Thank you for standing by. And welcome to the Independence Realty Trust Inc. Q4 Earnings Conference Call. My name is Sam, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call was an opportunity for questions-and-answers at the end. [Operator Instructions]. I'll now turn the call over to Lauren Torres. Lauren, please go ahead.

Thank you and good morning, everyone. Thank you for joining us to review Independence Realty Trust fourth quarter and full year 2022 financial results. On the call with me today, are Scott Schaeffer, Chief Executive Officer; Mike Daley, EVP of Operations and People; Farrell Ender, President of IRT and Jim Sebra, Chief Financial Officer. Today's call is being webcast on our website at irtliving.com. There will be a replay of the call available via webcast on our Investor Relations website, and telephonically beginning at approximately 12 pm Eastern Time today. Before I turn the call over to Scott, I'd like to remind everyone that there may be forward-looking statement made on this call. These forward-looking statement reflect IRT's current views with respect to future events, financial performance and the merger with Steadfast Apartment REIT, which will be referenced herein at 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 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-L available at IRT's website under Investor Relations. IRT other SEC filings are also available through this link. IRT does not undertake to update forward-looking statement 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.

Thank you, Lauren. And thank you all for joining us this morning. 2022 was a strong year for IRT, as we integrated the STAR portfolio and exceeded our initial synergies and full year operating guidance during a challenging macroeconomic environment. Our ability to deliver nearly 30% core FFO per share growth in 2022 was the result of the strategic positioning of our expanded portfolio concentrated in non-gateway markets within the Sunbelt region, where we continue to benefit from positive supply and demand dynamics. Our team delivered another year of robust performance, which was reflected in our fourth quarter and full year results. Specifically, our average rental rate increased 12% in 2022, supporting a double digit increase in revenue. Our same store NOI increased 13% in the fourth quarter and 13.7% for the full year compared to last year. And we continue to effectively reduce our leverage from 7.7 times EBITDA a year ago, to 6.9 times at year end 2022 ahead of our low-70s guided target. We also made meaningful progress on our value-added program, as we renovated 656 units in the fourth quarter and 1,451 units for the full year, while achieving an annual return on investment of more than 24%. This positions us well to deliver the 2,500 to 3,000 units that we've previously guided in and 2023. We remain confident about the potential of value-add program and continue to assess the economic landscape as we determine the pace and scope of renovations of properties in selected markets. While coming up a strong year, we recognize there is more work to be done to drive sustainable occupancy gains across the entire portfolio, and can assure you that this is a top priority for us in 2023. We are focused on working with our regional leaders and frontline leasing…

Thanks, Scott. I'm happy to join today's call for the first time and share in greater detail, why we are excited about our portfolio and its ability to provide stable growth through different economic cycles. Our strong fourth quarter and year end results were driven by double digit rent growth, with markets like Tampa, Myrtle Beach, Memphis, Atlanta, and Raleigh Durham, achieving mid to high-teens average rent increases for the full year. We continue to see strong migration trends into our southern markets. This was recently confirmed by the U.S. Census Bureau, which reported that Florida, Texas, North and South Carolina, Tennessee and Georgia were the states with highest net domestic migration gains in 2022. The six states represent over 60% of IRT's NOI and are not only well situated in the attractive Sunbelt region, but also have experienced a robust job market recovery after the pandemic averaging 5% job growth since March 2020. As Scott mentioned, we are laser focused on driving improved occupancy in the fourth quarter average occupancy at our total same store portfolio was 93.8%, down 40 basis points from Q3 2022, driven in part by seasonality. As we've previously indicated, the start of renovations in our value-add communities within our same store portfolio also impacts occupancy, as every unit comes offline for approximately 30 days. We started renovations on 10 communities during the second half of 2022 through today. We also recognize that the average occupancy of our theme store non-value-add communities during the fourth quarter was 94.6% below our previously stated target of 95%. Improving our leasing and sales process is a priority for the entire opportunity. And we are confident our occupancy will increase our targeted levels during leasing season. We are pleased to note that we are seeing positive momentum as we begin 2023. On a blended basis, we have achieved 4.8% lease-over-lease rental rent growth through February 13, with a 4.6% increase in new leases and a 4.9% increase in renewals for our combined same store portfolio. We have a 4.9% earn in that will contribute to 2023 revenue growth and our loss to lease across the portfolio is 6%. I'd now like to turn the call to Farrell, to provide you with an update on our investment opportunities.

