All right, we're going to get our next presentation started here. We have Independence Realty Trust, that's ticker IRT. Management team up here with me. My name is Aaron Hecht. I'm a senior research analyst at JMP Securities. I focus on REITs and other various real estate asset classes. Management team here, Scott Schaeffer, CEO and Chairman of the Board, Jim Seabra, CFO. Scott, I'll turn it over to you and maybe talk about the company for those that haven't been introduced to IRT before.
Sure. Thank you, Aaron. Thanks to everyone for joining us here today. I will give a very high-level overview of the company, and then we'll take some questions. So IRT currently owns 110 communities, 32,600 units, in non-gateway markets, predominantly in the Southeast and also in the Midwest. Our plan when we started 2024 was to grow occupancy, you know, amidst the additional supply into leasing season and then use the traffic and leasing season to generate and increase rents, frankly.
So I'm happy to say that as we sit here today, our same-store occupancy is 95.7%, which is 100 basis points higher than it was during the first quarter of this year, and 140 basis points higher than it was last year. So our plan to promote occupancy has worked. Our resident retention is 55.2%, which is a full 300 basis points increase over this time last year, and our leads are 21 higher year to date than they were also for the same period of last year. So between the increase in lead traffic and resulting in and higher retention, that's what has been driving the better occupancy.
And again, this was all about giving us some pricing power for rent growth heading into leasing season, which we're now seeing. So our new lease trade outs for the second quarter are only a -0.7%, versus a -2.4% in the first quarter, so, you know, a 1.7% increase. Our blended rent growth for May is 1.7%, versus 1.2% in the first quarter. So again, we're starting to see that pricing power heading into leasing season. Really, this all results in something that's been consistent for IRT over the years, which is industry-leading NOI growth and core FFO growth.
We've also delivered the highest total shareholder return of any of our peers year to date and for three years and five years. So we have a proven track record. As we look to continue through 2024, our priorities will be to continue our value add strategy. We'll do approximately 2,400 units this year. We spend about $17,000 per unit, interior kitchens, baths, flooring, lighting, cabinetry, really converting what was a B or B plus community into an A that competes with the newer construction, but at a much better price point. And that investment has historically returned 19% return on just the rent premiums. That does not include any cost savings from having basically a brand-new unit.
So it really is our best use of capital going forward, and that 19% is on an unleveraged basis. So as I said, we'll do approximately 2,400 units this year, and that depends on our retention. Higher retention, we'll do a little less. Lower retention, we'll do a little more. The reason for that is because we only renovate a unit when a tenant leaves on their own. So if the tenants, more tenants are staying, it just means we'll do you know, fewer renovations. But the nice thing about the renovation program is that if we don't do it this year, we'll do it next year. It doesn't go away, it just gets delayed. The second strategy for this year is to complete our ground-up development.
When we acquired the Steadfast Apartment REIT a couple of years ago, we inherited two developments, ground-up developments in the Denver MSA from STAR. The first one is complete, it's 70% occupied. The second one is in late in the construction process. It should be CO'd in the fourth quarter of this year. When those two communities are completed, they will add about $14 million of EBITDA with no corresponding debt. So we are excited about that because that will continue to accelerate the deleveraging process. And we will continue to recycle capital. We just completed the previously announced 10-asset sale.
It was communities that no longer fit our long-term priority, and we determined late last year that with interest rates higher for longer, that we ought to sell assets that don't fit our core strategy, and use that to delever. So we sold those 10 assets at a blended 5.8% cap rate, paid off about $520 million worth of debt, which reduced our debt to EBITDA almost a full turn, 0.8% of a full turn. And lastly, we have at IRT from day one, we IPO'd this company in 2013 with a $100 million total capitalization. Today, we're about $6 billion. And we did it with a simple capital structure, and that's been part of our plan.
Common equity and very easy to understand debt is it. And the nice thing about our debt is that we only have 7% of our debt maturing through year-end 2025, and only 28% maturing through 2028. So we have a very nice debt maturity ladder. So at this point, I will stop, and Aaron, take it away-
Sure
-for questions-
Yeah.
-and, anyone else who might have some questions.
Scott, you talked about that growth that you've seen in the business going from $100 million in market cap at IPO to, what, $4 billion today, and just wondering, you know, how that kind of manifested itself? Was it raising additional equity capital just along the way? Was it M&A? Just kind of give the details on how you got that kind of growth, 'cause a lot of the smaller REITs out there never get to the scale that you need to to really be successful, and you guys have gotten there.
