Independence Realty Trust, Inc. (NYSE:IRT) Q2 2022 Earnings Conference Call July 28, 2022 9:00 AM ET
Company Participants
Lauren Torres – Investor Relations, Edelman Financial Communications & Capital Markets
Scott Schaeffer – Chief Executive Officer
Ella Neyland – Chief Operating Officer
Farrell Ender – President
Jim Sebra – Chief Financial Officer
Conference Call Participants
John Kim – BMO Capital Markets
Neil Malkin – Capital One Securities, Inc.
Brad Heffern – RBC Capital Markets
Nicholas Joseph – Citigroup Inc.
Austin Wurschmidt – KeyBanc Capital Markets Inc.
Wes Golladay – Robert W. Baird & Co.
Michael Gorman – BTIG, LLC
Operator
Good morning. Thank you for attending today’s Independence Realty Trust Second Quarter 2022 Earnings Call. My name is Francis, and I’ll be your moderator today. All lines will be muted during the presentation portion of the call was an opportunity for questions-and-answers at the end. [Operator Instructions]
I would now like to pass the conference over to our host, Lauren Torres.
Lauren Torres
Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust’s second quarter 2022 financial results. On the call today are Scott Schaeffer, Chief Executive Officer; Ella Neyland, Chief Operating Officer; Farrell Ender, President of IRT; and Jim Sebra, Chief Financial Officer. 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 PM 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, financial performance and the merger with Steadfast Apartment REIT, which will be referenced herein as STAR.
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 made in 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.
Scott Schaeffer
Thank you, Lauren, and thank you all for joining us today. As I think back over the past year, there have been numerous developments which have impacted IRT. At this time last year, we announced our plans to merge with Steadfast Apartment REIT, and in December of 2021, we closed on that transaction. We then spent the first few months of this year integrating the operations of both companies, while locking in $31 million of annual synergies. We are pleased to note that IRT is now one of the top apartment owners in the United States. Our larger portfolio of middle market communities and non-gateway cities is well positioned to realize outsize growth due to favorable market fundamentals, including the supply demand imbalance for rental housing.
Regarding the second quarter, we delivered a 14.4% combined same-store NOI growth and 30% core FFO per share growth on a year-over-year basis. We attribute this strength to our ability to maintain high occupancy rates 95.5% at the end of quarter 2, while achieving double-digit average rental rate growth of 12%. This is possible due to our high exposure to non-gateway markets in the Sunbelt region, which currently represent approximately 70% of our NOI. These markets continue to see high residential demand, particularly due to the employment opportunities and increasing wages, which has led to population growth that exceeds new supply.
As a result, we are expanding our presence in the Sunbelt markets when appropriate. The expansion of our portfolio continued in the second quarter as we acquired a community in Nashville, which was our first multifamily property acquired through our JV development program. And then just last month, we closed on a joint venture in Austin, Texas, for the development of a new apartment community. These are both exciting opportunities with reflect continued value creation at IRT.
In addition, we are actively investing in our existing communities to our value add program, which far we’ll provide more details later on this call. But I’d like to note that our planned renovation pipeline is robust and well positioned to continue generating attractive unlevered return on investment. As we look ahead, we anticipate further macro uncertainty and volatility, but due to the strength of our portfolio and execution of our strategic initiatives, we are equipped to continue to produce strong results. With that said, and as Jim will discuss more later.
We recently closed on a new $400 million unsecured term loan using the proceeds to repay our 2024 maturities and to reduce the outstanding balance on our line of credit. This financing did not increase our leverage, but rather extended the maturity on $300 million to term loans to 2028 and increased our liquidity by $100 million, while reducing our interest rate spread. These steps further strengthen our balance sheet and position IRT to realize future opportunities.
For the second half of 2022, we will be mindful of economic volatility and inflationary pressure, with a particular focus on employee engagement, continued cost management and realizing the full benefit of our merger-related synergies. With that said, we believe today’s environment is particularly favorable for the multifamily sector, as increasing home prices and mortgage rates have led to greater demand for affordable apartment rents. This is true on our markets, which continue to exhibit strong fundamentals, and where we increasingly provide homes and well maintained amenity rich communities.
As a result of our continued confidence, we are raising our previously provided full year 2022 guidance now targeting 13.75% combined same-store NOI growth, and 27% core FFO per share growth each at the midpoint of our guided ranges. We are confident in our ability to deliver these results, given strong demand and rent growth achieved to date. And our expectation is that we will be able to continue to drive rental rate growth during the second half of the year, while managing inflationary pressure on operating expenses.
