Independence Realty Trust Inc

NYSE:IRT

Earnings Call Transcript 2021-Q4

[Operator]

Hello and welcome to the Independence Realty Trust’s Fourth Quarter 2021 Earnings Release. My name is Emily and I will be coordinating the call today. [Operator Instructions] I will now hand the call over to our host, Lauren Torres. Please go ahead, Lauren.

[Lauren Torres, Investor Relations]

Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust’s fourth quarter and full year 2021 financial results. On the call with me 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 at www.irtliving.com. There will be a replay of the call available via webcast on our Investor Relations website and telephonically beginning at approximately 12:00 p.m. Eastern Time today. 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 merger with Steadfast Apartment REIT, which will be referenced herein as STAR. 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 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 made in 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, Chief Executive Officer]

Thank you, Lauren, and thank you all for joining us today. 2021 was an exceptional year for IRT. Not only due to our strong results, but also due to the December completion of our merger with Steadfast Apartment REIT or STAR. The combination of IRT and STAR created a leading multifamily REIT with an equity market capitalization of approximately $5.9 billion and total enterprise value of $8.6 billion at year-end. We are incredibly excited about the opportunities that lie ahead and look forward to discussing them with you in more detail on today’s call. Before we do that, I’d first like to provide some quarterly and full year 2021 highlights. In the fourth quarter, positive trends and performance continued building upon momentum experience in the first nine months of 2021. IRT success has stemmed from our ability to execute a strategic plan, which focuses on non-gateway communities and the Sunbelt region, where there is strong resident demand. This has allowed us to benefit from positive trends, such as population and employment growth as well as new household formation. And as we’ve highlighted on recent calls, our selective approach along with the housing shortage in our markets has led us to achieve high and stable occupancy levels and significant rental rate growth, which was clearly reflected in our fourth quarter and full year results. Specifically, we delivered an industry-leading same-store NOI growth of 15.1% in the quarter and 11.4% for the full year and our quarterly core FFO improved 58% compared to a year ago while our annual core FFO grew 34% year-over-year. Since the merger closed on December 16, these results include only two weeks of STAR property operations. The full benefit of the merger will be realized in 2022 and beyond. We are very pleased with our results, particularly in light of the challenges, which have impacted our industry during the pandemic. Our team’s efforts have enabled us to deliver attractive growth on a same-store basis while realizing additional opportunities through our longstanding value-add program and our more recent joint venture investments in new multifamily development. And now as a result of our merger with STAR, we have doubled our portfolio to 119 communities increasing our presence in attractive markets like Atlanta and Dallas and entering new markets like Denver and Nashville. Our exposure to the Sunbelt represents approximately 70% of our NOI and we expect strong growth fundamentals to persist in this region with people continuing to migrate the cities for a lower cost of living, a better tax policy, and more economic opportunity. With our larger footprint in these desired U.S. markets, we are confident in our ability to implement our strategic initiatives capture incremental growth, particularly through our redevelopment efforts and to strengthen our total company platform with increased economies of scale. One thing that won’t change at IRT is our simple capital structure and strong balance sheet. We will maintain our conservative financial and credit policies and further delever the balance sheet through organic NOI growth, value-add renovations in non-core asset sales. Our larger portfolio is well positioned to generate increasing NOI, which will allow us upon future growth opportunities and markets, where we expect to see continued strong residential demand while continuing to improve our net debt-to-EBITDA ratio. We finished 2021 with a net debt to adjusted EBITDA ratio of 7.7 times, reaching this target a full year earlier than projected due to the strong operating results and the significant value received from our properties recently sold. We have now completed the sale of all nine properties previously identified for sale and with the corresponding debt repayments now have a net debt-to-EBITDA ratio of 7.5 times. Overall, we exited 2021 from a position of strength and scale and are excited about the future growth potential of IRT. We are also confident that we have the right team in the right place to execute our strategy. And with that said, I’d like to turn the call over to Ella Neyland, IRT’s Chief Operating Officer. Ella joined us from STAR and is an experienced multifamily executive. We welcome her and look forward to her value contribution to our team. Ella?

