Independence Realty’s 2026 Q2 Call: Lease Spread Outlook vs. Breakeven Hopes, Mustang Sale Delays Clash

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Date of Call: Aug 4, 2026

Guidance:

• Same-store NOI growth guidance increased to 1.5% (from 0.8%), representing an additional $2.5M NOI.
• Same-store revenue growth expected to be 1.7% for the full year.
• Non-same store NOI forecast decreased by $2M primarily due to slower lease-up at a development asset.
• Interest expense guidance increased by $2M.
• Core FFO per share guidance maintained at $1.14, with lower weighted average share count from Q1 buybacks.
• Wi-Fi program expected to contribute $5.5M in revenue and $3M in NOI in 2026.

Business Commentary:

Operating Momentum and Market Recovery:

• Independence Realty reported that operating momentum is building across their portfolio, with rental rate growth improving and a 120 basis points of liquidity completed in August. New lease spreads for like-kind leases are positive, with 65% of new lease actives slightly positive.
• The recovery is attributed to improving market conditions, a decline in new deliveries, and macroeconomic drivers of demand outpacing national averages, particularly in healthcare and education sectors.

Increased Core FFO and Same-Store Revenue Growth:

• The company's core FFO per share for the second quarter was $0.28, driven by stronger-than-expected same-store revenue growth of 1.2%, exceeding the 80 basis point midpoint of their original guidance.
• This outperformance was due to stronger revenue growth and lower expense growth, supported by a 7.3% increase in other property revenue and a decline in bad debt.

Value-Add Renovation Program Success:

• Independence Realty completed 1,026 units in the first half of the year, achieving a 16% ROI, and is on track to meet their guidance of 2,500 units for the year.
• The success is due to a shortened renovation timeline, enabling increased volume without impacting occupancy, and competition with newer Class A properties by offering modern interiors at a lower price point.

Wi-Fi Initiative and Revenue Diversification:

• The initial phase of the community Wi-Fi initiative was completed ahead of schedule, contributing approximately $400,000 in incremental revenue in the second half of 2026.
• This new revenue stream supports the company's outlook for same-store revenue growth and is expected to contribute at least one incremental penny of core FFO per share to next year's results.

Guidance Revision and Expense Management:

• The company increased the midpoint of their same-store NOI guidance by 70 basis points, now expecting 2.1% growth in the second half.
• This revision is based on expectations for lower operating expenses during the second half of the year, particularly due to decreases in property taxes and insurance.

Sentiment Analysis:

Overall Tone: Positive

• Management reported operating momentum building with market recovery, stronger-than-expected same-store LI growth, and confidence in achieving 2026 guidance. Quotes: 'operating momentum is building across our portfolio as market conditions continue to improve' and 'we are on track to achieve our 2026 guidance, and we are excited about the earnings momentum building towards 2027.'

Q&A:

• Question from Eric Wolf (Citibank): Quantify the year-over-year change in lead volume and concession usage across your markets.
  Response: Lead volume is up about 5% YOY. Concession usage for new leases in July was 23%, down significantly from 52% in April and 54% YOY, with average concessions around $1,500.

• Question from Eric Wolf (Citibank): Where is occupancy today and is it expected to stay stable?
  Response: Occupancy is 95% and is expected to increase slightly by year-end.

• Question from Austin Werschmidt (KeyBank Capital Markets): Which markets are still driving down concession usage?
  Response: Atlanta saw the biggest positive move, with concession usage down to ~23% in July from ~50-55% earlier. Dallas remains relatively high at ~40-45%.

• Question from Austin Werschmidt (KeyBank Capital Markets): What is the expectation for further improvement in bad debt in the back half of 2026?
  Response: Guidance implies ~95 basis points of bad debt in the back half, with expectations for continued progress in 2027, though reaching pre-COVID levels will take more time and technology.

• Question from Connor (Wells Fargo): Are you seeing any meaningful divergence between Class B and Class A products in terms of retention, move-outs, or pricing power?
  Response: No significant change is seen today between Class B and Class A properties in core operating fundamentals.

• Question from Connor (Wells Fargo): Is the Wi-Fi initiative largely ramped or is there additional upside?
  Response: The program is ramping, with $3M in revenue expected for H2 2026 and ~70% penetration in July. Penetration expected to reach 80-85% by year-end, with additional properties being evaluated for 2027.

• Question from Brad Heffin (RBC Capital Markets): What is expected for new lease trade-outs in Q3?
  Response: Guidance assumes new lease trade-outs to remain roughly -50 basis points quarter-over-quarter, with July at -1.1% and easier comps expected for Q3/Q4.

• Question from Brad Heffin (RBC Capital Markets): Is the full-year new lease improvement driven by rate growth or concessions?
  Response: Year-over-year improvement in July is driven by rate growth; the improvement from earlier in the year is driven by reduced concession use.

• Question from John Kim (BMO Capital Markets): Could new lease trade-outs improve to within typical ranges for Q3/Q4?
  Response: Yes, Q3/Q4 should be better than the -2.7% seen in Q2, though specific ranges were not provided.

• Question from UBC Analyst: Is the extended leasing season due to stronger demand or easier comparisons?
  Response: Strong absorption rates and easier comps are supporting the recovery, though seasonal patterns are expected to kick in.

• Question from UBC Analyst: What is the new normal level of bad debt and could there be tailwinds in 2027?
  Response: A new normal level post-COVID exists, with fraud still a factor. Progress is expected in 2027, but reaching pre-COVID levels will require more technology.

• Question from UBC Analyst: What is the conversion rate from leads to leases?
  Response: Conversion focus is on the entire process, not just a single metric, and has largely improved.

• Question from John Pawlowski (Greens): Were the lead increases in July due to organic demand or other factors?
  Response: The increase is due to organic demand from better search engine optimization, not additional marketing spend.

