Thank you for standing by. My name is Briana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Independence Realty Trust Second Quarter 2023 Conference Call. [Operator Instructions]. I will now turn the call over to Lauren Torres. You may begin your conference.

Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust's Second Quarter 2023 financial results. On the call with me today are Scott Schaeffer, Chief Executive Officer; Mike Daley, EVP of Operations and People; Jim Sebra, Chief Financial Officer; and Janice Richards, SVP of Operations. 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 12:00 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 and financial performance. 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 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. It's now been 2 years since we announced our merger with Steadfast Apartment REIT and 18 months since the merger transaction closed. After a number of changes during the integration process, we are confident that we have the right team in place to lead IRT into the future. Before getting into second quarter operating results, I want to share that IRT has delivered the best FFO per share growth across the large public apartment peer group with a 106% cumulative growth over the last 5 years. This growth and improvement in our business can also be seen in various other metrics that we will cover throughout this call. We are proud of the business that we've built and the shareholder returns we've delivered, but we're not done, and we continue to execute on our business plan in a disciplined manner. Now on to the quarterly results. In the second quarter, we delivered a 6.3% same-store portfolio NOI growth and 8.7% core FFO growth on a year-over-year basis, reflecting the strength and resiliency of our portfolio across key Sunbelt and Midwest markets. We delivered operational improvements that drove increased same-store occupancy of 94.2% in the second quarter, reflecting a sequential 110 basis point improvement compared to last quarter. As of July 24, our same-store occupancy reached 94.8% with our same-store non-value-add portfolio at 95.3%. We expect continued occupancy growth in the second half of this year. Lead volume and conversion to leases remain strong, and the sustainable occupancy enables us to drive rental rate increases in many of our submarkets. Our key performance metrics in the second quarter include: average rental rate increased 8% year-over-year, supporting a 6.2% increase in revenue. NOI margin improved to 62.1% year-over-year, up from…

Thanks, Scott. As Scott mentioned, we've made significant improvements in our operations over the past 7 months, which have led to increased overall performance as well as sustainable occupancy gains. These improvements have included completing the implementation of a 24/7 call center to capture close to 100% of leads, expanding and enhancing our sales training program and improving the communication and information exchange between our on-site teams and our revenue management group. As of July 24, performance improvements have led to a same-store nonvalue-add occupancy rate of 95.3%, which is a 60 basis point increase compared to the second quarter average and in line with our targeted goal. Looking ahead, our focus remains on driving occupancy across the portfolio with Q2 and Q3 today's results validating the success of these efforts. Through today, our lead-to-lease conversion has improved 110 basis points from 7.9% last year to 9% year-to-date in 2023. For all of these new leases signed, the average rent-to-income ratio was 22% and lease-over-lease effective rent growth was 2.8% in Q2. From a resident retention standpoint, our retention rate was 54.2% in Q2 and has increased to 54.4% for Q3 to date. This strong performance is attributable to enhancements made to our renewal process as part of our comprehensive sales and leasing improvements. Sales excellence has been and will continue to be a critical driver of robust and sustainable occupancy at IRT. Lease-over-lease rent growth for renewals in Q2 2023 was 2.3% as we prioritize driving occupancy. Based on that foundation, our renewal rent growth increased in Q3 2023 to date to 4.5%, reflecting increased pricing power. We are optimistic about our operational performance for the remainder of 2023 and expect to continue to benefit from overall high demand for our middle market communities. We are confident in our ability to deliver sustainable operating performance and create long-term value. With that, I will now turn the call over to Jim.

Thanks, Mike, and good morning, everyone. Beginning with our second quarter 2023 performance update, net income available to common shareholders was $10.7 million compared to a loss of $7.2 million in the second quarter of 2022, the latter of which was reflective of higher depreciation and amortization expense related to YieldStar merger. During the second quarter, core FFO increased 8.7% to $63.7 million, and core flow per share grew 7.7% to $0.28 per share from a year ago. This growth reflects the organic rent and NOI growth that we experienced in the quarter on a year-over-year basis. IRT same-store NOI growth in the second quarter was 6.3%, driven by revenue growth of 6.2%. This growth was led by an 8% increase in average monthly rental rates to $1,531 per month. On the operating expense side, IRT same-store operating expenses increased 5.9% during the second quarter, led by higher property insurance and contract services as well as advertising expenses. Inflationary pressures continue to have an impact on operating costs, causing higher-than-normal increases. We continue to use our procurement teams to read the contracts and technology solutions to help reduce costs wherever possible. In particular, over the past year, we generated approximately $2.5 million in annual savings associated with the centralization of resident services and sales performance management teams. This effort has reduced complexity, consolidated support responsibilities, empowered our community teams and improved our response times to better service existing and new residents. On the technology front, we continue to invest in an advance our initiatives across the business, helping us improve operational effectiveness and resident services. This has included implementing a value-add ERP platform, mobile apps for our maintenance teams and an improved procurement and vendor portal. Going forward, we are actively evaluating new technology to help drive better bottom line…

Thanks, Jim. As we look ahead to the second half of 2023 and beyond, we're excited for the opportunities that lie ahead for IRT. We will remain patient and disciplined in our capital allocation efforts, which will be focused on continued debt reduction and investments in our value-add program. We are also committed to driving shareholder value and returning capital to our shareholders while delivering outsized growth rates as real estate fundamentals remain strong in our well-positioned markets. We thank you for joining us today and look forward to speaking with you again. Operator, we can now open the call to questions.