[Ella Neyland, Chief Operating Officer]

Thanks, Scott. And I’m really excited to be joining my first IRT earnings call. Most of my experience has been working with great multifamily companies, including Steadfast Apartment REIT, STAR for the past 10 years. The merger of STAR and IRT has been an incredible journey. Very seldom that the combination of two public companies, come with the opportunities that this prevented to our combined shareholder base and dedicated team members. The investment thesis for both companies was absolutely aligned investing well located and well maintained non-gateway communities and high job growth markets. And not only is demand continuing to grow for apartment homes, but supply is still lagging demand. The National Multifamily Housing Council estimates that we will need another 4.6 million apartments by 2030 to meet this estimated demand. We believe the future is bright for owning and running multifamily apartments, supported not just by its supply demand imbalance, but also by the changing lifestyle and finances of most of America. And so to echo Scott’s comments, I’m also incredibly excited about what lies ahead and believe as a combined company, we have a very long runway of growth. We closed out 2021 with strong operating results. In particular in the fourth quarter IRT’s same-store occupancy grew 90 basis points to 95.7% from a year ago and improved 230 basis points to 95.7% for the full year. And similarly, when you consider IRT and STAR combined, same-store average occupancy was 95.9% during Q4 reflecting the strength of our total combined portfolio in non-gateway markets. On a lease of release basis for the IRT same-store portfolio, new lease rates increased to 22.3% and renewals were up 8% during the fourth quarter, yielding a combined lease of release rental rate increase of 15.2%. On a combined same-store basis with STAR, we achieved double-digit growth across each metric in the fourth quarter with new lease rates up 18.8% and renewals up 10.2%, delivering 14.2% year-over-year growth on a blended basis. Strong trends continue in the first quarter to date with new leases for our combined same-store portfolio having increased 16.4% led by our value-add communities while renewed leases are up 10.2% with a blended lease over lease rental rate increase of 12.4% for our same-store portfolio. Since the merger was completed in December, our team has been identifying opportunities within the combined company. Most notably our property management and revenue management system integration is complete, and we are on track to deliver $8 million of property management synergies that we’ve previously disclosed as we implement the best practices both companies brought to the merger. So with that said, I’d like to turn the call over to Farrell to provide you with an update on our investment opportunities.

[Farrell Ender, President]

Thanks, Ella. A highlight of the past year is a successful execution of our value add program. We closed out 2021 having completed renovations on 253 units in the fourth quarter, and 953 units for the full year, delivering a return on investment of nearly 30%. Since the inception of our value add program in January, 2018, we have completed renovations on 4,672 units achieving a return on investment of 18% and an average monthly rental rate increase of 19.6%. A 11 of our communities are currently undergone renovations, and we’ve identified five communities that we will be adding to the pipeline in 2022, two of which commence renovations already. In addition, we designated eight communities as completed having renovated on average in excess of 90% of their combined units and will continue to work towards completing a 100% as unrenovated unit leases expire. Now that the merger with STAR is complete, we have a pipeline of approximately 20,000 value-add units, which includes about 12,000 former STAR units. This year, we expect to renovate 2000 units from the combined portfolio and ramp up to 4,000 units per year thereafter. Consistent with IRTs prior value-add results, we expect to generate 15% to 20% ROI on renovations. We’re also excited about our joint venture relationships, which were established last year and focus on new multifamily development. To recall, we closed on a joint venture in Nashville during the third quarter of 2021 to develop three communities, totaling 504 units with a joint venture development partner. We have committed $14.4 million to this joint venture with a total capitalization of $83 million. Similar to our other joint venture transactions, we maintain our rights, but not the obligation to purchase the community to upon completion. The first community will be delivered within the first quarter of 2022 and is expected to provide additional scale in this very desirable market. The same holds true for our joint venture in Richmond, Virginia, where we are investing $16.4 million into a 402 unit community. This project is expected to be completed in the second quarter of 2023 with the right to purchase this property upon completion. We are continuing to evaluate additional joint venture opportunities and expect them to provide solid risk adjusted returns with the added benefit of growing our portfolio. As a result of the merger with STAR, we also inherited three development projects in various stages. Garrison Station is a recently completed 176 unit community located in Nashville, with occupancy stabilized at 94%. Destination at Arista located in Denver has broken ground and is expected to begin leasing in mid-2023. Flatirons also located in Denver is in the final planning stages with construction beginning later this year with a mid-2024 delivery date. All three of these developments will be delivered substantially below current market values. These company owned projects are attractive and increased our exposure to markets experiencing above average population and opponent growth. Touching on our dispositions. We sold two communities in Atlanta in the fourth quarter and then sold an additional four properties in Indianapolis, Oklahoma city and Louisville in the first quarter. The total combined sale price for these six properties was $297 million. We realized the total gain on disposition of $172 million with a blended economic cap rate of 3.8%. In addition, in anticipation of the merger, STAR hold three communities in the fourth quarter for a total sale price of a $106.5 million with a blended economic cap rate of 3.7%. While these recent dispositions were focused on managing our marketing concentrations post merger, going forward, IRT will continue to assess markets where we see long-term growth opportunities and reevaluate those that may not be attractive long-term investments. Now let’s turn the call over to Jim.

