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 with an opportunity for questions and answers at the end. If you'd like to ask a question, press star one on your telephone keypad. I would now like to pass the conference over to our host, Lauren Torres.
Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust second quarter 2022 financial results. On the call with me 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 on 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.
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 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 in non-gateway cities is well-positioned to realize outsized 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 two, while achieving double-digit average rental rate growth of 12%. This is possible due to our high exposure to non-gateway markets in the Sun Belt 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 Sun Belt markets when appropriate.
The expansion of our portfolio continued in the second quarter as we acquired a community in Nashville, which was our first multi-family property acquired through our JV development program. 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 which reflect continued value creation at IRT. In addition, we are actively investing in our existing communities through our value add program, which Farrell will provide more details later on this call. 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, 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 of 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 rentals. This is true in our markets which continue to exhibit strong fundamentals and where we increasingly provide homes in 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.
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. 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. Now I'd like to turn the call over to Ella for an operational update.
Thank you, Scott. We've delivered another strong quarter with momentum continuing from the first to 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 in markets where we continue to see inbound migration, particularly in the Sun Belt region, where jobs are being created and residents are attracted by better lifestyle opportunities. When looking at occupancy, the average occupancy in Q2 was 95.7% when excluding properties that are undergoing value add renovations. So far in July, this average occupancy continues to be strong at 95.3% as we increased 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 increase of 13.4%.
Our ability to deliver these results is partially attributed to our favorable loss to lease, which stood at 16% as of June 30th, giving us pricing power in these strong demand leasing months. So far in Q3, our resident retention rate is 59.8%, up 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 complete, and we've 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.
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, bringing 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 a $333 per unit increase in monthly rents over comparable unrenovated 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 The 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 eight 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 the 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, including 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 of three communities from our joint venture partner in Nashville for $25.4 million. This price translated into a 5.5% effective economic cap rate. 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 the 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 yield on cost for the project is 5.75%. As of the end of the second quarter, we had 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 would have a blended cap rate of 4.7%. Lastly, in August, we expect to close on a 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%. I'd now like to turn the call over to Jim.
Thanks, Farrell, and good morning, everyone. Beginning with our Q2 2022 performance update, net loss allocable 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 with 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, contract services, and payroll. The increase in repairs and maintenance was driven mainly by the timing of spring 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 we've implemented various additional revenue services at the legacy STAR properties. On the payroll and staffing front, 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 are 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 markets, allowing us to improve effectiveness and our resident services.
Before moving on to the balance sheet, we would like to highlight Appendix A in our supplement where 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 at the legacy Star communities is a 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 to our balance sheet. As of June 30th, 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, earlier this week, we completed a new $400 million term loan and used 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 + a spread based on our leverage. Currently, that spread is 115 basis points, five basis points lower than our other term loans. As part of this new term loan, we took the opportunity to convert all of our unsecured borrowings from LIBOR to SOFR-based. 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 sevens by the end of this year and mid-sixes 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, a 2-cent increase from our previous guidance. For 2022 and 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 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?
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 and 120 communities across resilient, high-growth markets. The positive demographic trends in our markets will support continued outperformance 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 look forward to seeing some of you at Bank of America's Global Real Estate Conference in September. Operator, we would now like to open the call for questions.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. To remove your question, press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from John Kim with BMO Capital Markets. Please go ahead, John.
Thank you. Wanted to ask about your same-store revenue guidance, which you revised up, but at 10.9% as a midpoint, it still seems a little modest given it's about 20 basis points below, your lease growth rate over the last 12- months. Jim, I realize you talked about vacancy as a partial offset, but what else could get you to the midpoint, of this new range?
Yeah, I mean, I think, you know, right now the guidance has for the year average occupancy at 95.3%. We've just been, you know, thinking about Q4 revenue growth for a lease-over-lease basis, and we're just moderating it lower, just considering the broader economic world that we live in today, and just being cautious as we think about full year guidance.
Okay. Second question is on cap rates in your markets. We've heard of at least one transaction occurring, you know, exhibiting cap rate compression. Can you comment on this dynamic? What are buyers underwriting in terms of growth in the near term? How do you react to this continued, you know, strong demand in your markets?
John, you said cap rate compression?
Yes.
'Cause what we're seeing.
Cap rate compression.
