INDEPENDENCE REALTY TRUST, INC. Q4 FY2024 earnings call

• 2024 was a strong year with core FFO per share at the high end of guidance, driven by same-store NOI growth of 3.2%, same-store occupancy increase of 110 basis points to 95.2%, and average effective rental rate increase of 1.3%.
• The company completed 1,671 value-add renovations in 2024, achieving a 15% return on investment. In the fourth quarter, 395 units were renovated with a weighted average return on investment of 15.1%.
• In 2023-2024, the company executed portfolio optimization and deleveraging strategy, selling 10 properties to reduce presence in non-core markets, reducing net debt to adjusted EBITDA to 5.9 times, and achieving investment-grade ratings from S&P and Fitch.
• In 2025, the company plans to accelerate value-add renovation volumes, expecting lower new supply in markets and strong demand in Sunbelt and Midwest markets due to population growth and job growth.

The core FFO per share for the year 2024 was $1.16, which was at the high end of guidance, driven by a solid same-store NOI growth of 3.2%. In the fourth quarter of 2024, core FFO per share was $0.32, growing 6.7% over the prior year period. Same-store NOI in the fourth quarter increased 5.3%, with revenue growth of 2.3% and a 3% decrease in same-store operating expenses compared to the prior year quarter. For the full year 2024, same-store NOI grew 3.2%, average effective monthly rent increased 1.3%, and same-store occupancy rose 110 basis points to 95.2%. In 2024, the company completed 1,671 value-add renovations, driving a $239 average increase in monthly rent per unit on renovated comps, equating to a 15% return on investment. Additionally, in 2024, the company invested $240 million at a blended economic cap rate of 5.7% to acquire three properties with 908 units in high-growth markets and was under contract to close on a 280-unit community in Indianapolis for $59.5 million.

• 2025 core FFO guidance is $1.16 to $1.19 per share. The bridge from 2024's $1.16 core FFO includes $0.03 accretion from NOI growth, half a penny from acquisitions, offset by half a penny of increased overhead and $0.01 dilution.
• Same-store NOI guidance for 2025 assumes a 2.1% increase at midpoint, driven by 2.6% same-store revenue growth with components like 30 basis points from higher occupancy, 50 basis points from lower bad debt, etc.
• Blended rental rate growth for 2025 is expected to be 1.6%, with majority in the second half. Intends to renovate approximately 2,500 to 3,000 units in 2025. Net debt to EBITDA ratio expected to be in the mid-5s as NOI and EBITDA grow.

• Supply pressure in some markets like Denver and Charlotte, though expected to decline in 2025 and further in 2026.
• Bad debt timing issues in Q4 2024, but confident in hitting 1.4% of revenue for bad debt in 2025.
• Interest rate and market dynamics could impact cap rates and the ability to acquire properties accretively.

Q: Hey. Good morning, everybody. Jim, you flagged new lease rate growth remains negative early this year. I think you said it's gradually improving. Early 2025. What does guidance assume for new lease rate growth this year, and how does that sort of play out through the year? And then could you also share whether that includes the benefit as well from the value-add redevelopment that you provided?

A: Yeah. No. Great question, Austin. And good morning, everybody. So in guidance, we've assumed a blended lease rate growth of 1.6% for the year, that excludes any benefit from the value-add and, obviously, other income benefits. Of the 1.6%, that assumes a renewal growth of 3%, a 55% retention rate, and a 0% new lease growth over the year. Obviously, we're starting the year slightly negative, and it will continue to move north to zero by kind of early leasing season in April. This is new leases, obviously, in early April, and then obviously end of year positive.

Q: Hey. Thanks. Can you talk about why you're increasing the value-add spend in 2025? And I think your guidance is based around 30 bps of occupancy growth, if I got that right. So just how you're gonna achieve that even with the sort of increase in value-add spend that I think typically brings sort of a longer-term time more downtime. Because I think in the past, one of the things you've been hesitant about doing increasing the value-add spend is that sort of lower occupancy that you get with it. So just talk about how comfortable you are predicting sort of occupancy growth with the increase in the average spend.

A: Good morning, Eric. You know, in past years, we've always targeted the 2,500 to 3,000 units. In 2024, we ended up doing less than that just because of this pressure from new supply. And we didn't want to spend the capital to renovate a unit and have it be competing with all the new supply that was offering concessions. So we purposely dialed back the number of value-add units that we completed. But as we see supply pressure waning going into 2025 and now and clearly in 2026 and 2027, and rents going up, we intend on doing more value-adding and take advantage of those dynamics.

Q: Hey, Brad. I know you didn't want to talk about spreads, but I'm curious if you can just qualitatively talk about how the start of the year compares to last year and maybe a normal year in the Sunbelt trying to gauge how much the supply impact is fading.

A: Brad, sure. Great question. I would say that certainly the new lease spreads are certainly lower this year than they started last year at. But I would say, you know, the trends that we're seeing in the fourth quarter are certainly, you know, continuing into January, February, but as I mentioned in all the prepared remarks, you know, rents are rising into February here. So we're, you know, we're seeing that, you know, improvements in the negative new lease trade-out. On the renewal side, renewals are slightly lower, I'm sorry, slightly higher earlier this year as compared to last year simply because we've got concessions burning off and we're benefiting from that. But we're quite excited about, you know, kind of what we're seeing in the trajectory here, and we're looking forward to kind of delivering on our guidance.