[Jim Sebra, Chief Financial Officer]

Thanks, Farrell, and good morning, everyone. Beginning with our 2021 performance update for the fourth quarter of 2021 net income available to common share was $28.6 million up from $13.3 million in the fourth quarter of 2020. For full year 2021 net income available to common shareholders was $44.6 million up from $14.8 million from the full year 2020. Please keep in mind that changes in GAAP net income from year-to-year are significantly impacted by the size and timing of gains on the sale of real estate assets. During the fourth quarter, core FFO grew 57.9% to $31 million and core FFO per share grew 14.3% to $0.24 per share. For the full year core FFO grew 33.6% to $92 million and core FFO per share grew 15.1% to $0.84 per share. As Scott mentioned, we completed our merger with STAR on December 16 and we consolidated the results from then on. We’ve provided an additional supplemental disclosure at Appendix A of our earnings supplement that depicts the impact of STAR for those two weeks on both our fourth quarter and full year 2021 results. From a fourth quarter perspective, just for those two weeks STAR added $0.01 accretion to our core FFO per share, which is in line with the accretion we’ve highlighted since we announced the merger. Turning to our same-store property operating results, we are going to focus all of our same-store results on IRT historical definition of same-store property this quarter. Therefore, my comments will only reflect IRTs properties. I’ll discuss later how we will intend to report the impact of STAR on our future same-store results. IRT same-store NOI growth in the fourth quarter was 15.1% driven by revenue growth of 10.2%. This growth was driven by a 9.7% increase in average rental rates and 90 basis points of higher average occupancy. While this NOI growth includes value add communities, we did see NOI growth of 10.4% at our same-store non-value add communities which reinforces the fundamental strength of our core markets. Again, this growth was driven by an 8.4% increase in our average rental rate and 80 basis points of incremental occupancy in the fourth quarter, both as compared to last year. For the full year 2021, IRT same-store revenue grew 8.4% driven by the 5.9% increase in average rental rates and a 230 basis point increase in average occupancy. On the property operating expense side, IRT same-store operating results grew a modest 1.8% in the fourth quarter as non-controllable expenses for real estate taxes then insurance declined on a year-over-year basis. The decline in real estate taxes was due to the finalization of assessments and reductions we received from appeals. For the full year, IRT same-store operating expenses grew 3.8% primarily due to an increase in repairs and maintenance costs as compared to 2020. When many projects were delayed due to COVID. Turning to our balance sheet, as of December 31st [Audio Gap] of unrestricted cash, $223 million of additional capacity through our unsecured credit facility and $23 million of ATM proceeds available from forward equity sales. In December, we’ve expanded and consolidated our unsecured credit facility, which increased our borrowing capacity to $500 million and extended the maturity data from 2023 to 2026. We are well positioned with the financial flexibility to support our increased portfolio. As part of the closing of our merger with STAR, our balance sheet now includes $4.8 billion of assets acquired, $1.8 billion of net debt assumed. And the issue is of 106 million shares at OP units. As we highlighted previously, we are very focused on de-levering the combined balance sheet leading up to, and after the closing, we de-levered through a combination of our July forward equity raise of $271 million and 16.1 million shares. The disposition of three STAR properties for a total sales price of $107 million. And as Farrell mentioned, our sale of six IRT properties between December, 2021 and early February, 2022 for total sales price of $297 million. We’re extremely excited on the progress made on the de-leveraging front. As of today, we own 119 assets and have $2.5 billion in debt outstanding of which 95% is considered fixed rate or hedged with no