And now I’d like to turn it over to Ella for an operational update.
Ella Neyland
Thank you, Scott. We’ve delivered another strong quarter with momentum continuing from the first and second quarter of 2022 as well as on a year-over-year basis. This was led by our ability to drive rent growth, while maintaining high occupancy levels. We have an attractive portfolio end markets where we continue to see inbound migration, particularly in the Sunbelt region, where jobs are being created and residents are attracted by better lifestyle opportunities.
When looking at occupancy, the average occupancy in Q2 is 95.7%, when excluding properties that are undergoing value added renovations. So far in July, this average occupancy continues to be strong at 95.3%. As we increase rents for both new leases, and renewals. On a lease over lease basis for the combined same-store portfolio, new lease rates increased 17.2% and renewals were up 9.7% during the second quarter, yielding a blended lease over lease rental rate increase of 12.7% for the leases expiring in Q2 2022.
For the new leases in Q2, the average rent to income ratio of those residents was around 20%. We’re pleased to note that rental rate trends continue to improve in the third quarter to date, with new leases for our combined same-store portfolio having increased 20.8%, while renewed leases are up 11.4% for a blended lease over lease rental rate increased 13.4%. Our ability to deliver these results is partially attributed to our favorable loss to lease which stood at 16% as of June 30, giving us pricing power and the strong demand leasing marks.
So far in Q3, our resident retention rate is 59.8% of 520 basis points from Q2 2022 reflecting the positive seasonal momentum from our key leasing season. As mentioned last quarter, our property management and revenue management system integration post merger is completed and we realized $31 million in synergies, including $8 million of annual operating synergies and $23 million of annual corporate expense savings.
I would now like to turn the call over to Farrell to provide you with an update on our investment opportunities.
Farrell Ender
Thanks, Ella. I’d like to start off with an update on our longstanding value add program. In the second quarter, we completed renovations on 195 units during our year-to-date total to 338 units. For these completed renovations, our year-to-date renovation cost was $11,959 per unit. And these units achieved on average of $333 per unit increase in monthly rents over comparable on renovated units. This yields an unlevered return on investment of 33.5%.
For the full year, we now expect to renovate approximately 1,800 units, which is lower than our initial projection of 2,000 units. The change is primarily due to our Meadows property in Louisville, which is now being held for sale, which reduced our estimated completions by 150 units as well as higher retention rates at our value add communities.
Our value add program now includes 13 communities with ongoing renovations and we expect to add another 8 communities over the remainder of this year. At this point, we expect to complete approximately 775 units in Q3 and 650 units in Q4. As a reminder, the addition of these communities to value add program, will create downward pressure on occupancy as the units are taken offline for approximately 30 days.
Regarding next year, we are making steady progress to ramp up to 4,000 units. We will provide a further update on our third quarter earnings call included expected value add renovation unit volume by quarter for 2023. One note of caution, we are monitoring market conditions and may if needed adjust our plans depending on macroeconomic volatility.
As Scott mentioned earlier, we are excited about the progress of our joint venture program, which focuses on new multifamily development. In April, we acquired the first three communities from our joint venture partner in Nashville for $25.4 million. This price translated into a 5.5% effective economic cap rate. And in June, we entered into a new joint venture for the development of a 378-unit community to be built in Austin, Texas. The community is located in North Austin within walking distance to commuter rail and in close proximity to the domain and several employment centers.
Site improvements began last month with the completion of the project scheduled for May 2024. We’ve committed to invest an aggregate $29.7 million into this joint venture, of which $14.7 million has already been funded. The unit [ph] costs for the project is 5.75%. As of the end of the second quarter, we have two properties held for sale, one in Louisville, Kentucky, and the other in Terre Haute, Indiana.
Our community in Louisville, the Meadows is under contract and expected to close in September. We expect to recognize a gain on sale of approximately $20 million. The economic cap rate on this community is 4.1%. We are still marketing our community in Terre Haute with some of the preliminary views on pricing at a 5.4% economic cap rate. Combined these two communities held for sale whatever blended cap rate of 4.7%.
And lastly in August, we expect to close on the community in Charlotte, North Carolina. The recently completed property contains 234 units, and will be 86% occupied at closing. The purchase price is $80 million, generating a stabilized economic cap rate of 4.3%.