Q: Good morning, guys. I just want to go back to the same-store build-up really quickly. I think you said a 55% retention assumption for the year, and obviously, that's, you know, down materially from where you ended 2024. And so is that, you know, related to the value-add displacement? Is that something else driving that specifically in particular?

A: Yeah. No. I think we always kind of target 55% in terms of retention each quarter. I would say that, you know, some quarters bounce around. I think the fourth quarter was 51%. The third quarter was 57%. I think largely for 2024, we are in that 55% zone.

Q: Hey. Good morning. Can you give us a rough sense of the NOI margin benefit to your existing properties in your subscale markets when you acquire an additional property and meaningfully expand that unit count in those markets on a percentage basis?

A: Yeah. I mean, I think, you know, obviously, from the standpoint of the acquisition, as we, you know, bring something in-house that was previously owned, maybe not managed well, you know, once we get on our platform and then kind of be able to benefit from the scale of, you know, better contracts, certainly it's improving. I don't have the exact NOI benefit in front of me, but we've been able to see our ability to either keep increases of expenses in the side either kind of muted throughout, you know, from year to year. When we start adding, you know, significant scale. Or even try to make them go down, but I can get back to you specifically with what we see as an NOI, you know, margin increase.

Q: Great, guys. Thanks for taking the call. On the acquisitions, just to kind of drill down a little more on that, on the distressed properties that you're seeing. Are cap rates rising? And if so, by about how much maybe versus, you know, six months ago that you might have seen?

A: Good morning. The cap rates we're seeing have been pretty stable in the, you know, the mid-5s. The property that we're buying in Indianapolis is about a 5.7 cap. The ones that we purchased in Charlotte and Orlando are similar. You know, obviously, the cap rates follow the ten-year up and down with a little bit of a lag. And, you know, while we might have seen cap rates drop at the end of last year and then increase this year with the ten-year, what we're seeing is just more properties and more opportunities come to market. But the cap rates are really pretty static in the mid-5s.

Q: Yeah. Thanks. Good morning, Scott. Maybe sticking with that question for a second there. When you think about the cap rates you're talking about on new investments, you talked about acquiring properties in lease-up. I just wanted to make sure I clarified. Is that a stabilized number, or is that a going-in number? And then how do you think about value-add potential in the future when you think about those investment yields on a going-in basis?

A: So when we typically buy in lease-up, we're really buying late in the lease-up process, so it's close to stabilization. But we do look to have some benefit as we take occupancy from 80 or 85 up to that 95% level. So, you know, the 5.5, 5.6, 5.7 is really going in, and then we're looking to get it a little higher than that once the property is stable. And as far as the value-add, you know, the value-add has always been our best use of capital, and we've been able to generate those high mid to high teens returns on ROI. That's what we're seeing continuing. That's, again, on an unleveraged basis. So we're excited about the supply pressure of 2024 and 2023 being largely behind us. But we really can ramp that value-add back. The value-add, the number of value-add renovations back to where we want it to be in that, you know, high 2,000 to 3,000 unit number.

Q: Yes. Hi. Could you remind us what bad debt was last year and how much it contributed to your same-store growth in 2024?

A: Bad debt last year was 1.9% of revenue. I'm going to have to double-check this, but I believe it was 2.2% in 2023. So it contributed roughly 30 basis points of growth in 2024.

Q: Hello? Can you hear me?

A: Yep. Hey, Tayo. Good morning.

Q: Oh, perfect. Good morning, everyone. How are you, Scott? How are you doing?

A: Doing well, thank you.

Q: So the same-store OpEx guidance for the year, again, it kind of seems like a normalization of same-store OpEx growth. You guys did a fantastic job last year of controlling the controllables. I'm curious what kind of initiatives are in place for 2025 to, quote, unquote, control the controllables and what are the factors that will determine whether you end up on the high end or low end of that same-store OpEx guidance?

A: Absolutely. So we had the fundamentals in place as we did in 2024 and 2025 to ensure that we are spending smartly and we are basing the dollars to really enhance the resident experience. And ensure that we can maintain that retention level at a high place. Dependent upon how that goes and if there are any inflationary costs that we have to come into play, we may or may not see that that comes in at a high level, but we anticipate it to come in in the middle based on our guidance. And we will march forward as we did in 2024 with a very controlled approach.

Q: Good morning. Jim, you mentioned on your guidance that you're expecting renewals at 3% and you signed 5.4% in the fourth quarter. Got over 4% for the year. So why are you expecting us to moderate so much? And maybe if you could tell us where you're sending out renewals today.

A: Yeah. We sent renewals out for the month of April in the kind of 3, 3.5% range. The first half of May has also gone out in that same range. And it's just, John, we're just kind of, you know, we just exited a period of time that was never really seen in history before. We're kind of entering into a period of time where we've never necessarily seen the low supply. We're just trying to be, you know, thoughtful in terms of our guidance so we deliver on the promise. To be successful, we can deliver above it, we will