maturities until 2024. We ended 2021 at 7.7 times net debt to EBITDA. Once we factor in the impact of our property sales in early 2022 and the related de-leveraging our net debt to EBITDA would be 7.5 times. Before moving on to guidance, I’d like to address how we will be presenting same-store results going forward. Starting in Q1 2022, we will be reporting same-store results using with a legacy IRT definition, as well as on a combined basis with STARs properties. The newly combined same-store results will become the primary measure that we highlight with the legacy IRT same-store results presented as an Appendix. We’ve added these new definitions of combined same-store to our Q4 earning supplement and we would invite investors to review those definitions. To aid in future modeling, we’ve also added Appendix B, which provides the 2021 quarterly property operating results for the 2022 combined same-store portfolio. With respect to our outlook for 2022, our EPS guidance is a range of $0.32 per share to $0.36 per share. And for core FFO in the range of $1 to a $1.4 per share. For 2022, we expect NOI at our combined same-store portfolio to increase 11% at the midpoint. This guidance reflects expected, same-store revenue growth of 8.6% at the midpoint. For 2022, we are guiding average occupancy to be 95.7% at the midpoint with an increase of 10% in our average rental rate. Moving on to expenses, our projected growth and combined same-store operating expenses of 4.75% of the midpoint is a result of our expectation that non-controllable expenses for real estate taxes and insurance should increase 7.5% of the midpoint and our controllable operating expenses should increase 3% at the midpoint. Clearly we’re keeping an eye on near term pressure that are factoring inflationary increases on all our expenses. We expect these increases to be partially offset by a rollout of additional technological efficiencies in 2022. Regarding our transaction and investment volume expectations, we are currently not assuming any acquisition volume as we integrate STAR. As for dispositions, we are providing guidance or disposition volume of $157 million. This reflects the assets that were sold in early 2022 and these proceeds were used to de-lever. As we formulate further capital recycling opportunities, we expect to reinvest those proceeds into our core markets. We expect these recycling opportunities should they occur will only have a positive impact on our 2022 guidance. And regarding CapEx, we expect $20 million in recurring maintenance CapEx, $45 million in value add and non-recurring spend and $70 million in development CapEx in 2022 each at the midpoint of our guided ranges. These incremental development and value add CapEx will be funded primarily through the excess cash flow generated during 2022, which at the midpoint of our guidance is approximately $105 million. Now I’ll turn the call back to Scott. Scott?

[Scott Schaeffer, Chief Executive Officer]

Thanks Jim. In closing, I’d like to highlight the incredible strength of our now expanded portfolio in the high growth Sunbelt markets. We have a clear roadmap ahead that will enable us to continue to deliver exceptional results. Our strategy is focused on completing the STAR integration and achieving at least $28 million in annual synergies, capitalizing on continued macro trends and resident demand to sustain occupancy levels in drive rent growth, accelerating our organic growth profile through our value-add program, which is now even more robust with the addition of the STAR properties. And lastly, continuing to refine the portfolio and expand our presence in core high growth markets through our capital recycling and JV development initiatives. We are confident that the output of the strategy will translate into greater shareholder return, including approximately 21% core FFO growth at the midpoint for our fiscal 2022 guidance, as well as significant cash flow creation that will be used to fuel future growth and maintain an optimal leverage position. We thank you for joining us today, and we look forward to speaking with many of you at Citi’s Global Property Conference in early March. Operator, we would now like to open the call for questions.

