Good afternoon, everyone. This is the 2:30 P.M. session. I'm Eric Wolfe with Citigroup. I'm very pleased to have with us Independence Realty Trust CEO, Scott Schaeffer, CFO, Jim Sebra, and SVP of Investments, Jason Lynch. Scott, I'll turn it over to you to introduce the company, and then we'll do some Q&A.
Thank you, Eric. Thanks everyone for joining us today. I'm going to give a very brief overview, and then as Eric just mentioned, we'll get to your questions. IRT has a differentiated portfolio of 117 communities with over 34,000 units. Differentiated because it's predominantly Class B located in the Sun Belt and Midwest, and mostly the Sun Belt. After some rough couple of years, I can say that market fundamentals are finally improving. Multifamily, like most real estate, is supply and demand driven, and I can happily say that supply is finally trending below the long-term average, which for us in our markets has been about 3% per year. New deliveries in 2026 are projected to be 2.6%, so below the 3% of existing supply, and then it drops to only 1.2% in 2027 and 1.3% in 2028.
We're at the beginning of what should be a good time in the cycle. Along with that reduction in supply, demand continues to be strong. Population growth, employment growth, and household formation in our markets will significantly outpace the national average and the coastal markets. For the next three years, population growth in our markets is expected to be 6.1 people for every new apartment that's delivered. Employment growth is forecasted to outpace the national average by three and a half times. We have a resilient middle-income resident base that is largely immune to AI job disruption. That's a big topic these days, but we are seeing no effect whatsoever. Our portfolio will continue to benefit from the cost of renting versus the cost of home ownership.
We benefit from the lower cost of renting one of our apartments versus the cost of renting a newly delivered Class A. As we have all those new deliveries being absorbed, and the concessions burning off, we will be back in a very good price competitive place. We have an efficient operating platform. Our operating expenses increased by only one half of a percent in 2025, and our G&A spend was only 34 basis points of gross assets, which is in line or lower than most of our even large cap multifamily peers. Our secret sauce, for some time now, has been our value-add strategy. It's meaningful to us just because of our size. We will do between 2,000 and 2,500 units this year, full renovations, that will compete with brand new Class A construction but at a much lower price point.
This value-add program returns about 16%-20% on our invested cost. Lastly, we have a seasoned management team that has managed through many multifamily cycles. I've been at this for over 40 years, Jim probably 20, 25 years, and Jason, not as many, but still enough to know what he's doing. At this point, I'll stop and turn it over back to Eric for questions.
Okay.
Thank you.
Then, obviously you can see the mics over there, so just jump or raise your hand with questions whenever you want to. Maybe I'll lead off. Over the last couple of weeks, we've seen some big news in the apartment space. You have the two largest apartment REITs, AVB and EQR, merging. I think, if you look at the reasons behind it's mainly because they're trying to find a way to generate alpha versus peers. Maybe talk about how you think you're going to generate alpha. When you look at your size, obviously you're on the smaller end within the group. Do you consider that to be an advantage, disadvantage, and do you think you need to achieve more scale over time?
Well, historically, it's been an advantage. It's funny because when I'm talking to someone about IRT that doesn't really know us, I say we're the smallest of the big REITs and by far the largest of the small REITs. We're kind of caught in the middle all by ourselves. I don't think bigger is necessarily better. Our track record will support that. We've delivered higher same-store NOI growth. Our value-add program and expense management has led to outperformance on a total shareholder return on both the five years and 10-year periods. We're the only apartment REIT with predominantly Class B apartments.
Again, with a sizable, meaningful value-add component, which lifts our same-store NOI performance by at least 20% each year over the past several years and has helped us achieve NOI growth that's above the peer group, even during a period of declining new lease rates. The value-add will add about 0.5% to our NOI for our total portfolio NOI. That's why I continue to say that it's meaningful.
Okay. You mentioned in your remarks that you're finally kind of starting to see supply ebb after multiple years of heavy supply. I think there have been times over the last couple of years that peers have been sort of optimistic that we would see a bit of a turnaround, and then that supply tended to linger. I guess, why do you think right now or this time is going to be different? What gives you the confidence that fundamentals are actually turning?