Now, I’d like to turn the call over to Jim.
Jim Sebra
Thanks, Farrell, and good morning, everyone. Beginning with our second quarter 2022 performance update, net loss available to common shareholders was $7.2 million as compared to net income of $3.4 million in the second quarter of 2021, primarily due to higher depreciation and amortization expense related to the STAR Merger. During the second quarter, core FFO grew to $58.6 million, up from $20.2 million a year ago, and core FFO per share grew 30% to $0.26 per share up from $0.20 per share in Q2 2021. This growth is a result of the completion of our merger of STAR and the related accretion as well as the sizable organic rent growth we’ve experienced throughout the combined portfolio.
IRT’s second quarter combined same-store NOI growth was 14.4% driven by revenue growth of 11.4%. This growth was driven by a 12% increase in average rental rates, and an increase in the other income generated by the STAR communities. While the NOI growth includes value add communities, we did see similar NOI growth of 14% at our same-store non value add communities, which reinforces the fundamental strength of our core markets.
On the property operating expense side combined same-store operating expenses grew 6.9% in the second quarter, led by higher repairs and maintenance costs, contracts services and payroll. The increase in repairs and maintenance is driven mainly by the timing of spring [ph] projects as well as an inflationary pressure on both supplies and services. The increase in contract services, as mentioned last quarter, was driven by expenses for reimbursable resident services as implemented various additional revenue services at the legacy STAR properties.
On the payroll and staffing fund, we continue to see inflationary increases and expect this to persist during this highly competitive staffing environment. To help offset these pressures, we are in the process of completing the centralization of two select areas of our operations, sales and resident services. We expect this effort will save IRT approximately $2.5 million in payroll costs annually once complete early in Q4. We’re always assessing how technology can make our business more efficient and have many more projects in the works, from further centralization, to automation, to machine learning. We’re excited about the use of technology across our business and market allowing us to improve effectiveness and our resident services.
Before moving on to the balance sheet, we like to highlight Appendix A in our supplement will we provide our Q2 2022 combined same-store results broken down between legacy IRT and STAR communities. As you will see the 15.3% NOI growth that the legacy STAR communities is result of strong rental and other property revenue growth as well as the execution of our operating synergies that we identified as part of the merger.
Now, turning onto our balance sheet. As of June 30, our liquidity position was $429 million. We had approximately $11 million of unrestricted cash, $368 million available on our line of credit, and $50 million of ATM proceeds available from forward equity sales. Also [known as we] [ph], we completed a new $400 million term loan and use the proceeds to repay 2024 maturities and reduce borrowings outstanding on our line of credit. This new term loan will mature in January 2028, and will bear interest at SOFR across the spread based on our leverage. Currently, that spread is 115 basis points, 5 basis points lower than our other term loans.
As part of this new term loan, we took the opportunity to give all of our unsecured borrowings from LIBOR to SOFR base. Overall, this new term loan demonstrates the strength of our banking relationships improves our debt maturity profile, and increases our financial flexibility.
At quarter end, our net debt-to-EBITDA was 7.4 times down from 8.5 times a year ago, and we continue to target low-7s by the end of this year and mid-6s by year end 2023. As you can see, we are well on track to achieve those leverage targets.
Regarding full year 2022 guidance, we are raising our outlook based on strong fundamentals and the economic strength of our markets. Our guidance now includes a core FFO per share midpoint of $1.07 per share, $0.82 increase from our previous guidance.
For 2022, on a combined same-store basis, we now expect NOI to increase 13.75%, an increase of 125 basis points at the midpoint from our prior guidance. The higher NOI growth expectation is driven by a revenue growth of 10.9%, which is an increase of 130 basis points at the midpoint from our prior guidance. This 10.9% revenue growth is based on full year average occupancy of 95.3% and a 12.9% increase in our average rental rate.
This higher revenue growth is partially offset by operating expenses that we now expect to grow by 6.3%, an increase of 130 basis points at the midpoint from our prior guidance. This higher expense growth is driven by property tax assessments, particularly in the Atlanta and Texas markets. Our remaining guidance on G&A, property management expenses, interest expense, transaction volume and capital expenditures are largely unchanged from our prior guidance.
Now, I’ll turn the call back to Scott. Scott?