[Operator]

Thank you very much. [Operator Instructions] Our first question today comes from Nick Joseph from Citibank. Nick, please go ahead.

[Nick Joseph, Citibank]

Thank you. I was hoping you could talk and walk us through the process of transitioning the STAR assets onto the IRT operating system, and how that has gone so far? And I recognize occupancy is still very high, but it looks like it’s come down a bit quarter-to-date, so just where it is today as well? Thanks.

[Jim Sebra, Chief Financial Officer]

Yes. Nick, thanks. This is Jim. Ella may chime in with her additional insight. The process for us to migrate from what STAR used to run majority onto our property managed system called Entrada. We did half of their portfolio in the last two weeks of December, the other half of the portfolio in the first two weeks of January. And that migration was also inclusive of moving from there. Revenue managed platform which was YieldStar on to our revenue management platform which was LRO. And it was all done in an effort to make sure it was done ahead of the beginning part of leasing season, so that way any of this kind of interim friction that we would see from migrating would be through the system and ready for leasing season, where that friction will be gone. From a standpoint of occupancy, you saw in the release, the STAR occupancy did trend down slightly here in the first quarter. It’s at that level today and is beginning to build slowly back upward. So it’s very short-term in our view and nothing to be overly cautious about.

[Nick Joseph, Citibank]

Thanks. That’s helpful. And then I was wondering if you had – sorry, go ahead.

[Ella Neyland, Chief Operating Officer]

That’s all right. I was going to echo what Jim said, this is Ella Neyland. And I will say that, that friction that transition onto those new systems in that timeframe went so smoothly because of the experience that IRT had on migrating their systems over to Entrada and the ability to walk us through, and have the training associated with it. And as Jim mentioned, any impact on occupancy we see as temporary, as a result of that transition.

[Nick Joseph, Citibank]

Thank you. And then I was wondering if you have any insight or color on shareholder turnover since the close of the merger and then index inclusion as well?

[Jim Sebra, Chief Financial Officer]

Yes. That’s great. So it’s another great question. We have – there is variety of indexes that will beginning to increase positions in IRT on their rebalanced dates. The three most significant are the S&P 600, MSCI family of indexes and some Russell family of indexes. The S&P Index will rebalance in the middle part of March, so I think the date is March 22, and the other two will rebalance in the middle part of May. We believe based on our estimate that the incremental purchasing demand from those – just those three are in the $750 million range. Again, it’s an estimate, it’s hard to exactly know until they put out their disclosure, but that’s what our kind of bankers and our internal estimates compute. As for the STAR legacy retail shareholders selling out, is something that we’ve been obviously focused on in communicating around for quite some time. The intelligence that we have, considering how hard it is to see the actual retail trading volumes, is that the estimate is that somewhere around $15 million, $16 million incremental retail volume – retail volume had increased since the merger closing, which would kind of aligned with kind of our expectation around plus or minus 25% to 30% of IRT’s shareholders will eventually exit – I’m sorry, STAR shareholders will eventually exit. So, we’re plus or minus halfway through what we think is the total expectation.

[Nick Joseph, Citibank]

Thank you very much.

[Operator]

Our next question comes from the line of Brad Heffern from RBC Capital Market. Brad, your line is open.

[Brad Heffern, RBC Capital Market]

Hey good morning everyone. I was just curious if you could talk about the main risks that are still present for the integration?

[Jim Sebra, Chief Financial Officer]

Yes. I mean, I think from the main parts of the integration are pretty much behind us. I think we have one left over kind of integration effort that’s just combining the two payroll systems, but that will be happening here in the next few weeks. And again not really huge risk issues, one of the last things we have to do as part of integration effort. But we think largely the major part of the integration and that’s policies processes system, all that through the process and moving forward.

[Brad Heffern, RBC Capital Market]

Okay. And then on the synergies, can you talk about how much of that you’ve realized on a run-rate basis? And is there anything that you’ve seen, that maybe represent potential sources of upside that weren’t in the initial numbers?