Yeah. I'll take that.
Sure
you can chime in. I think from the standpoint of what Scott had mentioned before, the fundamentals, the pressure from the new deliveries in most of our markets happened, the deliveries happened in late 2024, early 2025, such that the lease-up is almost complete. That is what's kind of fueling this opportunity and this perspective that we have. Everybody seemed to be very focused on when will new lease trade-outs turn positive or at least be break-even. Where we see ourselves today, we continue to see really great acceleration in new lease trade-outs, some really great momentum from first quarter into April and May, and certainly now into June. We have confidence that we'll be able to hit kind of break-even point at some point this year. Where our asking rents are today, roughly $1,550 per unit.
The average expiring rent for the rest of the year is $1,531. We're already positive, and it's really what will allow us to turn really positive from a trade-out perspective is ultimately not having to use concessions to drive leasing activity. As Jason will cover here in one minute, we expect to see that just because we're getting now to more of a stabilized occupancy in the overall each market.
Yeah. Looking at the amount of supply that's been delivered since 2024 and 2025, what's left of that, most of that inventory has already been leased up. It's roughly 80% occupied today, which leaves roughly 80-some thousand units left to lease up of that supply. That represents roughly 1.5% of the total inventory in our markets. In the grand scheme of things, it's a relatively small amount of supply remaining to be leased. That goes hand in hand with the amount of supply that's expected, that Scott already mentioned, around 2.5% for next year, coming down from the highs that we've seen over the last years. Going forward, it starts to support a pretty strong foundation for continued absorption of that remaining supply and improved pricing.
I guess along with that, can you maybe talk about what you're seeing for this peak leasing season specifically? Obviously, it's a really important point in the year for you all. I think based on your systems, you can kind of tell what's going to happen, sort of one to two months forward. Maybe tell us what the sort of forward indicators are looking at. What are the most important demand indicators that you look at and how they've been trending?
Yeah. Great question. Obviously, for us, we send renewals out about three months ahead of time. We've already sent renewals out through the first half of August. We're seeing really great kind of pricing. July renewals were sent out at right around 5.2%. Now, we'll ultimately achieve a little bit lower than that, but that's great renewal growth that we expect to see at least in the month of July. On the new lease side, let me step back again. What we saw so far in April and May from both new leases as well as renewals, our blended rent growth is about 1.6%. That's a really great sign as we head into the beginning part of leasing season. On the new lease side, we continue to see really great trends. Our lead activity and our lead volume is very much in line with what we expected.
We see very normal, what I would say, patterns in that lead volume. The timeframe for which leads are turning into ultimate leases is a little bit longer this year than maybe it was in previous years as people continue to search and evaluate. But it's not extremely longer. Typically, it would be about four weeks from when a lead shows up until when they move in. That's now about four and a half to five weeks of time.
What we've been focused on is really trying to combat the competitive set by, A, making sure people find us on the web or AI tools by really kind of pumping up our SEO and our website work, making sure our keywords are there, making sure the information that people are seeking through their web searches or AI are found on our website, so they, again, folks show up as a lead for us, and then we can work to convert them into a tour. Ultimately, our lead-to-lease conversion rate so far this year is better than what it was last year. Again, we see some really great trends developing in terms of overall fundamentals. I won't comment yet on where we see new lease trade-outs for June. It's still a little bit early. July is even earlier.
It is shaping up certainly to kind of move into that kind of break-even direction.
I guess, would you say that the improvement you're seeing is sort of consistent across your portfolio? Are there certain markets that are driving that? I think if you look at sort of the past year, call it two years, you've seen some pretty consistent and solid growth out of your Midwest markets. It's been some of those more supply-affected markets that have been lagging. What are you seeing in those specifically?
Yeah. In the Midwest, that continues to be the trend. The Midwest, there's some supply that we've seen there that's pretty minimal, but we're working through that. Generally speaking, it's continuing to be one of the strongest, more stable regions, and so that includes Columbus, Indy, Lexington, and Louisville. Where we're seeing kind of inflection points is in the Southeast, is we're looking at like a Raleigh, for example, where if we look at total occupancy within the market of both newly delivered units as well as the existing stabilized assets, we're starting to see some of that get to a point that it's at 90% occupancy for the total market. That starts to lead us to be able to see some light at the end of the tunnel, so to speak, on being able to push rate there.