It's been an interesting market. Yeah. The cap rates are expanding. I mean, what we're seeing is, you know, valuations peaked probably six months ago and, you know, transactions basically stalled during the volatility, as there was some price discovery. To your point, it seems like in the last couple weeks there's been more of an agreement on, you know, the buy-sell, and pricing has adjusted basically 5%-15%, depending on the market you're in, which equates to, you know, a 50 basis point-100 basis point expansion. In the markets we're in, we're seeing about a 4%-4.5% cap rate right now. You know, capital's really chasing quality, so the tertiary markets are gonna be wider than that.
For, you know, your Atlanta, Dallas, Raleigh markets, you know, 4-4.5 is what we're seeing currently, as opposed to 3-3.5 at the peak.
What's your appetite in terms of acquiring a negative leverage basis? I mean, do you focus more on development at this point or are there cases where you could buy creatively?
Well, we look at each individual transaction on its own merits. You know, we've maintained from the day we started this company that we were going to be disciplined and only grow when it made sense, you know, for the company as a whole. You know, 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. We're now gonna close on it, you know, in the next, I think 30 days, Farrell said. We're gonna stay disciplined. We're going to, you know, buy when it makes sense. I'm not a fan and never have we in the past bought at negative leverage.
I don't see us doing that going forward. We're in a good position with plenty of liquidity, and as opportunities present themselves, you know, we will evaluate them individually.
Great. Thank you.
Thank you, John. Our next question comes from Neil Malkin with Capital One. Please go ahead, Neil .
Thanks. Good morning, everyone. Nice quarter.
Morning.
Can you... Hey, 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 up all-star numbers, can you talk about, you know, just capital priorities, I guess sources and uses, you know, just given, excuse me, just given sort of the environment we're in in terms of, you know, I think it was just announced we're in a recession, rates going up, you know, valuations, you know, trying to find a new normal. Can you just maybe just kind of go over how that's changed or adjusted your thinking over the next maybe 12 months or so?
Well, I'm not sure it's changed much, Neil. Our number one priority for capital allocation is value add. I mean, you know, I think you heard Farrell say that we're generating, you know, 30%+ unlevered return on equity. There's nowhere else anyone is gonna see returns like that. That'll be our number one priority. We're still evaluating joint venture development opportunities. We have slowed that down, you know, during the current uncertain times. But we're still seeing some good opportunities in markets that we like that pricing seems to make sense.
I would tell you that that's something that we will continue to pursue, albeit it will be at a slower pace than it was, you know, a number of months ago. You know, after that, it's again, just trying to be opportunistic. If we see, you know, 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 accretively, we will consider those as well.
Okay. Awesome. Just real quick. On the cap rate you mentioned for Charlotte, the 4.3%, was that an economic or is that nominal?
That's an economic, assuming occupancy is 94% once we stabilize it.
Okay, great.
Which should be a couple months.
Okay. Appreciate it. The last one for me is in terms of you talked about your affordability being around 20%, which is obviously, you know, very, very good. But I'm just wondering if given, I guess you wanna call it, the nature or the demographic, however you wanna put that, of the renter, of your renter, have you seen any pushback in rate increases? Maybe any notable or noteworthy increases in move-outs for you know, rent increase purposes? Anything along those lines. And then, you know, potentially related is are you seeing any you know, tech or other sector layoffs impacting any specific assets or markets? Thanks.
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 Class A apartment homes for working America that want well-located, amenity-rich, well-maintained apartment homes. The traffic flow and the demand for that continues to be incredibly strong. In fact, probably increasing in most of our markets. That price point that we have on our apartment homes, as you mentioned, is about 20% rent to income for most of our residents. 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 that typically in a downturn like this, one of the first things that happens is there's a pullback, a significant pullback in job growth, and there are a lot of layoffs. It, with 3.6% unemployment, there are definitely enough jobs out there. Most of our people, again, our residents, are working Americans. We don't see that impact that you'd normally be worried about during a recessionary period to be hitting us on that front.
Yeah, no, I appreciate that. I guess you're not really seeing anyone, you know, more than normal balk at the rent increases.
No, we are not. One of the reasons is.
Okay, thank you.
You know. Okay.
Thank you for your question, Neil. The next question comes from Brad Heffern with RBC. Please go ahead, Brad.
Thanks. Morning, everyone. Ella, just to follow on that last question. I mean, is it fair to say that you're not seeing any signs of the macroeconomic pressure, you know, when you look at the operating performance, there's no, you know, increase in delinquency or anything that would suggest that that's happening?