Thanks, Mike. Starting with our value-add program. We completed renovations on 656 units in the fourth quarter, and as a result of the four properties from our ongoing renovation list to complete under the program. For the full year we completed renovations on 1,451 units, achieving a return on investment of 24.1%. This was done with an average cost per renovated unit of $13,659 and an average rent increase of $270 over unrenovated costs. As Scott mentioned, we expect to renovate between 2,500 to 3,000 units in 2023. Currently, we have 18 properties in 10 markets included in our ongoing value-add program. Over the course of 2023 we plan to add another nine properties comprising 2,654 units, and expect to achieve an average ROI on interior costs of 22% at these new projects. In connection with our ongoing capital recycling program, we sold two previously held-for-sale properties in the fourth quarter. Meadows Apartments in Louisville, Kentucky, and Sycamore Terrace in Terre Haute, Indiana. The aggregate sale price was $99 million and we recognize the $17 million net gain on sale from these two communities. The blended economic cap rate on these dispositions was 4.5%. We also moved one property to held-for-sale status, a 277 unit community in Indianapolis. The property was built in 1976 and requires a high level of annual CapEx spend relative to our other communities located in the same market. We expect the sale of this property to close at the end of this month with proceeds from a disposition to be used to reduce debt. Due diligence is complete, the buyers deposit is hard and they rate locked on the debt they're using to finance the purchase. The economic cap rate on this disposition is 4.8%. Regarding new supply, deliveries are expected to increase in 2023,…

Thanks, Farrell. Good morning, everyone. Beginning with our 2022 performance update, for the fourth quarter of 2022, net income available to common shareholders was $33.6 million, up from $28.6 million in the fourth quarter of 2021. For full year 2022, net income available to common shareholders was $117.2 million, up from $44.6 million in the full year 2021. During the fourth quarter core FFO more than doubled to $66.8 million from $31 million a year ago and core FFO per share grew 20.8% to $0.29 per share. For the full year, core FFO grew to $247.4 million from $92 million and core FFO per share grew 20.6% to $1.80 per share on a year-over-year basis. This growth reflects the earnings accretion associated with our merger with STAR as well as the sizable organic rent and NOI growth experienced throughout the combined portfolio during 2022. IRT same-store NOI growth in the fourth quarter was 13%, driven by a revenue growth of 9.8%. This growth was led by a 12.2% increase in our average rental rates. For the full year, IRT same store NOI growth increased 13.7% supported by revenue growth of 10.7%, with rental rates increasing by 12%. On the property operating expense side, IRT same-store operating expenses increased 4.6% in the fourth quarter, led by higher real estate taxes and utility expenses, while repairs and maintenance costs and advertising expenses declined compared to a year ago. For the full year, IRT same-store operating expenses grew 5.9%, mostly reflecting increases in property insurance, real estate taxes and contract services. While inflation continues to drive higher costs for products and services, we are continuing to roll out efficiencies using technology and procurement efforts to help reduce the inflation burden. Turning to our balance sheet. As of December 31, our liquidity position was…

Thank you, Jim. As we move ahead in 2023, we remain well positioned for continued growth as we execute our strategy and invest in our portfolio. Our confidence stems from IRT's ability to build a leading presence and attractive markets with solid renter demand fundamentals, which has been able to withstand the backdrop of macroeconomic uncertainty. We are fully committed to enhancing shareholder value and regularly returning capital to our shareholders. We look forward to another year achieving our targets and strengthening our presence in the multifamily sector. Thank you for joining us today and look forward to speaking with you again. Operator, you can now open a call for questions.

Absolutely, we will now begin the Q&A session. [Operator Instructions] Our first question today comes from the line of Austin Wurschmidt with KeyBanc. Austin, your line is now open.