[Operator Instructions]. Your first question comes from Eric Wolfe with Citi.

You mentioned in your remarks that you're expecting blended growth to accelerate to 4.2% in the back half of the year. Based on your recent trends, I would assume that the spreads probably would stay consistent to the fourth quarter, even though you would kind of normally see a seasonal decline there. So what gives you the confidence, I guess, this year that you're not going to see that decline and spreads can actually accelerate in the back half.

Yes. Eric, thanks for the question. I appreciate it. Our guidance does include an average net effective rent growth of 4.2% in the second half of this year. That effective rent growth kind of has a base case blended, so just base rental rate growth of roughly 3.5% plus an additional kind of 75 basis points coming from the impact of the additional roughly 1,300 value-add units that will deliver in the second half of 2023. I'll remind everyone that our current loss to lease is 5%, and we think that loss to lease will help support that base 3.5% on the rent growth. And then also to date for Q3, the lease-over-lease growth is 3.9%, and we're sending renewals out for October in the 4% to 5% range. So we definitely see progress as we -- as well as just strength now that occupancies return to that normal level. So we'll be able to kind of match us grow rents a little bit, but also maintain them through the back part of this year.

That's helpful. And then I guess just based on what you said, it also sounds like you're expecting around sort of mid-3s, call it, 3.6%, 3.7% blended growth for the full year, that's just sort of averaging out the year. Given that, I mean, should you be entering 2024 with like the earn-in of around 1.7%. I'm basically just taking 45% of your blend for the year. Just curious [indiscernible] thoughts on 2024.

Yes. I mean it's a little bit early for us to put out an earnings number for next year. But certainly, it's just maths at this point and you can certainly do it, but that would be a rough kind of approximation of it.

Okay. So the 1.7 would be like a rough approximation around there.

Rough.

Your next question comes from Brad Heffern with RBC Capital Markets.

You're back above the 95% occupancy level in the nonvalue-add bucket, I think that's historically been the target. But I know in the prepared comments, you also said occupancy should continue to rise. So I'm curious, is there a new sort of occupancy level that you're targeting? And at what point will you be satisfied with keeping it flat and maybe pushing more on the rent side?

Thanks for the question, Brad. It's -- this is Scott, as you know. It's always been a balance for us to generate the highest total revenue between occupancy and rent growth. You've heard me say over the years that for me, full occupancy is 95%. The value add does put a little bit of pressure on that full occupancy, but we're confident with the lead volume that we're seeing and the conversion rate of leads to leases that the nonvalue-add occupancy will continue to grow through the third quarter, which will allow the whole occupancy for the combined portfolio to be in that 95% range.

Okay. Got it. And then, Jim, you mentioned in your prepared comments the mid-5s line of sight on leverage by year-end '25. I think that's new. But should we take that as a goal? And ultimately, is the point there getting the leverage profile more in line with the larger public peers? Or are you also choosing that figure in order to maybe go down the investment-grade path at some point?

Yes. The mid-5s, it's a number that we've kind of talked about in the past a little bit with the individual meetings. I think we even talked about it in AREIT meetings. It is something that is on our kind of target as we go down this path of investment grade. And while certainly, we kind of always comp ourselves against our larger public peers, it is certainly something that's kind of right now more driven by just the goal of becoming investment grade. And we think we have the trajectory to do so.

Your next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

I was hoping you could provide some additional detail around how new lease rate growth trended in 2Q and into July, specifically across the nonvalue-add pool of assets just to remove some of that volatility caused by value-add renovations. And then should we think about the 4% to 5% asking rate on renewals kind of through the balance of the back half of the year to back into, I guess, what new lease rate growth assumption is from that 4.2% back half blended lease rate growth.

Yes, it's a good question. For July, we continue to focus on driving occupancy. The July data that we presented on new leases in early June, as you know, or as you kind of highlighted, it was definitely a small sample size as it was kind of still early in July -- still early for July to have new leases and it had a higher weighting of the value-add units. These generally value-add units are previous generally 4 to 6 weeks before occupancy. The July -- the new leases are continuing to kind of trend up in the back half of July for the non-value add portfolio. And as you kind of think about that 4.2% blended lease growth, the new lease -- I'm sorry, the 4 to 5 -- 4.2% of blended lease growth, the new lease component of that is in that kind of upper 3s percent range, given the October renewals going out of 4% to 5%.