So it was a little bit of everything. Our strategy in the beginning, and it's how we really became who we are, is to focus on B-class assets in non-gateway markets. And it was for the simple reason that cap rates were higher, so that we could generate a better return on investment from day one. What that did was allow us to continue to do follow-on equity offerings, do put that money to use in small one-off acquisitions, always being accretive to our current earnings. And through you know, small over-equitizing of those acquisitions to continue delevering through the growth process. So the growth, Aaron, really came from you know, many, many one-off single transactions, but then there were two transforming transactions as well.
In 2015, we bought a small REIT called Trade Street Residential. That was a stock-for-stock transaction, so it didn't take any additional capital. That added about 8,000 units, 5,000 units, excuse me. But then the big transformation came at the end of 2021 when we purchased Steadfast Residential, which added 19,000 units. And that also was a stock-for-stock transaction, so there was no equity raise necessary. We did raise equity as part of that transaction to delever, but the acquisition itself was stock for stock.
What's your appetite like to do more transformative M&A? And based on your size today, is there more or less motivation? And what I'm getting at is, based on the market cap, is there near-term targets that you could hit to get you into, like, new indexes, or is there some sort of motivation to get to a certain spot?
So there's never been a motivation to be bigger just for the sake of being bigger. I mean, we, we looked at it when, you know, that growth would take us into an index or, or open up some other, other, you know, avenues for us. Right now, there continues to be a disconnect between, you know, public and private valuations, and, and frankly, it's it would be hard for us to acquire or to grow, through the use of equity because our equity isn't, isn't priced, currently where, you know, properties are trading. For example, we sold those 10 assets, and those were assets that were not nearly core to us, at a, again, a blended 5.8 cap, and our equity is trading north of a six.
I don't see us doing any acquisitions for growth in the near term. If there are opportunities, and they make sense, and we can do them accretively, of course, it's something that we would consider.
Right. You talked about that disposition program that you had. I think you have maybe one or two more to complete if it hasn't happened already, and to get that out of the way. But where are you in terms of leverage at this point? And now that that's effectively gonna be gone, what's the plan from a capital deployment standpoint going forward?
I'm gonna let Jim talk about the leverage.
Thanks, Scott. So from a leverage standpoint today, our plan is to be down in Q4 of this year at roughly 6x net debt to EBITDA. Earlier this year, technically late February, we received our investment-grade BBB flat rating from Fitch and plan to seek some additional investment-grade rating from Moody's or S&P, you know, this summer, earlier or later this year. You know, our expectation on the leverage front is to continue to navigate that net debt to EBITDA down to the mid-fives. Some of the good stuff that Scott had mentioned before in terms of some of the new development that we have coming online will really add a lot of that EBITDA that will help to kind of drive that, in addition to obviously just portfolio NOI growth and EBITDA growth.
Then, where are you, how are you gonna allocate capital going forward?
So right now, the best use of our capital is the value add program. Again, that, that generates an unlevered, you know, 19%, give or take, return. So that's priority number 1. The second would be to finish the ground-up construction project in the Denver MSA. And then after that, really, that takes us through the end of this year. For 2025, we'll look at continuing the deleveraging process, you know, depending on where interest rates are, 'cause we will have some debt maturing in 2026. And, if not that, then probably stock buybacks, again, depending on what our cost of capital is.
Are you seeing any distress out in the market, given where interest rates have gone? And if so, are you getting more of those deals showing up across your desk? Is it accelerating? Has it not happened yet? Just kind of give us an idea.
So the stress that I think a lot of people were anticipating, we have not seen. We have seen some opportunities from merchant builders that just are at a point where they can't continue to fund the interest carry on new developments that are still on their construction loans, and the refinancing market is not what they would want it to be. And so we're seeing those come to market. There are some opportunities, but again, there's enough capital out there that's looking for these opportunities that when one does hit the market, it doesn't last for long.
One thing I think that we didn't hit on in the company overview was just your geographic exposure. To me, Sunbelt, Midwest, big positive, for your business. But there have been some supply issues. So maybe talk about, where you're seeing supply today and, how long you think it could be a problem for?
Sure. Well, I think, you know, our portfolio being, again, predominantly B class, you know, 12-15 years old, is somewhat insulated from the effects of the new supply because we're at a better price point, and we're also at more infill locations rather than out at, like, the second loop, where a lot of the new development is being done are in the urban core. So we typically don't really have or feel the effects of new supply. That changed last year. The effect of new supply, the new supply was so great and the pressure on the developers, because again, the increase in interest rates, so great, that we saw people offering, you know, three, maybe even three plus months free rent.