[Jim Sebra, Chief Financial Officer]

Yes, it’s a great question. As Ella mentioned, of the synergies, the original property management expense synergies we saw originally $8 million. We’ve already locked in $6 million of the $8 million for all fiscal year 2022. There is a few left everything that we’re just kind of nailing down, but we fully expect to achieve the $8 million. There is some additional upside to the $8 million around kind of rental insurance programs that we’re beginning to implement, but that is still being finalized. On the G&A front we promised $20 million of G&A synergies, I think we originally told everybody that for 2022, we anticipated that number to be $17 million or $18 million as things kind of took hold. We are happy to announce that all $20 million has been locked in already, heading in. And we think there is probably another $2 million to $3 million of additional upside as we finalize the remaining aspects of the integration efforts.

[Brad Heffern, RBC Capital Market]

Okay, thank you.

[Operator]

Our next question today comes from Neil Malkin from Capital One Securities. Neil, please go ahead.

[Neil Malkin, Capital One Securities]

Thanks. Good morning guys. Another great quarter. Nice to meet you, look forward to working with you in the future. Yes, I guess, first question, rates obviously expected to rise on the short end of the curve. Just curious, might be too early, but given the nature of the people who compete for some of your types of assets. Do you think you might see some pressure alleviated or reduced competition as the year progresses, as short end of the curves moves up and people that sort of leverage the high leverage variable rate debt financing becomes a little less accretive. Do you think that’s going to be a benefit? Or is there just too much capital chasing everything in multifamily?

[Scott Schaeffer, Chief Executive Officer]

Thanks, Neil. It’s Scott. Our view is that there is a lot of capital chasing multifamily assets, specifically in our location and our vintage property. We don’t see that changing. We all saw what, what’s happened with Resource and BlueRock and APTS over the last, probably two months. This is a space where people want to be invested in, and they see the long-term benefit for it. So typically we – cap rates lag movements in interest rates, but there is so much capital chasing this, that if there is any correlation in the cap rate movements with interest rates, I think it’s going to be sometime down the road.

[Neil Malkin, Capital One Securities]

Yes. Makes sense. Thanks for that. Other one for me is, can you just talk about strategy and priority, is in terms of growth capital allocation. How do things change in your mind with the addition of STAR and the scale you have as well? Thinking about newer or existing market acquisitions to increase exposure, particularly in some of the newer markets you got from STAR. And then can you also talk about your priorities in terms of the JV development stuff versus acquisitions versus preferred, you mentioned before, if you just kind of outline that for us? That would be great.

[Scott Schaeffer, Chief Executive Officer]

Sure. Well, we’ve always been focused capital allocation and trying to make sure that we were putting our capital to work in the best possible way to generate shareholder return. So the value-add is for the last few years has been a big component of that and we’ll continue to be. The STAR merger, as we reported added 12,000 units to our value add pipeline, which means that we own within our portfolio, if you will on the inventory of value-add units for the next – value-add units available for renovation. We have basically a four to five year runway now without having to add any more units to the portfolio. So that will continue to be a priority, and a big focus. Secondly, about a year ago, we started the JV program because we saw the benefit of development. I have been resistant over the years to have IRT jump in the development, because I thought our balance sheet was a little too small and a little too highly levered. Those two things have changed. We have a much bigger balance sheet and our leverage is as Jim referenced, we’re down today at 7.5 times EBITDA and declined. So we feel a little bit better about development. We’re going to continue with the JV program. We have the three communities, actually one is been completed, so we have the two communities that we inherited from STAR, that are in the development process. And we’re going to look for more opportunities, but we’re going to do it in a measured way where we manage the risk versus any potential benefit.

[Neil Malkin, Capital One Securities]

Okay, great. Thanks very much.

[Scott Schaeffer, Chief Executive Officer]

Sure.

[Operator]

Our next question comes from Anthony Powell from Barclays. Anthony, please go ahead.