In terms of slower markets, Denver is one of our slower markets that have been a little bit more difficult from some regulations there as well as new supply.
Could you maybe talk about the demographics of your tenant base, whether that's changed over time, sort of who your core customer is. You kind of think back to the core customer today. Is that different than it was pre-pandemic?
Yeah, I'll take that one. I would say just generally speaking, our resident demographics are very relatively consistent with what it was pre-pandemic. The vast majority of our residents have jobs that are in what we refer to as more essential services or point-of-demand type services. Folks like blue-collar construction workers, plumbers, electricians, first responders, healthcare services, nurses, etc , as well as in the education or teaching fields. Our estimate, based on job descriptions and what we see in our resident base, 80%-85% of our residents are really kind of secure and not easily replaced by AI. The average age of our resident is 36, 37 years old. They make about $80,000-$85,000, and they have a rent-to-income ratio of in the 22%-23%.
We have been getting a lot of questions around recent college grads and difficulty of them finding jobs, therefore impacting overall occupancies or at least demand. We see that rough range of people that are less than 25 years old is still roughly the same percentage of our overall resident base. We don't necessarily see kind of issues in that regard. Yeah.
I think everyone has seen the sort of weaker housing numbers that have been out there, whether it's sort of existing home sales, stagnant sort of prices. Obviously, it depends quite a bit on which market you're talking about. I guess to what degree is sort of this weaker housing market helping you? Obviously, we've seen your retention increase, but at the same time, weaker housing market also typically means less job growth associated with that. How do you sort of weigh the balance between whether this sort of weaker housing market is helping you or hurting you?
Yeah, I think you're absolutely right. The old adage that we kind of tend to follow or tend to see is, in any given month, in any given year, a third of your residents are always leaving for life events. They're buying a home, they're renting a home, they need more space, they're getting relocated a job, et cetera. A third are going to stay no matter what, you're kind of always competing for that third. Certainly, the slowness in the housing market or the high house prices are keeping residents in our buildings a little bit longer. Our residents who are moving out to buy a home is certainly lower today than it was pre-pandemic. Pre-pandemic, we were kind of in the 16%-21% kind of in every month, every year. Right now, we're kind of right around 13%.
We're not so much worried about it kind of snapping back, that it's going to kind of impact retention significantly. We're doing a lot of data science and decision science around kind of what keeps residents in and really trying to pay attention to the resident experience. We certainly see, as Scott mentioned, we're expected to see in our markets just continued job growth to the tune of about 3 x the national average. Even if the housing market is a little bit slow, and we still see the jobs being there, that will kind of continue to absorb both, Class A, stuff that's already been delivered, as well as stuff that will be delivered in the future.
If there are any questions, obviously, just go up there. Oh, go ahead.
Really curious about your operating expense results, which have been great, and some of the tensions with things like interest, insurance costs, etc . How have you guys managed to do that?
Sure. We're very, to use a term of a Philadelphia Flyers, gritty, right? In Philadelphia. That's where we're from. We really try to use competitive results whenever we can. On the property insurance side, last year on May 15th, is when our property contract gets renewed. We were down 18%. In May of this year, we just renewed our property insurance again. We were down 24.5%. That's with better insurance and no change in our ultimate deductible, simply because we have a great consultant who helps us inject competition into a very uncompetitive field, which is the insurance brokerage network. We're also very gritty when it comes to real estate taxes. We work directly with a consultant to help us with tax assessors and when to push and when not to push, and how to negotiate and not negotiate.
We've had really great success on that over the years. Hopefully, that answers your question.
Nice. Maybe sticking with the expenses you brought up, AI before, can you just maybe talk through how are you using AI today, sort of some of the things that you're considering, and to the extent that you want to quantify it, but maybe just sort of what the opportunity might look like?