Scott Schaeffer
Thanks, Jim. Our goal this morning was to convey our confidence in our expanding portfolio and ability to execute our strategy under various and sometimes volatile market conditions. Our current year results are on top of exceptional performance in 2020 and 2021. Since 2019, IRT has delivered 31% cumulative combined same-store NOI growth. This compares to average cumulative same-store NOI growth for our public apartment peers of 11% and reflects the strength of our communities and markets.
We have purposely built a strong operating platform in 120 communities across resilient high growth markets, the positive demographic trends in our markets will support continued on performance during these volatile times. Going forward, we will remain focused on capitalizing on strong resident demand and accelerating our organic growth through our value add program. This will allow us to strengthen our company and capture incremental growth for years to come.
We thank you for joining us today. And I look forward to seeing some of you at Bank of America’s Global Real Estate Conference in September. Operator, we’d now like to open the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from John Kim with BMO Capital Markets. Please go ahead, John.
John Kim
Thank you. I wanted to ask about your same-store revenue guidance, which you revised up at 10.9% at the midpoint, it still seems a little modest given it’s about 200 basis points below your lease growth rate over the last 12 months. Jim, I realized you talked about vacancy, it’s a partial offset, but what else could get you to the midpoint of this new range?
Jim Sebra
Yeah, I mean, I think right now the guidance has for the year at average occupancy at 95.3%. And we’ve just been thinking about Q4 revenue growth for lease over lease and we’re just moderating a lower, which is considering the broader economic world that we live in today, and just being cautious as we think about full year guidance.
John Kim
Okay. Second question is on cap rates in your markets, we’ve heard of at least one transaction occurring exhibiting cap rate compression. Can you comment on this dynamic? What are buyers underwriting terms of growth in the near-term? And how do you react to this continued strong demand in your markets?
Jim Sebra
John, you said cap rate compression?
John Kim
Yes.
Jim Sebra
Because what we’re seeing, so it’s been an interesting mark. Yeah, so the cap rates are expanding. And what we’re seeing is valuations peaked probably 6 months ago, and your transactions basically stalled during the volatility, but there’s some price discovery. And, to your point, it seems like in the last couple of weeks, there’s been more of an agreement on the buy/sell, and pricing has adjusted basically 5% to 15% depending on the market you’re in, which equates to a 50 to 100 basis point expansion. And in the markets, we’re seeing about 4% to 4.5% cap rate right now. Capitals really chasing quality, so the tertiary markets are going to be wider than that. But for your Atlanta, Dallas, Raleigh markets, 4% to 4.5% is what we’re seeing currently, as opposed to 3, 3.5 at the peak.
John Kim
So what’s your appetite in terms of acquiring a negative leverage basis? I mean, do you focus more on development of its plant? Or are there cases where you could buy accretively?
Jim Sebra
Well, we look at each individual transaction on its own merits. And, we’ve maintained from the day we started this company that we were going to be disciplined, and only grow when it made sense for the company as a whole. So, as you see, we’ve only announced one acquisition, and that’s one that we have had under contract for many months now. It was put under contract pre-certificate of occupancy. And we’re not going to close on it in the next 30 days, as Farrell said. So we’re going to stay disciplined, we’re going to buy when it makes sense. I’m not [a fan] [ph] and never have we in the past, but at negative leverage. So I don’t see us doing that going forward. But we’re in a good position with plenty of liquidity and those opportunities present themselves, we will evaluate them individually.
John Kim
Great. Thank you.
Operator
Thank you, John. Our next question comes from Neil Malkin with Capital One. Please go ahead, Neil.
Neil Malkin
Thanks. Good morning, everyone. Nice quarter.
Scott Schaeffer
Hi, Neil.
Neil Malkin
Can you – hey. I mean, kind of similar to, I think, John’s last question. But in addition to the value add, which is just continuing to put all STAR numbers. Can you talk about just capital priorities, I guess, sources and uses, just given sort of the environment we’re in, in terms of, I think we just announced we’re in recession, rates going up, valuation trying to find a new normal, and you need to maybe just kind of go over how that’s changed or adjusted your thinking over the next maybe 12 months or so?
Scott Schaeffer
Well, I’m not sure it’s changed much, Neil. So our number one priority for capital allocation is value add. I mean, I think, Farrell say, that we’re regenerating 30%-plus unlevered return on equity. So there’s nowhere else for that, anyone is going to see returns like that. So that’ll be our number one priority. We’re still evaluating joint venture development opportunities. We have slowed that down, during the current uncertain times. But we’re still seeing some good opportunities and markets that we’d like that pricing seems to make sense. So I would tell you that that’s something that we will continue to pursue via it will be at a slower pace than it was a number of months ago.