Thanks and good morning, everybody. Scott and Mike, appreciate all your comments around the focus on ramping and stabilizing occupancy. But I'm curious, do you feel like you have the right personnel in place on the operations team? Have there been any other recent changes to the team that are worth highlighting? And do you feel that the team really has kind of a handle on quickly reacting to changing market conditions in order to keep occupancy within a tighter band moving forward particularly, within that non-value-add pool?

Thanks, Austin. Good, good question. This is Scott, as you know. I think the best way to answer your question is to start with a little bit of how we got to where we are. So, as I've said, in the past, I wasn't happy with our occupancy trends in the fourth quarter. We pushed rents a little too hard, which had a negative effect on our resident retention, and our ability to sign new leases. The market was changing, and frankly, we were -- our team was slow to adapt. On the good side of this is we had one of the highest increases in lease rates of all the multifamily REITs. But, I've always stressed the importance of balancing rent increases with occupancy, so that we can deliver the highest possible revenue. And frankly, we got away from that formula. And this happened at the same time that we were increasing the number of properties going through the value-add program, which we said in the in the call previously, has that adding properties to the value-add program has a significant negative impact on our occupancy. The 656 units that we completed in the fourth quarter reduced overall occupancy from 50 to 60 basis points. So it really does have an effect. So we decided to make some changes in our operations team in the fourth quarter, including adding additional senior leaders with approval with proven track records and multifamily operations. We just brought on Janice Richards, who heads our operating platform, 16 years of experience with Camden, and we really look forward to her being and having her voice in charge of operations. We made the changes, I wanted to make these changes during the slowest period and leasing, the fourth quarter leading into the first quarter of…

Yeah. No, I appreciate, you know, all the detail that you provided there, I guess, can you share how you were interacting or overriding sort of the revenue management system previously. And, how much I guess the impact of the frictional vacancy redevelopment you highlighted? But maybe how that's impacting in a pricing to some extent?

Well, I'm not sure the overriding was right, there is the right description. The pricing team, I believe was not getting real time market information. And the market changed dramatically last year. I mean, if you think about it, all of all of the REITs were getting 12-15 even up to 20% or more rent increases, and it changed in the third quarter going into the fourth quarter. And our team was a little bit slow to react. And we send out our review letters 90 days in advance to our tenants as leases are expiring. So that's slow to react, has a forward effect as well. Because here in January we're renewing leases or January expirations received letters back in October-November on lease renewals were -- we frankly were pricing above the market. So people left. And that had a negative impact on occupancy. We saw it. I made the changes. And going forward, we're in a much better position.

Just last one for me. I'm just curious if you alluded to getting back to that 95% plus percent level. Maybe Jim, can you provide a little bit of additional detail on your occupancy assumption and kind of the milestones or cadence through the year how we should expect that to ramp?

Yeah, the occupancy, the average occupancy assumption in guidance at the midpoint is 94.5%. That's expected to kind of ramp up similar to like some of the seasonal kind of gains that we saw last year through the summer months, and then kind of tail off in the back half of the year back to that seasonal kind of norm. Like we saw pre-COVID in October-November, November-December, but the average for the year is 94.5.

Okay, thanks, everybody.

Thank you. The next question comes from the line of Brad Heffern with RBC. Brad.

Yeah, thank you. So on the new 6% loss to lease quote, I think that's down a decent amount from the last quarter. Can you talk about what contributed to that change? And what gives you confidence in the new number against this backdrop of declining occupancy?

Yeah. Great question, Brad. This is Jim. Our loss to lease is based off of a comparison of our asking rents at our communities versus our average in place rents basically suggesting if we were to release based on our asking rents, how much rent would kind of grow by? There's a little bit of seasonality to rental rates in the fourth quarter that causes a slight decline. But at the same time, as Scott mentioned, we began to try to drive out occupancy in the fourth quarter and certainly early part of this year, such that the estimates came down a little bit to try to do so.

Okay, got it. And then on the revenue growth guide, is there an underlying assumption for market rent growth in that? I think the 3% blend just seems like it's half of the current loss to lease. I'm not sure if there's anything that's being added on top of that.