I think we're not ready to quantify it just yet, but I think we are using AI today when it comes to the resident or the prospect leasing funnel. Once obviously a resident shows up as a lead, the AI tool will work that resident. I would encourage all of you to go out and look at one of our communities on the website. Put yourself in as a lead, and you can see how the tool interacts with you. You can ask it questions like, "Why should I live here?" Get some really great responses. We also use it to serve our existing resident base. If residents have questions, they have work orders, they have an issue with paying a bill, or they have an issue with a charge, the AI tool can give them all of those responses and help them get the work order placed.
As well as follow up on satisfaction of that work order post that is complete. That has been running in our business since April of last year. We are using, as I mentioned, AI and various machine learning-type techniques around kind of data science and our retention, and we're really kind of looking at what keeps people with IRT, what causes people to leave.
We continue to obviously see things like resident service and the resident experience as being drivers outside of the typical life events, as being items that cause people to leave IRT, and we're really using that to help us with a series of agents, when those service issues pop up, we're getting notified then quickly, and we're able to get working with the residents to make sure their issues and/or concerns are alleviated or resolved very promptly because we now know how much that's going to impact us from a resident retention down the road. Lastly, we're certainly looking at ways in which we can continue to be efficient. As Scott had mentioned, from a G&A perspective, we're already at levels where our bigger, larger peers are, but we are not done, and we want to continue to get better at that.
We're looking at using agents in our finance team, in finance accounting functions and payables functions, to continue to create more work and more opportunity for the computers to do a lot of the mundane and routine tasks. It frees up our team to do more important tasks, like serving our residents or looking at amenities from revenues, et cetera. Hopefully that helps.
Maybe switching to capital allocation. You brought up one of the sources of alpha being your value-add program. It's different than a lot of what your peers are doing. Could you talk about that and how you look at the returns, what the runway is on it, and then how you like to fund it?
Sure. The value-add, I believe, is our best use of capital. Currently, we're able to fund that just from free cash flow after the dividend payment, which obviously is our cheapest form of capital. It's a very simple program. We're taking 10-year to 15-year-old communities that compete directly with newer construction in any of our markets. We're improving our communities to the point where they compete from a lifestyle, amenity point of view with that new construction, but at a significant discount to the rent being charged by the newer community. We're spending anywhere from $15,000-$20,000 a unit. That includes interior and also common area space. Generating, as I mentioned earlier, premiums that are, again, anywhere from 15%-20% returns on that invested dollar.
What that return doesn't include is the cost savings going forward because you have all new appliances, new air conditioners. You take out the carpeting, you have faux hardwood plank flooring. Each turn and ongoing repairs and maintenance in those communities tends to be much more cost-effective. We did run an IRR out on a number of our communities, and the IRRs are in the mid-30s when you include in the cost savings going forward. That is, by far, our best use of capital. Beyond that, it depends on where, frankly, our cost of capital is at any given time. Today, with where our share price is relative to NAV, a very good cost or use of our capital is buying back shares. We bought back 1.8 million shares already this year. We, again, use that from transaction capital or free cash flow.
We're not going to lever up in order to buy back shares. Whenever we're going through a recycling or we have other sort of a capital event, we will then do the quick math, and it doesn't take long. What is that best use? Is it to buy back our own stock, and/or is it to invest in a new community? Again, right now, the analysis is very simple. It would be to buy back shares.
I guess, remind me for the value-add program, I guess, what percentage of your portfolio have you already done? It sounds like you've calculated that the expenses are lower to the point where it actually lifts your IRR. What percentage have you done? What's left to do?
Did you want to answer that?
I do, yeah.
Good. We've done about 12,000 units kind of over our life cycle. We have about 10,000 that are still in the pipeline kind of left to go. I'm sorry, there's 7,000 in the pipeline today that are working and renovating, and there's another 3,000 or 4,000 behind that that'll be ready once, obviously, the current properties are done. As Scott has always said, as we complete what we have today, our nicer stuff will age, and then by the time we're done with our current stuff, those will be ready for and right for a value-add program.