That's correct. We're not seeing anything out of the norm on any of that.
Okay. On the occupancy front, I know it was down, you know, 50 basis points on the same-store in July. It sounded from the prepared comments like that was maybe just pushing rate a little bit. I guess any color on, you know, 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?
Another great question, Brad. As we started this year, we were very focused on any potential merger integration bumps. We announced that we were gonna 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 has gone really well. Starting in the second quarter, we look to increase rental rates on new leases and renewed leases. As you know, that's a sort of a forward-looking. It's when you send out the notices for the 30, 60, 90 days. In our guidance, you can see that we're starting to see the benefit of that increase in our blended renewal rates. The loss to lease, we're starting to harvest that too, which gave us that great pricing power.
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.
Okay. 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?
Sure. I mean, I think the majority of the capital needs, as Scott mentioned, we continue to prioritize capital into the value add program. When you kind of look at just the free cash flows of the business as well as all the demands from, you know, just, you know, just normal recurring CapEx spend, you know, 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, you know, extra cash flow that could be used to invest in joint ventures, et cetera. I think, you know, there's very little need to, you know, raise capital either by borrowing or even equity, you know, to fund all the business activities in a recurring and routine basis.
Okay. Thank you.
Thank you, Brad. The next question comes from Nicholas Joseph with Citigroup. Please go ahead, Nicholas.
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? What makes those markets attractive to enter or to add capital to right now?
We actually think, you know, with combination of the increase in construction costs and now, you know, construction debt being both more expensive and lower leverage as deliveries probably slow down in the future. Markets like Nashville and Austin and Dallas that, you know, have a lot of in-migration, I think, you know, are gonna be pretty strong over the next couple of years.
Thanks. You think starts slow, and that benefits supply in 2.5 years-3 years and out?
Yeah. We're already seeing it with a lot of the sponsors that we're talking to on the JV side. I think it's, you know, it's gonna start, you know, trickling through the system regards to just reducing the amount of deliveries again over the next, you know, 2 years-5 years.
Thanks. You talked about the macroeconomic environment. I mean, 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?
Yeah. I mean, I think you saw a little bit of it, Nick, when the pandemic first started back in 2020, you know, we quickly, you know, toggled off a few of the properties in the value add program that saw just traffic drop. For us, the first kind of question is just traffic flow into the value add communities when evaluating continue to move forward or not. Obviously, that traffic flow is a big determiner based on the macroeconomics in terms of rent being pushed or people losing their jobs, et cetera. So that's the first key indicator that will, you know, determine the on and off nature of the value add.
Nick, it's also completely within our control because we self-perform, you know, all of this work. It's not like we have committed contracts out there that we would have to continue to honor. If the market changes, we can shut it down relatively quickly.
Thank you very much.
Thank you.
Thank you for your question. The next question is from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead, Austin.
Thanks, 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 were trading, you know, at or inside Class A assets. You referenced or someone referenced earlier that there's been the upward pressure on cap rates in your markets. I'm just wondering at what point do you kind of pivot back and look, you know, again at doing more of the value add one-off deals, if you know cost of capital permits and or through just funding through additional capital recycling?
Well, Austin, thank you. It's a great question. You know, we're constantly looking at it. You know, the attractiveness of the value add is that we're literally providing an apartment, you know, community that competes with brand new construction at a better price point than what the residents would have to pay again for new development. Again, it gives us that benefit of a comparable property at a lower price as we're out leasing. We started to pivot a little bit. I don't want to say pivot, but we started looking and doing a few more Class A investments because the cap rates just got upside down.
You know, we were seeing, you know, brand new Class A, well located, desirable communities trading at cap rates that were higher than 15- to 20-year-old Class B product. It was because of the whole value add focus that buyers had. You know, we thought, you know, why not use some capital and invest in, you know, 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. You know, if that now changes back, you know, we are able again to pivot quickly and, you know, focus more on, you know, again, the 15- to 20-year-old value add type communities.
No, that's helpful. Then, Jim, on expenses and maybe focusing on property taxes in particular, I'm curious kind of what % of assessments have come in at this point, and if that's, you know, something that could ultimately be better than feared if you're able to, you know, successfully appeal, you know, any of the sizable increases you've received thus far?