There is a little bit of assumption on market rent growth. We talked about market rent growth in that kind of the low-single digits, 1% to 3% in terms of the guide. So, our last at least typically, we've always said takes us to kind of 12-18 months to capture it. But there is a little bit of a market rent growth assumption. But again, we're being -- we're looking at 2023 ever with a relatively conservative eye.

Okay, thank you.

Thank you. The next question comes from the line of John Kim with BMO. John?

Hey, thank you. I just wanted to follow up on that question, I didn't really quite get that. So your blended lease growth assumption for the year is 3%. Your last lease is 6. You're expecting market rental growth this year, and on top of that your value-add programs stepping up. So I'm wondering how you get to that 3% lease growth rate assumption?

Yeah. I think the 3% these growth stage is just again, a conservative estimate around kind of what the leasing cadence will be to continue to drive that occupancy. The value add is certainly supporting. A lot of the value add picks up in the summer months when the lease expirations are the highest. But I think ultimately, it just comes down to a level of conservatism around what will happen in the middle mid-summer with respect to any kind of macroeconomic uncertainty.

Okay. The loss in occupancy you had this quarter suggests that your customers are maybe a little bit more price sensitive. But you are getting the 20% uplift plus on rents on the value add. And I'm just wondering with this occupancy loss and the uplift you're getting, how do we interpret this? Is it just that you're getting a different demographic on the value-dd customers? Or is it taking longer to complete the renovations? I'm just wondering how we marry these two characteristics of your company

It's a different demographic. Our value-add program improves our property so that we compete directly with newer Class A construction but at a price that's still below that Class A new rent. So you know the premiums that we're receiving is because we're basically changing the resident profile, and it's a resident who's willing to pay a higher rent for a better product. And they're choosing the value-add communities, our value-add community over a newer construction, because our rent even with these premiums and with these returns is $300 to $400 below what a comparable new properties rent would be. So that's what's driving that value-add premium.

Okay. I think you said last quarter that you were going to moderate the value-add this year, and it looks like you're doubling it. Just wanted to understand that.

No. The moderation is because we had originally targeted 4,000 units for 2023. And now we're we're targeting 2,500 to 3,000.

Okay, thank you.

Thank you.

The next question comes from the line of Nick Joseph with Citi. Nick?

Thanks, maybe just on that market rent growth. Understand the macroeconomic uncertainty, but how much of a range are variants is there between markets that are expected? And if you can talk, I know you touched on supply that kind of top and bottom performing expectations for markets?

Yeah, I mean, I think there's some markets that are expected to have good rent growth from a market standpoint. I think probably the top end of the range is 3%-4%. And the bottom end is 1%-ish. I mean, I think it's fairly tight when you look at some of the perspective that real page and others have put out in terms of some data sources.

Thanks. And which are those are 3 and 4 versus 1.

So I think the general view is, if you look at some of the markets like Tampa, we'll continue to see strong market rent growth. But again, I think there's a lot of the data sources suggest, so continue to kind of be relatively conservative when it comes to macroeconomic uncertainties.

Thanks. So then just start in the asset, where is it in the sales process? And then if you can talk about anything from a pricing or demand side, what you've experienced with that on the market.

So, property we have under contract will close in the next couple of weeks. Through contingency, they have a hard deposit and their financing lined up. So very confident that it will close. ' In regards to overall transaction volume is down considerably. I think there's still a significant disconnect between the bid ask. We are seeing some transactions occur for specific reasons, whether it be 1031s or debt maturities, their pricing, in the high-4s, low-5 cap range, but there's still a lot of people, including ourselves waiting to just see where the market settles in. A lot of this is due to treasuries and debt costs, and people don't know where they are. So we need some stability in interest rates before it becomes more transactions.

Thank you very much.

Next question is from Anthony Powell with Barclays. Anthony?

Hi, good morning. Just a question on I guess, occupancy and turnover move out. When people are moving out of your building due to high rent, where are they going to other fancy apartments Class A? How's the kind of the competitive landscape changing for you?