You brought up that one of the better uses, or you might have said best, I don't want to misquote you, uses of capital today was buying your stock back. You said you don't want to increase leverage to do it. Maybe sort of tell us how you can continue to buy back your stock without increasing leverage and sort of where you want leverage to be one, two years from now?
We've worked very hard to bring our leverage down, so at least from my perspective, it's not something that we want to do that would increase our leverage. We've invested in a number of new development deals through what we refer to as our, it's a very unique title, our JV program, where during the development, there is capital that's tied up, plus there's also presumably some level of profit upon delivery of the community, and that capital is not generating any EBITDA along that process.
When that capital hits, we then have cash, frankly, that we can allocate, and because it has not been part of our EBITDA while outstanding. It's then a very good use of it is then to just buy back your shares because you're not giving up any EBITDA, which would, if you were giving up EBITDA, it would then just increase your leverage ratio. That's capital. We've done some of that last year. We have one JV community in Dallas that has been delivered and is going through the sale process today. That to me is capital that is perfect for, again, at the right price, buying back shares.
Beyond that, we do have two assets held for sale, and they will transact at some point this year, and we'll have to use some of the proceeds to pay down leverage in order to right size it, but then the excess proceeds would be available to be used to buy back shares, again, should the price warrant it.
Yeah. I guess maybe take us through sort of you have the two assets for sale. Are there others that you're not wed to? How do you think through each year? What's a sort of non-core part of your portfolio? What's better off to be sold versus held? Then obviously, you're doing the math on whether it makes sense to sell and then buy your stock as well.
Generally speaking, we like our footprint. We like our communities. We do go through a process every year where we review the performance, we review what we believe the future is for each community, and we determine if there's any that we feel that we should exit, and then redeploy that capital. As I sit here today, we only have the two that are announced and held for sale, but it's something that we're constantly looking at. Typically, because we like our, again, our geography, and markets, it comes down to an age, and whether or not a community is more expensive to run than an alternative would be, and how much rent growth, and is it available for value add.
There's certain things that you have to consider, such as any community that was built before 1990 has generally eight-foot ceilings, and that's not something you can change, and people would rather have nine-foot ceilings. When we're looking at whether a community is right for our value-add program, typically the ones with the eight-foot ceilings we don't consider. Those are the assets that, at the right time, we will be looking to exit and to redeploy that capital.
Got it. Any other questions from the audience? Okay. Oh, Joe.
Yeah. It seems like you guys are generally being thoughtful about capital in the current set of circumstances. I'm curious, and this is true for even a lot of your peers, as assuming another year or two years goes by and you continue to trade at a discount to NAV.
Don't say that.
Assume things don't change to the positive on that front. Does your calculus change after some period of time in terms of how you address that, or is it kind of you're comfortable existing and sort of doing what you do is the right thing in that context? It really sort of goes to the broader question of some of your peers, like Veris are just chosen to effectively negative some of them which wouldn't have. I'm curious how you think about just that dynamic for you guys. Is that because that's a fairly unique portfolio in the context of the broader sharehold community size?
Just restate the question so the webcast can hear.
Yeah.
Sure I'm gonna repeat the question so anyone who's listening in can hear it. It's how do we consider our share price versus our value, we've been trading below NAV for a little bit of time, if that doesn't change going forward, how are we going to look at it, and what do we want to do?
I will tell you that, again, our results, rent growth, NOI growth, core FFO growth, have been strong relative to our peers. That's what we can control. We do get questions, "Should you sell the company?" I would've rather sold the company when we were trading at $28 a share rather than $16. I don't think today is the time to just, when you have a well-performing, stable portfolio, to just throw up your hands and say, "We're done." We know that our returns are growing.
Our rent is increasing on a blended basis. Our expenses are under control. Our NOI is growing. Our EBITDA is growing. This market dislocation will end. There's always cycles, what I believe is we're coming to the end of what is this difficult cycle, and we're at the beginning of what should be a very good period. The results will be telling. If we get back to the standard 4%, 5%, 6% rent growth where we were before COVID, with good expense control, you'll see much higher NOI growth, in the high single digits to low double digits. At that point, the valuation should change. If they don't, it's something that we'll have to consider.
Thank you.