverage will increase as a result of this transaction as we assume the existing debt on the Steadfast communities. However, we expect to quickly delever, first, from proceeds from the announced equity offering; and second, from non-core asset sales, which we are currently targeting at approximately $340 million.

We currently expect these deleveraging as well as increased growth through the aforementioned synergies and value-add efforts will significantly reduce leverage post closing such that our previously guided midterm target of 7.5x net debt-to-EBITDA is now expected to be achieved during 2023. Please keep in mind that we factored all of these deleveraging efforts into our accretion map and feel very comfortable with the identified 11% approximate annual accretion to core FFO.

In closing, it is evident that we have multiple reasons to be excited about our future. These include our strong presence in attractive markets, particularly in the Sun Belt region, further enhancement in our value-added investment programs and our plans for expansion through our proposed merger. We are excited to partner with Steadfast and welcome their team. This strategic merger has been unanimously approved by the Board of Directors of IRT and Steadfast, and we look forward to receiving the support and approval from our stockholders.

Together, we are ready to embrace the opportunity to strengthen and expand our high-quality portfolio, where we see high-growth potential and to deliver long-term value for our stakeholders.

[Scott Schaeffer, Chairman and Chief Executive Officer]

We, again, want to thank you for joining us today.