Independence Realty Trust Inc. 2026 Q2 Earnings Call

Thank you. Good morning and welcome to Independence Realty Trust conference call to discuss second quarter 2026 results. On the call with me today are Scott Schaeffer, Chairman and Chief Executive Officer, Jim Sebra, President and Chief Financial Officer, Janice Richards, Executive Vice President of Revenue Strategy, and Jason Lynch, Senior Vice President of Investments. Before we begin, please note that any forward-looking statements made during this call are based on our current expectations and beliefs as to future events and financial performance. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially. Such statements are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and IRT does not undertake to update them except as may be required by law.

Please refer to IRT's press release, supplemental information, and filings with the SEC for further information about these risks. A copy of IRT's earnings press release and supplemental information is attached to IRT's current report on the Form 8-K that is available in the Investors section of our website. They contain reconciliations of non-GAAP financial measures referenced on this call to the most direct comparable GAAP financial measure. With that, it's my pleasure to turn the call over to Scott Schaeffer.

Thanks, Stephanie, and thank you all for joining us this morning. I am pleased to report that operating momentum is building across our portfolio as market conditions continue to improve. As our results demonstrate, rental rate growth has improved throughout the year, driving a 120 basis point sequential improvement in new lease rates during the second quarter, with further improvement in July. Additionally, as of today, with 65% of new lease activity completed for the month of August, new lease spreads for like-kind leases are slightly positive. The consistent upward trajectory in leasing spreads is a clear signal that our markets are in recovery, which when combined with the new Wi-Fi revenue stream that we've established, supports our confidence in our guidance for same-store revenue growth. As expected, the volume of new deliveries has declined in our markets, and macroeconomic drivers of demand continue to outpace national averages.

Recent employment data continues to highlight healthcare as the primary driver of national job gains over the past year. This is visible across our footprint. Education and healthcare employment grew faster than total employment in every one of our 10 largest markets over the trailing year, aligning with our residents' income profile. People continue to relocate to the Sun Belt and Midwest markets for employment opportunities and quality of life. The high cost of homeownership continues to support rental demand and IRT's value proposition, namely larger apartment units, good school districts, proximity to essential retail and employment centers with monthly rents that are meaningfully less than new construction continues to attract and retain residents. Bearing this point, the steady improvement in market conditions has resulted in greater lead generation volumes over last year and a decrease in concession use.

Importantly, overall market occupancies across our portfolio have generally reached levels that support market-wide rent growth. The combination of durable demand, rising market rents, and normalizing concessions has driven sequential improvement in rental rates that I mentioned earlier. New lease trade-outs for like-term leases at our Midwest communities were positive 2.3% in the second quarter and a positive 2.1% in July. New lease spreads at our Sun Belt communities were a -3.8% in the second quarter and improved 180 basis points in July. In the West, new lease trade-outs were a -3.2% in the second quarter and improved 340 basis points to a positive 20 basis points in July. Taken together, net effect of rental rate growth in our markets is gaining steam. With the recovery that is upon us, rent premiums from our value add activity will also increase.

Because we perform a full repositioning of the apartment community, our renovated properties successfully compete with newer Class A properties by offering modern interiors and attractive on-site amenities at a lower price point than new construction while delivering a mid-to-upper teens return on investment. Our approach to value add renovations enables us to capture an immediate rent premium and benefit longer term from lower repairs and maintenance and turn costs. The higher rents and lower operating costs realized on renovated units has expanded our NOI margins and boosted same-store NOI by more than 20% annually. Additionally, over the past two years, we have significantly decreased the time it takes to renovate units such that moving forward, we can increase the volume of value add renovations without impacting occupancy, further benefiting future NOI growth.

Lastly, as I referenced at the beginning of my remarks, during the quarter, we successfully completed the initial phase of our community Wi-Fi initiative ahead of schedule. This new revenue stream not only supports our outlook for same-store revenue growth this year, but will also contribute at least $0.01 of core FFO per share to next year's results. In short, our markets are in recovery. We are on track to achieve our 2026 guidance, and we are excited about the earnings momentum building towards 2027. With that, I'll turn the call over to Jim.