After that, it’s again, just trying to be opportunistic, if we see one-off transactions that are now being priced at a level that makes sense for us in markets where we want to grow and where we know that with our platform, we can do it accreatively. We will consider those as well.
Neil Malkin
Okay, awesome. Just real quick on the cap rate, you mentioned for Charlotte of 43 [ph], was that an economic or is that nominal?
Scott Schaeffer
That’s an economic assuming occupancy at 94%, once we stabilized it should be a couple of months.
Neil Malkin
Okay. Appreciate. Last one for me is, in terms of you talked about your affordability being around 20%, which is obviously, very, very good. But I’m just wondering if it’s given, I guess, you want to call it maybe the nature of the demographic? How do you want to put that of the renter of your renter? Or have you seen any pushback in rate increases? Maybe any notable or noteworthy increases in move out for rent increase purposes anything along those lines? And then, potentially related to, are you seeing any tech or other sector, layoffs impacting any specific assets and markets? Thanks.
Ella Neyland
Neil, this is Ella, and thank you for the question. One of the strengths that we have is the fact that we do have what I call affordable small rent apartment homes. For working America that wants well located amenity rich, well maintained apartment homes, so the traffic flow, and the demand for that is continues to be incredibly strong, in fact, probably increasing in most of our markets. So that price point that we have on our apartment homes, as you mentioned, is about 20% rent to income for most of our residents. So in this, I guess we can now call it a recessionary period that we’re in, they have a lot of price pressures on them, but it gives them enough cash management needs that they can pay their rent and continue to pay other sources.
The other great thing too as we enter again this as many people are calling it the recession, is it typically in a downturn like this, one of the first things that happens is, there’s a significant pullback in job growth. And there are a lot of layoffs. But with 3.6% unemployment, there are definitely enough jobs out there. And most of our people, again, our residents are working in America. So we don’t see that that impact that you’d normally be worried about during a recessionary period to be hitting us on that front.
Neil Malkin
Yeah, I appreciate that. So, I guess, you’re not really seeing anyone more than normal walk at the rent increases.
Ella Neyland
No. We are not. And one of the reasons, people – okay.
Operator
Thank you for your question, Neil. The next question comes from Brad Heffern with RBC. Please go ahead, Brad.
Brad Heffern
Thanks. Good morning, everyone. Ella, just to follow-on on that last question. I mean, is it fair to say that you’re not seeing any signs of the macroeconomic pressure? When you look at the operating performance, there’s an increase in delinquency or anything that would suggest that that’s happening?
Ella Neyland
That’s correct. We’re not seeing anything out of the norm on any of that.
Brad Heffern
Okay. On the occupancy front, I know it was down 50 bps on the same-store in July, it sounded from the prepared comments like that was maybe just pushing right a little bit, I guess, any color on what’s driving that? It seems like the guidance would suggest that maybe it’ll pick up a little bit again, but any thoughts on occupancy?
Ella Neyland
And another great question, Brad. So as we started this year, we were very focused on any potential merger integration bump. And so we announced that we were going to put a strong focus on maintaining occupancy during that period, and not necessarily as much on increasing rents. The great news is that the merger of these two great companies is gone really well. So starting in the second quarter, we look to increase rental rates on new leases and renewed leases. But as you know, that’s sort of a forward looking when you send out the notices for the 30, 60, 90 days.
And then our guidance, you can see that we’re starting to see the benefit of that increase in our blended renewal rates, and the loss to lease we’re starting to harvest that too, which gave us that great pricing power. So that combined with the strong traffic flows that we’re seeing, we are very confident we will meet that guidance for occupancy for the year.
Brad Heffern
Okay. And, Jim, just given all the sort of puts and takes on acquisitions, dispositions, the development activity through the JVs. Can you just walk through the capital needs? And how you think about funding those?
Jim Sebra
Sure. I mean, I think the majority of the capital needs, as Scott mentioned, we continue to prioritize capital into the value add program. And when you kind of look at just the free cash flows of the business as well as all the demand from just normal recurring CapEx spend, incremental value add CapEx spend even this year as well as the 4,000 units next year. That’s all met with free cash flows from the business and there’s still some extra cash flow that can be used to invest in joint ventures, et cetera. So, I think, there’s very little need to raise capital either by borrowing or even equity to fund all the business activities in a recurring and routine basis.