[Anthony Powell, Barclays]

Hi, good morning. Just question on rent growth, that’s been very strong obviously for you in the fourth quarter and so far this year. How is – how are rent-to-income ratios trending throughout your portfolio, and what’s your view on the ability of tenants to take further price increases, given since the overall inflationary environment we’re seeing across the economy?

[Ella Neyland, Chief Operating Officer]

This is Ella, and actually that’s one of the great strengths of the IRT investment thesis, it’s not just investing in gateway markets, but it’s the fact that we target moderate rate income for working America. So when you look at the strength of our residents, especially in an inflationary period, our rent-to-income across our portfolio is 19%. And so what that means is that, they have the ability to work through this inflationary environment and it also gives us the ability to have a big spread on the ability to increase those rents and deliver value to our residents as part of that.

[Anthony Powell, Barclays]

Got it. Thanks. And other inflation question, obviously, the returns on the renovations have been pretty strong. How are costs trending for your renovations? How does that impact expected ROI? And just an update there will be super helpful.

[Scott Schaeffer, Chief Executive Officer]

We saw some pressure when COVID started with – when supply chain had some issues. We’ve diversified both our vendor and our supply chain providers. So, we’ve seen a little bit of increase in the cost to perform the unit renovations, but it’s been offset and you can see our returns are growing quarter-over-quarter as we try to rein in and get more efficient on the renovation side and push rents a little bit more, our returns are actually improving.

[Anthony Powell, Barclays]

All right. That’s it from me. Thank you.

[Scott Schaeffer, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from the line of Austin Wurschmidt from KeyBanc. Austin, your line is open.

[Austin Wurschmidt, KeyBanc]

Hey good morning and thank you. I was hoping you could discuss, you kind of highlighted you’ve got no additional dispositions and presumably any equity assumed in guidance. So could you discuss how you plan to fund? I think you’ve got a $150 million commitment remaining for the development projects you acquired from STAR. You’ve obviously got the ramping redevelopment and then you also mentioned, you’ve got a right of first refusal on the Nashville JV assets. So, what are sort of the plans to fund those commitments today?

[Jim Sebra, Chief Financial Officer]

Yes, it’s great, a great question, Austin. Obviously the commitment on the development deal is obviously a multiyear spend, right, as we develop, we’ve got one under development today and the other one will start later this year. We at the midpoint of our guidance, given our current dividend where our operating cash flows in excess of $100 million, I think it’s like $105 million this year, and that will continue to repeat next year. So, I think our anticipated use of proceeds or funding today is effectively operating cash flow. And we’re just excited about kind of where the businesses is and be able to kind of fund all that operating cash flow and not have to increase leverage.

[Austin Wurschmidt, KeyBanc]

Understood. And maybe along similar lines then, how does that change or affect the decision or your recommendation, I should say to the Board with respect to the dividend and your target payout?

[Scott Schaeffer, Chief Executive Officer]

Thanks, Austin. It’s Scott. So obviously we discuss this every quarter and the Board will ultimately make the decision. We’re well aware of our payout ratio and how it relates to the peer group. And we’re also very well aware of retained earnings are the most efficient form of capital. So the Board will be weighing all of that, and we’ll make a decision on dividend down the road.

[Austin Wurschmidt, KeyBanc]

Got it. And then just – I guess the last one for me, STAR assets are up and running, it sounds like the synergies are identified or already achieved. What’s sort of the consideration for future large transactions? Or should we expect that, from here on you’ll stick mostly with sort of the capital recycling and some of the internal opportunities?

[Scott Schaeffer, Chief Executive Officer]

Well, we’re clearly going to stick with the capital recycling in the internal opportunities, but we’re always looking for opportunities to grow the portfolio through acquisitions, but it has to be something that makes sense. One from a portfolio management point of view, but also we want to do transactions that are accretive. The STAR transaction was a perfect fit. As Ella mentioned, it’s the same type of assets in the same markets, the company’s culture was – the company’s each individual company cultures were very similar, so it made a lot of sense. And then you add into there, that it’s going to be highly accretive from day one. So if that opportunity presents itself again, we will work very hard to take advantage of it. But we will continue to be open to opportunities, but they have to meet those criteria.