• Question from John Pawlowski (Greens): Should we expect outsized repair and maintenance cost increases in the coming years?
  Response: No, teams are focused on cost control, using vendors and on-site labor efficiently, with no expectation of outsized RM cost increases.

• Question from Peter Abramovic (Deutsche Bank): Provide an update on the potential sale of the Mustang asset.
  Response: No decision has been made; the asset is stabilized at ~93% occupancy. The company is analyzing the best approach, keeping or selling.

• Question from Peter Abramovic (Deutsche Bank): Why was the Q2 share buyback paused given the stock was below NAV?
  Response: The decision to pause buybacks was based on available capital and priorities; the primary use of capital is the renovation program, followed by buybacks. Excess capital from September's dividend will be considered for buybacks.

• Question from Jason Wayne (Barclays): Where were real estate tax savings captured this year?
  Response: The biggest savings were in Texas markets due to the annual appeal process, leading to lower-than-expected tax expense.

• Question from Jason Wayne (Barclays): Are you looking to grow the value-add program given the path to higher rent premiums?
  Response: Yes, the value-add program will continue to be a focus, especially as new construction declines, allowing for more units to be renovated without impacting occupancy.

• Question from Austin Werschmidt (KeyBank Capital Markets): How large can the value-add program get in terms of unit volume without impacting occupancy?
  Response: The program is ramping from 1,700 units last year to closer to 2,500 units this year, with potential to reach 3,000-4,000 units annually as renovation times have improved below 20 days.

• Question from Austin Werschmidt (KeyBank Capital Markets): What are the biggest other opportunities given improving fundamentals?
  Response: Opportunities include strategic acquisitions if capital allows, as the cost of capital may reach a point where growth can be pursued, but value-add remains the primary use of capital.

Contradiction Point 1

New Lease Spread Trajectory and Timing for Breakeven

Contradiction on the expected timeline for new lease spreads to turn positive.

Brad Heffin (RBC Capital Markets) - Brad Heffin (RBC Capital Markets)

2026Q2: Guidance for Q3 and Q4 assumes new lease spreads to remain roughly -50 basis points quarter-over-quarter. - [Jim Sebra](CFO)

Will new leases be positive in Q3? - Austin Wurschmidt (KeyBanc Capital Markets Inc.)

2026Q1: The company is confident in reaching breakeven new lease trade-outs during the leasing season due to rising asking rents and moderating concessions. - [James Sebra](CFO)

Contradiction Point 2

New Lease Spread Trajectory and Guidance

Guidance for new lease spreads in Q3-Q4 contradicts the previous annual forecast.

Brad Heffin (RBC Capital Markets) - Brad Heffin (RBC Capital Markets)

2026Q2: For the third and fourth quarters, guidance assumes new lease spreads to remain roughly -50 basis points quarter-over-quarter. - [Jim Sebra](CFO)

Do you expect Mr. Focus to appreciate slightly positive or better comments in the third quarter, and will the new lease be around zero with a normal seasonal decline after September, requiring a wait until next year to see results? - Austin Wurschmidt (KeyBanc Capital Markets)

2025Q4: The -75 bps new lease growth for the year starts negative in January... For H1, new lease growth is expected to be down ~2.25%. For H2, it turns up ~75 bps. - [James Sebra](CFO)

Contradiction Point 3

Expected Timing of the Mustang Asset Sale

The expected timing for selling the Mustang asset has shifted significantly.

Peter Abramovic (Deutsche Bank) - Peter Abramovic (Deutsche Bank)

2026Q2: No decision has been made on whether to sell the Mustang development asset. The property is stabilized with occupancy north of 93% and is a great asset. The company is analyzing the best approach. - [Scott Schaefer](CEO)

Could you provide an update on the potential sale of Mustang and Dust, including the progress of the process, pricing, and the depth of demand relative to your expectations? - Mason P. Guell (Robert W. Baird)

2025Q4: The company anticipates selling the asset this year using the proceeds for better uses like deleveraging or share buybacks. - [Scott Schaeffer](CEO), [James Sebra](CFO)

Contradiction Point 4

Supply Pressure and Market Improvement Timeline

Contradiction on the near-term outlook for supply-driven market pressure.

Questioner (UBC) - Questioner (UBC)

2026Q2: Strong absorption rates support the market recovery. Leads are up 5%, indicating good demand, but occupancy is still significantly below 20-25%. - [Janice Richards](EVP of Revenue Strategy), [Jim Sebra](CFO)

Is the leasing season's extension into July due to stronger demand or easier comparisons? - Brad Heffern (RBC Capital Markets)

2025Q3: Supply deliveries decreased in 2026 forecasts, and 2026 supply is expected to be meaningfully below the trailing 10-year average. Providing a 'light at the tunnel' for improvement. Expect benefits in the second half of 2026 as supply eases. - [Janice Richards](EVP of Operations), [Scott Schaefer](CEO)

Contradiction Point 5

Expectations for New Lease Rate Spreads

Contradiction on the expected trajectory for new lease spreads in the near term.

Brad Heffin (RBC Capital Markets) - Brad Heffin (RBC Capital Markets)

2026Q2: For the third and fourth quarters, guidance assumes new lease spreads to remain roughly -50 basis points quarter-over-quarter. - [Jim Sebra](CFO)

Will Mr. Focus appreciate the positive comments in Q3, and is the new lease expected to stabilize around zero with a typical seasonal decline post-September, with results deferred until next year? - Austin Wurschmidt (KeyBanc Capital Markets)

2025Q3: New leases have flattened as expected to support occupancy. New leases should reach breakeven point in the first half of 2026. - [Scott Schaeffer](CEO)

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