Great question. We have assessments in about two-thirds of the portfolio. We do not have any, you know, formal tax bills in yet, and we haven't received millage rates yet on those assessments. Assessments, as I mentioned in the prepared remarks, are higher than we originally anticipated this year and budgeted. You know, our tax consultants, you know, will fight all of these and appeal all of these. You know, we hope we are, you know, successful. You know, Dallas and Atlanta are two particular outliers in the real estate tax world. But we're, you know, hopeful. Hopefully, we can deliver better than what we've guided to.
Got it. Just last one for me. Just wanted to touch again on the occupancy, you know, in July and how quickly that sort of slid. You know, at what point should we think about, you know, you needing to dial back maybe the, you know, new and renewal rent increases?
In order to stabilize or even, you know, bring occupancy higher as it sounds like, you know, you expect it to average a little bit higher than where it sits today for the back half of the year.
Well, I've always maintained that 95% occupancy is full occupancy and, you know, our focus has been to balance rent growth with occupancy to generate the highest potential revenue. Really it's traffic driven, at least conversion driven. We will continue with the rent increases, as you now see, as long as we're able to keep occupancy in that 95%-95.5% range, going forward. If we start to see that soften, and again, it's a traffic issue and more of a macroeconomic issue, you know, if we start to see that soften a little bit, then we'll have to dial back or we will dial back the rent growth numbers. Right now we're
Thank you.
There's no need to do that.
Understood. Thanks for the answers and for the time.
Thank you.
Thank you for your question. The next question comes from Wes Golladay with Baird. Please go ahead, Wes.
Hey. Good morning, everyone. You have a buyback in place and cap rates are historically low. Do you have increased appetite to step up dispositions and buy shares at these levels?
You know, we're always looking at it. It becomes a you know, a capital allocation issue, and we have a couple of you know, communities that we've identified for recycling. You know, as we look forward at you know, those sales and what is available you know, to buy in the market, you know, the stock buyback would be in the equation as to is it better to buy back 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. You know, we're also watching leverage. That's another use of our capital as we continue to delever the balance sheet.
Got it. When we look at the occupancy declining a little bit in the third quarter, are you losing any of the tenants that were physically there but just not paying the rent? Is any of that occupancy leaving the portfolio at this currently?
Sure. That's part of it. I mean, I think all of the multi-family operators, you know, have, you know, I want to say a small shadow vacancy relative to tenants that weren't paying during the pandemic and as we go through the eviction process. As the courts continue to process those evictions, you know, that's putting a little bit of downward pressure out on the occupancy.
Great. Thanks for the time.
Sure.
Thank you. Our next question comes from Michael Gorman with BTIG. Please go ahead.
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 rate having a bit of impact on occupancy, which makes sense. Can you just juxtapose that with your retention rate, which seems to be climbing pretty strongly. What's the trade-off that you're seeing there with the stronger retention rate, but also a little bit of slippage in occupancy? How do you balance that out with pushing new versus renewal rates at this point in the cycle?
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. I think you heard it in Farrell's remarks that we're gonna do 700+ units in the third quarter. You know, when we add communities to the value-add program, every lease that turns goes offline for, you know, give or take 30 days. That has a negative effect on occupancy. 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. You know, obviously the 30+% returns on levered equity is well worth that.
The benefit is well worth that, you know, little bit of occupancy pressure.
Okay, great. Just one question on the value add. You know, as you continue to ramp up the pipeline towards that kind of 4,000 unit target next year, you know, targeting 1,800 for 2022, but the capital budget for the value add didn't change. Is a lot of that some of that anticipatory work that's gonna come to fruition next year, or I'm just curious why the capital budget didn't come down with the unit count.
I'm sorry. I thought Jim was gonna answer that question. No, I just think it's, you know, the 1,800 units is an estimate. We had initially targeted 2,000 units, but when we decided to sell the Louisville property, The Meadows, that took 150 units out of the value add program. You know, at $12,000, give or take a unit, it's just, you know, that 100 or 200 units is somewhat on the margin. The value add spend this year will be about $25 million, and it will be about $50 million in 2023.
Fantastic. Thanks for the time.
Sure. Thank you.
Thank you for your question, Michael. I will now pass the conference back over to the management team for any further remarks.
Well, thank you all for joining us today, and we look forward to speaking with you again next quarter. Have a good day.
That concludes the Independence Realty Trust second quarter 2022 earnings call. Thank you for your participation. You may now disconnect your line.