Eleven years ago, Independence Realty Trust acquired Trade Street Residential in a cash-and-stock transaction. In 2021, it more than doubled the company in size through its Steadfast Apartment REIT acquisition. 

Still, IRT integrated the Steadfast acquisition within months of closing and exceeded the synergy and accretion targets it set at the deal’s announcement, IRT CEO Scott Schaeffer said on a Sept. 9 call with analysts following his firm’s acquisition of Centerspace to create an $8.1 billion REIT.

“This is the same management team running the same playbook [with Centerspace], and this transaction is roughly a quarter of our current size rather than doubling it,” Schaeffer said. “Our track record of successfully integrating companies does not eliminate execution risk, but it does mean we know the cadence of how and what to do.”

Centerspace is about a quarter the size of IRT, with a distinct geographic footprint except for some overlap in Colorado, which should make the process smoother, Schaeffer said. “So the integration here will be more of back office systems rather than people,” he said. “And the integration of the people is where you end up having most friction.”

Schaeffer said on the call that he will remain chairman and CEO, while Jim Sebra will serve as president and chief financial officer. The combined company will keep the Independence Realty Trust name and continue to trade on the New York Stock Exchange under the ticker IRT. The board of directors will expand to 11 members, including nine from IRT and two from Centerspace.

“We will have more to say on organizational structure as we work through the integration planning between now and closing,” Schaeffer said.

Although there are still some things to iron out regarding the integration of the two REITs, the call highlighted the major drivers behind the acquisition: scale and diversification.

Complementary portfolios are a feature

Centerspace’s properties sit in the Midwest and Mountain West. Going forward, 58% of IRT’s pro forma net operating income will come from Sun Belt markets, 27% from Midwest markets and 15% from Mountain West markets, according to the press release announcing the sale.

“The Midwest is much more stable and [has] less volatility, while the Sun Belt seems to be higher growth, but also a little more volatile,” Schaeffer said. “So that's why they're complementary.” 

Alexander Goldfarb, managing director and senior research analyst for Piper Sandler, said he saw IRT’s acquisition of Centerspace as a “vindication of the Midwest” in a Sept. 9 research note shared with Multifamily Dive. However, he said he doesn’t expect competing bids.

“While this deal validates the Midwest, we believe there still may be some hesitation by other institutional buyers,” Goldfarb wrote.

Minneapolis and Denver play a major role in Centerspace’s portfolio, which IRT execs found attractive. “Those markets, especially Minneapolis, have been very stable and [have experienced] low volatility in rent growth,” Schaeffer said. “And if you look at the data sources, there's actually a fairly robust rent growth trajectory over the next few years, all at lower volatility.”

The Centerspace portfolio includes properties in places like Billings, Montana, and Grand Forks, North Dakota — places where apartment REITs normally don’t own assets. Schaeffer and his team evaluated those markets “very, very, very early” in the process.

“All of these markets are very, very low supply,” Schaeffer said. “There's just nothing being built. There's nothing being added while there is some population growth, which is what's going to drive good stable occupancy and ultimately rent growth.”

Anne Olson, president and CEO of Centerspace, added that these markets have provided steady growth, particularly as significant apartment supply has been added in the Sun Belt and in markets like Denver. “Markets like North Dakota have been consistently growing 5% to 7%,” she said on the call.

However, Schaeffer was clear that IRT “is and will remain a Sun Belt-weighted” REIT. “The Sun Belt represents 58% of pro forma NOI and remains our largest exposure and our primary growth engine,” he said.

Scale is a major driver

In multifamily, a diversified portfolio that can weather the highs and lows of the apartment supply cycle matters. But scale may be even more vital today. With 44,354 units across 17 states, IRT will have the size to operate more efficiently, according to Schaeffer.

“Scale improves our access to the capital markets, and over time, our cost of capital,” Schaeffer said. “Just as importantly, it lets us spread our institutional operating platform across a much larger base of units. This is how a bigger company becomes a better company rather than simply a larger one.”

IRT expects approximately $24 million in identified annualized synergies, with $19 million coming from corporate, general and administrative expenses. “The remaining synergies come from property-level and platform efficiencies as we move onto a single operating system, and near-term incremental revenue opportunities,” Sebra said on the call.

Sebra said IRT should achieve most of the synergies within the first 12 months after the aquisition closes. Additionally, general and administrative as a percentage of assets will fall to 37 basis points for the combined company. That is a 24% reduction compared to IRT as a standalone company and a 57% decline compared to Centerspace.

“It places the combined company well below the REIT sector average of 61 basis points and in line with some of our larger multifamily peers,” Sebra said.

IRT has also built what Schaeffer called “two internal growth engines”: its value-add renovation program and its other income initiatives, including the community Wi-Fi program that it began implementing this year.

IRT has renovated approximately 12,500 units to date, generating a return on investment of 16%, according to Serba. Centerspace has approximately 3,200 more apartments ready for renovation, while IRT has an additional 10,000.

“Those Centerspace assets are predominantly in undersupplied markets where rent growth is inflecting, which is precisely the environment in which renovation capital is most productive,” Serba said. “This incremental volume adds additional years to the existing value-add runway at IRT.”

Sebra said 3,000 to 4,000 Centerspace apartments can be moved into IRT’s Wi-Fi program immediately, which should generate $60 to $70 of incremental revenue per unit.

IRT will also be able to purchase items such as appliance packages across more units, providing additional buying power. “So we think that'll certainly provide a little bit lower cost and enhanced returns,” Serba said.

IRT may not be the last company seeking scale through acquisitions, according to Goldfarb’s commentary in his research note. “Given the lack of supply in general for real estate (apart from data centers), we see M&A as a key external growth avenue, especially for sectors like apartments, retail, and industrial, where size and scale can be exploited,” he wrote.

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