Brad Heffern
Okay. Thank you.
Operator
Thank you, Brad. The next question comes from Nicholas Joseph with Citi. Please go ahead, Nicholas.
Nicholas Joseph
Thanks. Maybe specific to the investments in Austin and Nashville, can you talk about some of the supply expectations you have and demand over the next few years and what makes those markets attractive to enter or to add capital to right now?
Scott Schaeffer
We actually think with combination of the increase in construction costs, and now construction debt being both more expensive and lower leverage deliveries, probably slow down in the future. So markets like Nashville and Austin and Dallas have a lot of in migration, I think, are going to be pretty strong over the next couple of years.
Nicholas Joseph
Thanks. You think start slow, and that benefits supply in 2.5, 3 years now?
Scott Schaeffer
Yeah, we’re already seeing it with a lot of the sponsors that we’re talking to on the JV side. So I think it’s going to start trickling through the system regards just reducing the amount of deliveries again over the next 2 to 5 years.
Nicholas Joseph
Thanks. And then, you talked about the macroeconomic environment. How quickly or what are you looking for in terms of just toggling capital into the value add program, either macro or if it’s specific property trends? How quickly can you kind of ramp on and off that program?
Scott Schaeffer
Yeah. And, I think, you saw a little bit of it, Nick, when we – when the pandemic first started back in 2020. We quickly toggled off a few of the properties in the value add program that saw just traffic drops. So for us, the first kind of question is just traffic flow into the value add communities, when evaluating continue to move forward or not. And obviously, that traffic flows of a big determine on based on the macroeconomics to rent being pushed, or people losing their jobs, et cetera. So that’s the first key indicator that will determine the on and off nature of the value add.
And, Nick, it’s also completely within our control, because we solid perform all of this work. So we – it’s not like we have committee contracts out there that we would have to continue to honor. If the market changes, we can shut it down relatively quickly.
Nicholas Joseph
Thank you very much.
Scott Schaeffer
Thank you.
Operator
Thank you for your question. The next question is from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead, Austin.
Austin Wurschmidt
Thanks and good morning. Scott, the attractiveness of sort of the Class A assets and putting the joint venture together, if I recall correctly, was really driven by sort of the value add deals that we’re trading at or inside Class A assets. And you referenced or someone referenced earlier that there’s been the upward pressure on cap rates in your markets. And so I’m just wondering, at what point do you kind of pivot back and look again at doing more of the value add one-off deals, if office capital permits and/or through just funding through additional capital recycling?
Scott Schaeffer
Well, again – and Austin, thank you, it’s a great question. And, we’re constantly looking at it, and the attractiveness of the value add is that we’re literally providing an apartment community that competes with brand new construction at a better price point then what the residents would have to pay again for new development. So, again, it gives us that benefit of comparable property at a lower price as we’re out leasing. We started to pivot a little bit honestly. But we started looking and doing a few more Class A investments, because the cap rates just got upside down.
We were seeing brand new Class A well located desirable communities trading a cap rates that were higher than 15 to 20 year old Class B product. And it was because of the whole value add focus that that buyers had. So, we thought why not use some capital and invest in a newer community that has lower operating costs, assuming it’s well located in its market that makes sense for us at a better return from day one. If that now changes back, we are able again to pivot quickly, and focus more on again the 15 to 20 year old value add type communities.
Austin Wurschmidt
That’s helpful. And then, Jim, on expenses, and maybe focusing on property taxes, in particular, I’m curious kind of what percent of assessments have come in at this point. And if that’s something that could ultimately be better than feared if you’re able to successfully appeal any of the sizable increases you’ve received thus far?
Jim Sebra
Good question. We have assessments on about two-thirds of the portfolio. We do not have any formal tax bills yet, and we haven’t received millage rates yet on those assessments. Assessments, as I mentioned in the prepared remarks, assessments are higher than we originally anticipated this year, and budgeted our tax assessor or tax consultants, we’ll fight all these and appeal all these. And, we hope we are successful. Dallas and Atlanta are two particular outliers in the real estate tax world, but we’re hopeful – hopefully, we can deliver better than what we’ve got it to.
Austin Wurschmidt
Got it. And then just last one for me. Just wanted to touch, again, on the occupancy, in July, and how quickly that sort of slid. At what point should we think about, you needing to dial back, maybe the new and renewal rent increases, in order to stabilize or even bring occupancy higher as it sounds like you expect it to average a little bit higher than where it sits today for the back half of the year.