Okay. Got it. No, that's helpful detail. And then I wasn't sure if you highlighted what's driving sort of the small downtick in the value-add renovations you expect to complete this year? And then how are you thinking about the size of renovations in 2024 at this time?

Yes. Good question. For the renovation properties, we've just seen higher retention of tenants. Therefore, as you know, we only do the renovations on turn and if folks decide to stay through the renewals, and there's obviously less units we can value add. We'll still value add the units. It will just be kind of next year. And right now, our expectation for next year is still roughly that 2,500 to 3,000 units continue volume for 2024.

And just a follow-up on that piece. I guess, with occupancy reramping now broadly for value-add and non-value-add. I mean, should we expect some of the returns in that segment to improve? Or has the slowdown in returns? Has that been just a function of what's happening in your markets today?

No, we definitely expect the returns and the rent premiums to improve as occupancies now stabilize or stabilizing, yes.

Your next question comes from John Kim with BMO Capital Markets.

Scott, you mentioned the strong net migration trends that are continuing in your markets. I was wondering how you plan on addressing new supply as far as being more aggressive with concessions potentially or offering longer-term leases or any other practices that you may use.

Thanks, John. We've used some targeted concessions where we feel that we need a little bit more of an occupancy push. But it's been relatively rare. As I've said in the past, the new supply really doesn't affect us and not nearly to the level that you might think it would. And as you read about, our units, generally speaking, are B-class we're at a much different price point on rent. And since we're on average 12 to 15 years old in our communities, we're in a better and more infill location that a lot of the new construction that everyone is focused on. So in a limited range, again, we've used targeted concessions. But generally speaking, the new supply has not really affected us. Even in the renovated units, our renovated units with the premium that we're receiving, we're still a good $300, maybe even $400 below the new Class A rents that are being delivered. So we have just a benefit from the pricing point.

Okay. And this market -- sorry, this period you exited Chicago. When can we expect IRT to sell other markets out of other markets where you only own one asset? And conversely, where do you see redeploying capital?

We're constantly looking at the portfolio and determining when it is appropriate to dispose off assets. There are some limitations. For example, in the Star portfolio was financed with fixed rate loans, first mortgages, and they have prepayment penalties. So we have to throw that into the equation as to when it's appropriate to sell a property. We don't want to just give away some of our value through large prepayments. But we're constantly looking at the portfolio. We do recognize that it should be more concentrated than it is, and we have some single markets that we're going to want to exit. But at this point, I don't have an answer that I can give you on a specific time frame. And when we do as far as use of proceeds, it will be determined again at that time. Is it better to just continue to delever? Or would it be more accretive and better in the long term to redeploy, again, depending on where cap rates are at the time.

Your next question comes from Anthony Powell with Barclays.

I guess a question on the lease spreads going up to 4% to 5% in October. What gives you the confidence that you'll be able to achieve those higher newly spreads, if later in the year, less foot traffic, economic uncertainty, I guess what are you looking at that gives you that confidence to go after that pricing?

Yes. So good question. The 4% to 5% in October is what we're sending renewals out for currently. Yes. The blended rent growth, as I kind of went through in one of my earlier questions, the base blended rent growth that we've assumed for the entire second half of the year is at 3.5%, plus an additional 75 basis points coming from that incremental value-add units that we'll deliver, 1,300 value add units that we'll deliver. And our loss to lease today is 5%. So when you really kind of think about, okay, you're achieving this 4% to 5% renewals, we've got baked in 4.2. So you really only need to kind of achieve that 3.5%, if not a little upper 3s on our loss to lease supports that. We feel quite confident given the occupancy push we've done year-to-date and kind of having that strength heading into the back part of the year or the season -- post leasing season.

And maybe one more on just transaction activity. You're selling asset in Chicago. Some of your peers are doing some acquisitions. What are you seeing out there in terms of assets out for sale? What are sellers being motivated by at this point? How cap rates going to trend in the past few months?

So it appears to us that there still is a gap between the bid and the ask on transactions. When -- for our Chicago transaction or the Chicago property, we had a number of bids. They were from, generally speaking, more local, smaller type investors, not the public REITs. We are seeing more transactions come to market. I'm not confident yet that those additional transactions will actually make it full circle and close because of that bid-ask spread and still the volatility in interest rates. Cap rates, we seem to have stabilized a little bit for the moment. And I would tell you, in the 5.25% to 5.5% range, generally speaking. We were very, very happy with our Chicago transaction.

There are no further questions at this time. I will now turn the call back to Scott Schaeffer for closing remarks.

Thank you all for joining us this morning, and we look forward to speaking with you again next quarter.

This concludes today's conference call. You may now disconnect.