Well, obviously, this is this is Mike. We're dependent on the feedback from the exiting resident to tell us why they're leaving and where they're going. So, I think we are seeing people going to a different class of community, because of the just affordability of those relative to what they're currently paying. We have kind of a normal -- excuse me, a normal level of relocations. There's, there's some moderation and people buying a new house, which obviously is reflecting mortgage rates. But by and large, it is an affordability issue. We see some folks moving in with a roommate situation some folks our younger demographic moving back home. But really, it's a mix of reasons that people are leaving, but a common theme is affordability and looking for somebody with someplace to live with a lower total cost. We have about a 22% or so kind of rent to income ratio, which is affordable relative to most of the options that people have. But we do see that pressure. So, I think that that is probably not the only reason but definitely influences the reasons that people are leaving.

I would add however, though, that ratio has or those reasons have not changed dramatically from prior years. So moving out to buy a home is still the number one reason, moving towards the job relocation is still the number two reason. And the third reason is to move to a single-family rental. Pricing has always been an issue in Class B apartments and will always continue to be.

Okay. And then I guess on the other side, you talked a lot about kind of the class A the Class B kind of migration and kind of tougher economic times over the years. Is that something that we expect to start being a tailwind this year in a macroenvironment? Or are those Class A apartment starting to be more price accommodating so that may not be as big of a tailwind as it may have been in the past?

No, I think it is. It is going to be a tailwind. It is going to be a benefit for us. I think you will see that. If you look at the multifamily peers with a larger portfolio of Class A assets, you'll see that they're still continuing to increase the rents. So I don't think that the Class A assets are in a rent reduction mode. So we do expect to see further demand from people moving from Class A down specifically into our value-add communities, because they're getting a again, I believe they're getting a Class A product at a a B plus A minus rent.

Got it. Maybe quick on a guidance. I think he talked about a mild recession being kind of the base case. Is that for both the high and low end and guidance? And let's say we have a soft landing, what's the potential upside to rent and occupancy that you see?

Yeah, I would say it's a base case in both scenarios. I think if there is some type of soft landing, I think that the ultimate kind of question will be just how to kind of how much the market rents begin to re accelerate. And the effect that has I mean, I think that will also continue to drive occupancy up a little bit. I don't think a soft landing mystery drive changes the expenses to too much unless maybe like insurance expenses come down a little bit. But that's more non-macroeconomic type drivers in the insurance category.

Right, thank you.

Thank you. Next question is from [Indiscernible] with Baird. Mason?

Hey, good morning, everyone. Thanks for taking my question. Just one for me. We noticed that the fourth quarter dispositions came in at $99 million. But you mentioned expecting $103 million for these dispositions after the third quarter. Just wondering if this 99 was the net number or if the buyer retreated at a lower price for these assets.

Yeah, the market changed interest rates went up and they came back at a price reduction. We actually went through a couple iterations with different buyers and we determined that it was still a good time to sell the asset.

That was the sycamore terrace asset in Terre Haute. And we made the decision since it was a one off asset for us in a market where we had no interest in growing that we would continue and dispose of the asset even though we did get retreated. I will tell you I don't like being retreated. But I didn't like this asset either. So it was a decision to move forward and just be done with it.

Thanks for that. That's all for me.

Thank you.

Thank you. Our next question is from the line of Linda Tsai with Jefferies. Linda? Linda, please ensure you're not on mute.

Sorry about that. Thanks for taking my question. Just one quick one for me. What would your expectation be for retention ratio by year-end?

I mean, we've always targeted our retention ratio to be in that 50 to -- 50% to 55% range. So I think a target of call it 53-ish would be kind of our expectation for the year solely based on the guidance.

Got it. Thank you.

Thank you. We have no further questions waiting at this time. [Operator Instructions] Seeing none, I'd like to hand the call back over to the management team for any closing remarks.

Thanks everyone, and we look forward to speaking with you again next year.

That concludes the Independence Realty Trust Inc. Q4 earnings conference call. Thank you all for your participation. You may now disconnect your lines.