Thank you, Scott, good morning, everyone. Core FFO per share for the second quarter of $0.28 was ahead of our internal expectations, driven by stronger than expected same-store NOI growth of 1.2% that outpaced the 80-basis point midpoint of our original guidance range for this year. The outperformance was driven by stronger revenue growth and lower expense growth. Same-store revenue growth of 90 basis points in the quarter was led by a 7.3% increase in other property revenue Along with continued improvement in bad debt, which declined to 1.1% of total revenue from 1.3% in the prior year period.

Average occupancy of 95% was down 20 basis points sequentially and reflected our deliberate strategy of capturing rental rates over occupancy to maximize revenue. Looking ahead, revenues from our community Wi-Fi program will contribute significantly to other property revenue and same-store revenue growth during the second half of 2026. More on this in a moment. Rental rate growth in the quarter was fueled by a combination of stable asking rents and declining concession use. Asking rents across our markets increased by 3% from January through May, have held steady since. As demand strengthened during the year, we were able to reduce concession use from 54% of new leases in April to approximately 28% in July.

As a result, like-term new lease trade-outs have improved throughout the year from -3.9% in the first quarter to -2.7% in the second quarter and -1.1% in July. Finally, as Scott mentioned, with over 65% of our expected new leases signed for the month of August, new lease trade-outs for like-term leases are slightly positive. While this is early, we are excited to see the continued improvement of market fundamentals translate into better pricing power. We provided July and August data in today's prepared remarks. Investors should not expect monthly data to continue to be presented on future calls. We are only providing this detail since one, new lease trade-outs are in focus right now, and two, this activity helps investors understand the momentum that is building and our confidence in achieving our guidance, which we will discuss momentarily.

Regarding individual markets and new lease growth, seven markets had positive new lease trade-outs during the second quarter, 11 were positive in July, so far in August, 13 markets are seeing positive new lease spreads. Markets with the highest new lease trade-outs in the second quarter were Lexington at a positive 9.6%, Cincinnati with 4.6%, Charleston with 1.8%, Columbus and Oklahoma City both with positive 1.1%, San Antonio with 1%, and Louisville with 30 basis points of positive spreads. Looking at our largest market, Atlanta's new lease trade-outs were -3.4% during the second quarter, they accelerated to a positive 2% in July. For renewal leases, our data science efforts are supporting lower renewal concession use and higher effective renewal rates without significantly impacting resident retention, which was 58% in the quarter.

To date, renewal spreads on like-term leases are ahead of expectations, increasing from 3.2% in the first quarter to 4.1% in the second quarter and further accelerating by 50 basis points in July to 4.6%. August renewals, which are 95% complete today, are a positive 4.5%. All in all, our blended rent growth across like-term leases improved from 70 basis points in the first quarter to 1.3% in the second quarter, resulting in blends for the first half of the year of 1.1%. In July, blended rents on like-term leases were positive 2.5%. On the expense side, same-store operating expenses increased 50 basis points in the quarter, reflecting higher payroll and contract services, partially offset by decreases in property taxes and insurance.

On our property Wi-Fi initiative, I'm pleased to report the program is running slightly ahead of plan due to earlier implementation at 19 communities that went live in May and June. Wi-Fi contributed roughly $400,000 of incremental revenue in the second quarter, which was ahead of guidance and is ramping quickly to achieve our original second half guidance of $5.5 million in revenues and $3 million of NOI. Turning to capital allocation, our value-add renovation program remains our most attractive investment opportunity. Through the first half of the year, we have completed 1,026 units, putting us on track to meet our original guidance of 2,000 to 2,500 units. We achieved 16% ROIs on renovations in the first half of the year and, as Scott highlighted, expect to capture higher rent premiums going forward as market rents continue to recover.