Jim Sebra
Well, I’ve always maintained that 95% occupancy is full occupancy. Our focus has been to balance rent growth with occupancy to generate the highest potential revenue. So really, it’s traffic driven and least conversion driven. So we will continue with the rent increases, as you can now see, as long as we’re able to keep occupancy in that 95%, 95.5% percent range going forward. If we start to see that soften, and again, it’s a traffic issue and more of a macroeconomic issue. If we start to see that that soften a little bit, then we’ll have to dial back and we will dial back the rent growth numbers. But right now, there’s no need to be better.
Austin Wurschmidt
Understood. Thanks for the answers and for the time.
Scott Schaeffer
Great. Thank you.
Operator
Thank you for your question. The next question comes from Wes Golladay with Baird. Please go ahead, Wes.
Wes Golladay
Yeah, good morning, everyone. You have a buyback in place and coverage historically low. Do you have increased appetite to step up dispositions and buy shares at these levels?
Scott Schaeffer
We’re always looking at it. It becomes a capital allocation issue. And we have a couple of communities that we’ve identified for recycling. And, as we look forward at those sales and what is available to buy in the market. The stock buyback would be in the equation as to, is it better to buyback our shares at current level? Or is it better to invest in a new property at whatever the cap rates may be at that moment. And, we’re also watching levers, so that’s another use of our capital as we continue to delever the balance sheet.
Wes Golladay
Got it. And then when we looked at the occupancy declining a little bit in the third quarter, or you move in any of the tenants that were physically there, but just not paying the rent, isn’t that occupancy leaving the portfolio at currently?
Scott Schaeffer
Well, that’s part of it. I mean, I think all of the multifamily operators have – only say a small shadow vacancy relative to tenants that weren’t paying during the pandemic. And as we go through the eviction process, so as the courts continue to process those evictions that’s putting a little bit of downward pressure on the occupancy.
Wes Golladay
Great. Thanks for the time.
Scott Schaeffer
Sure.
Operator
Thank you. Our next question comes from Michael Gorman with BTIG. Please go ahead.
Michael Gorman
Yeah, thanks. Good morning. Just sticking with the occupancy for a minute. I wonder if you could just give a little bit of color there because, obviously, pushing rates having a bit of impact on occupancy, which makes sense. But can you just juxtapose that with your retention rate, which seems to be claiming pretty strongly. So what’s the trade off that you’re seeing there? Or with a stronger retention rate, but also a little bit of slippage in occupancy. And how do you balance that out with pushing new versus renewal rates at this point in the cycle?
Scott Schaeffer
It’s really the increase in rents, which puts a little bit of downward pressure on the conversion, the new lease conversion rate in addition to the value add starts. So I think you heard that in Farrell’s remarks that we’re going to do 700 plus units in the third quarter. When we add communities to the value add program, every lease the turns, goes offline for give or take 30 days, and that a negative effect on occupancy. And right now, in July, we started a number of new communities, and we will continue to start new communities through the rest of the year. And that will have a negative impact on occupancy, it’s just a fact. But, obviously the 30% plus returns on levered equity is a well worth that, the benefit is well worth that that a little bit of occupancy pressure.
Michael Gorman
Okay, great. And then just one question on the value add, as you continue to ramp up the pipeline towards that kind of 4,000 unit target next year, targeting 1,800 for 2022. But the capital budget for the value add didn’t change is a lot of that – is some of that anticipatory work that’s going to come to fruition next year, or I’m just curious why the capital budget didn’t come down with a unit count?
Scott Schaeffer
I’m sorry. I thought, Jim was going to answer that question.
Jim Sebra
No, I just think it’s the 1,800 units is an estimate we had initially targeted 2,000 units. But when we decided to sell the Louisville property Meadows, that’s like 150 out of the value add program, and it’s $12,000 give or take a unit, it’s just that 100 or 200 units is somewhat on the margin. So the value add spend this year will be about $25 million and it will be about $50 million in 2023.
Michael Gorman
Fantastic. Thanks for the time.
Scott Schaeffer
Yeah, thank you.
Operator
Thank you for your question, Michael. I will now pass the conference back over to the management team for any further remarks.
Scott Schaeffer
Thank you all for joining us today and we look forward to speaking with you again next quarter. Have a good day.
Operator
That concludes the Independence Realty Trust second quarter 2022 earnings call. Thank you for your participation. You may now disconnect your lines.
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