No matter where you are in the market, that then will trickle down and affect, and that's what happened. We see that now coming to an end. Jim, you have some statistics that I would ask you to give in a minute on the new supply within our submarkets. But as I said, we typically are relatively insulated, and our portfolio is predominantly in the Southeast, about 75%, and then the rest in the Midwest. And it's in markets where you're seeing outsized population and job growth continue.
So once this supply gets under control, which is, you know, later this year, and then clearly drops off precipitously into 2025 and 2026, you'll see that demand then far outweigh the supply, and that's where we'll have, you know, good, stable occupancy and, and the chance for continuing rent growth.
Yeah, in terms of actual new supply deliveries in 2023 for our submarkets, we experienced about 4.8% new supply deliveries. That breaks down to about 1.2%, almost per quarter last year. So far in the first half of this year, we've seen about 1%, 1.1% in Q1 and Q2, respectively. And we now anticipate that to drop to roughly 70 basis points in the third quarter, and then down to 50 basis points in the fourth quarter. As Scott mentioned, we really see the expectation in 2025 and 2026 of significantly lower new supply deliveries.
Right now, the data sources show that new supply deliveries in 2025 should be about 2.2% of existing stock, and in 2026, about 1.8% of existing stock.
Thanks.
Yeah, so, understanding that supply is gonna drop off a cliff, per se, and it makes sense, because if you think about the timing that these projects that are going to be finished were financed, that was probably the tail end of the pandemic era, low cost of capital timeframe. So assuming that this is the last wave, how long does it take for assets to be digested in the market so you can benefit from the supply-demand dynamics that we're kind of talking about here?
So it's typically, for a suburban garden-style development, it's typically two years from, groundbreaking until the CO. And you'll start seeing pre-leasing happen, you know, three-four months, ahead of the CO. So and then for, you know, the next nine-12 months after the, the project has been delivered. So you have anywhere from a 12-15-month, you know, lease-up period. So really, what happens is, though, it kind of compounds on itself. So the, the units that were delivered last year, they're now finished being leasing up, and there's less new units coming on. So there will still be some lease-up pressure, but that compounding effect is being eliminated because there's not as many new ones coming in.
So that's why, you know, we're very excited about 2025 and 2026, because the demand, as I said again, will far outweigh with the increased population and job creation in our area, in our markets, will far outweigh the new deliveries.
A steady decline of supply that comes offline, and then that makes it more smooth in terms of the operating performance as it comes back. Is that fair?
Yes.
Okay.
That's fair.
Jim, you guys put out an operational update, I think, in conjunction with your presentation. Does that have any impact on guidance, or what should the takeaways be from those operational results that you put out?
It's a great question. You know, obviously, we haven't updated guidance yet. We typically will wait and do that as part of our second quarter earnings call, which will be kind of late July, early August. I would say that our operational metrics of both occupancy and rent growth are kind of in line with our expectations of kind of how we saw the year developing. On the operating expense side, controllable expenses are kind of in line with our expectations. Real estate taxes are coming in from initial assessments, although it's a small sample size, initial assessments are coming in, a little bit better than we anticipated. And then property insurance, we had a 10% decrease in our premium for our property and casualty that we renewed on 15 May .
That 10% decline is a nice number to hear, given the increases we've seen in the last couple of cycles. I assume that makes up a high percentage of your overall insurance costs. Maybe give us perspective on what percentage and-
Sure, yeah. So our liability insurance will renew on July first. We expect that to be roughly a flat renewal. And, you know, we anticipate because of that, to save almost $3 million relative to kind of our overall guidance that we originally kind of thought for the year. So it's a pretty nice renewal process for us. We use a consultant out of Boston who really helps kind of inject some competition into the insurance renewal process. We don't just use one broker, we use a series of brokers to really kind of create competition. And then, all of the savings was done without changing any of our structure to our insurance, size of how much insurance we buy, or even our deductibles.
The coverage is exactly the same as it was previous years.
Yeah.
Cost of homeownership has gone up significantly everywhere in your markets. Are you seeing any change in the percentage of move-outs to buy, and how has that shifted?
Yeah, so historically, our reasons for move-out to buy, of all the people that move out, everyone gets a reason, typically surveyed by the resident and filled in by our staff. And typically, about 20% of those who leave us are moving out to buy a home. In the first quarter, that is about 15%. You know, I think, you know, one of the reason is people just continue to want to kind of live in a home or, you know, purchase a home, but given their kind of own personal dynamics. You know, others are reporting much lower, kind of reasons to move out to buy.
One thing that's different about our markets is, you know, the cost of a home is not as significant to say, kind of in the New Jersey suburbs or New York suburbs. That typically would cause someone to say, "I can't afford it, given the current interest rate environment." We do expect, you know, that will kind of continue to, you know, navigate around, but we're not seeing a significant decrease, albeit it is slightly lower.