[Austin Wurschmidt, KeyBanc]

Understood. Thank you.

[Operator]

Our next question comes from John Kim from BMO Capital Markets. John, your line is open.

[John Kim, BMO Capital Markets]

Thank you. Good morning. Your guidance this year of 21% FFO growth at the midpoint is the highest in the sector. But you did mention when you announced the STAR merger, it would be 11% accretive to earnings immediately. And I think you basically said, your synergies are intact, so that implies 10% growth for the standalone IRT, is that the right way to look at it or are there other offsetting factors to that STAR accretion?

[Scott Schaeffer, Chief Executive Officer]

Yes. I mean, it’s a good question. I think that certainly one way to look at, I think there is a variety of factors, but the rough math you did there is certainly aligns with kind of what would be the core FFO growth per share on the legacy IRT business.

[John Kim, BMO Capital Markets]

And so Jim, can you just update us on your current master lease and what you’re expecting as far as market rental growth and how that translated into effective lease growth this year?

[Jim Sebra, Chief Financial Officer]

Yes. Sure. So current loss to lease across the portfolio, obviously, it’s very property-specific it ranges from kind of a low as 10% to slightly higher, just in the low-20s. Average cost of portfolio is about 15%. Our modeling for purposes of the midpoint of guidance has an occupancy rate of 95.7% and midpoint of guidance has a blended throughout the year, rental rate increase of about 10%. And the way we think about it is that the first half of the year is really kind of behaving from consistent with the results you see so far in the first quarter with cautiousness built into the second half of the year, given the rent growth that we saw in the second half of 2021.

[John Kim, BMO Capital Markets]

Okay. And then also if you could just clarify, last quarter you mentioned that first Nashville project in the JV would delivered this quarter. You don’t have any acquisitions in your guidance, but what is the likelihood that you’ll acquire that project? And if you can give any indication on pricing or going in yield?

[Jim Sebra, Chief Financial Officer]

Yes. So the first project was in Nashville, small project 96 units, it did – it was completed recently, there is a CEO, and we’re working through the purchase option process with the developer. It’s our intention that we’re going to take ownership of it.

[John Kim, BMO Capital Markets]

And how would pricing work, would it be like a market cap rate or a little bit higher?

[Scott Schaeffer, Chief Executive Officer]

So, yes, we will pay a market price, however, since we are in the development team or part of the development stack. Part of that the profit, the development profit flows back to us, so we will be buying it effectively at a slightly above the five cap.

[John Kim, BMO Capital Markets]

That’s great. Thanks, Scott.

[Scott Schaeffer, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from the line of Derek Johnston from Deutsche Bank. Derek, your line is open.

[Conor Peaks, Deutsche Bank]

Hi, thank you. This is Conor Peaks on for Derek Johnston. I have one question. Jim, I think you touched on in your opening comments, but the controllable expense growth guidance of 2.5% to 3.5%, any details on the drivers there that you’re looking forward that bring to that lower end of the guidance range?

[Jim Sebra, Chief Financial Officer]

Yes. I mean, I think the drivers that will help achieve at the lower end of the guidance range would just be kind of the timing and effectiveness of the technological efficiencies we plan on rolling out, to help kind of offset what other inflationary pressures will persist in the portfolio. Obviously, we’ve taken an inflationary lock-in has increased utility cost and contract services, whereas landscaping, but as well, as well as payroll costs. But as we rollout the efficiencies with the – and try to platform and kind of merging the two portfolios together and kind of executing on the contracts. And here the more sizable, more size and scale will help us achieve at the lower end of the range.

[Conor Peaks, Deutsche Bank]

Thank you.

[Operator]

We have no further questions. I’ll now hand back to Scott Schaeffer for any concluding remarks.

[Scott Schaeffer, Chief Executive Officer]

Well, thank you everyone for joining us. We look forward to speaking with you again next quarter. Have a nice day.

[Operator]

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