Dividend. What's kind of the company's policy or the board's policy in terms of growing that number versus, retaining capital to deploy?
Well, the board's policy is to continue to pay dividends and to, you know, re-review them every quarter based upon our, you know, operating cash flow and, capital needs. We did raise the dividend in 2022, and we raised the dividend in 2023. We haven't had that discussion yet in 2024. I would tell you that we are, one of the lowest payout-- We have one of the lowest payout ratios of any of the public REITs. But then again, retained capital is your cheapest form of capital. So as we continue to navigate, you know, in uncertain times with interest rates and, you know, inflation, you know, it's hard to say what the board will decide this year, but clearly, the dividend, that we're paying out is safe.
Understood. You did add a board member in March, and I think you opted out of MUTA.
We did.
What's the takeaway for investors from those events?
So, really, the takeaway should be nothing more than we had an open board seat. One of our shareholders put forth Craig Macnab. He's a well-known, well-respected prior REIT executive. He sits on another couple of other boards. Our nominating committee put him through the interview process and determined that he would be a good addition to our board. So, he is now part of the board. And as far as opting out of MUTA, it's just something that, you know, is good governance. We were never going to stagger our board anyway, so we decided to, you know, make it permanent.
Yeah. Jim, how does the balance sheet look in terms of a maturity schedule? Anything coming up that may be difficult to refinance at a, a pre or a neutral level?
That's a great question. You know, we've done a pretty good job over the years of being very thoughtful around our debt maturity profile. In 2025, we have about $137 million of mortgages that are maturing. We have plenty of capacity in our revolving line of credit to kind of address those maturities. With our recent Fitch investment-grade rating, we, you know, may begin to hit or begin to go into the private placement market later this year to help kind of fund some of those maturities. And then in 2026, we have about $400 million of maturities that again, we have plenty of capacity in our revolver to kind of continue to address those.
We do certainly anticipate in 2026, once we have both a Fitch and either a Moody's and S&P investment-grade rating, that we'll begin to kind of go into the public investment-grade bond market to begin to refinance our debt and get into that kind of annual, kind of roughly $300 million-$400 million of cadence every year.
Great. We have a couple of minutes left here. I wanted to open up to the audience. If anyone has any questions, now is the time. You don't have to be shy. I'll ask one more, and this could be for Scott or Jim. Within guidance, what are kind of the main puts and takes that you think could be the biggest variables impacting meeting, exceeding, or missing expectations?
You know, we, we're very thoughtful when it comes to setting guidance every year. We really try to look at all the pluses and minuses and the kind of range of possibilities. And I think right now, you know, we've got some really good trajectory on our, obviously, expenses. You know, taxes are kind of coming in kind of in line. You know, fundamentally, it's really just back to the macroeconomy and kind of how the push and pull between rental rate growth and occupancy, you know, occurs.
You know, right now, we're pretty much, you know, with renewals set for June and seeing some trajectory for July and August, we're feeling quite confident with our renewals, and it really just comes back to fundamentally, you know, kind of how the macro environment develops and if we can continue to kind of keep the occupancy in that trajectory that we've been able to achieve so far to date.
Got it. One more chance for the audience. Anybody? All right, Scott, maybe you can summarize the takeaways for what you want the audience to walk away with in terms of what IRT is going to do in the near to long term to create shareholder value.
We're going to continue to outperform. No, I mean, we set certain goals for 2024, which was to, you know, bring occupancy up to that, you know, 95%-96% range, which would give us pricing power. We've done that. We announced the sale of the 10 assets back in October of last year. We messaged an estimate of $520 million-$530 million, give or take, of gross proceeds. When it was all said and done, after the 10 assets were sold, it was $525 million, so we were right on target. We just announced the sale of one asset in Birmingham, Alabama, which is under contract, and it'll settle in July of this year. It's through due diligence.
So we're accomplishing all of the goals that we set out to do. Again, the purpose of the large sale, the 10 assets, was to delever. That's on track. As Jim mentioned, we'll be at 6x net debt to EBITDA at the end of this year, 5.5x last year, next year, excuse me. So we find ourselves in a strengthening balance sheet position at the same time as the difficulty in the market over the last couple of years because of, you know, the free money era of development, and then all of the supply that came along.
That's now largely behind us, so we have a better, more strengthened balance sheet, and we're entering a period of what should be, you know, operational growth. So we're excited about the future, and think that IRT is well positioned to continue to outperform.
Great. Appreciate everyone attending, and I think management might be available for a couple of minutes if you want to touch base with them.
Yes. Thank you, all.
Thank you.