Q2 2022 Independence Realty Trust Inc Earnings Call
Covenants, which have impacted Iot 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 <unk> 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 <unk> 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 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 exceed 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 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 to our value add program, which Farrell will provide more details later on this call, but I'd like to note that our plant 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 outset.
<unk> 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.
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 in 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 <unk> per share growth each of 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.
And 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 the second quarter of 2022 as well as on a year over year basis.
This was led by our ability to drive rent credits, while maintaining high occupancy levels, we have an attractive portfolio in markets, where we continue to see inbound migration were taken 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 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 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 nine 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 those residence was around 20%.
We're pleased to note that rental rate trends continued to improve in the third quarter to date with new leases for our combined same store portfolio, having increased 28% 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 was partially attributed to our favorable loss to lease which stood at 16% as of June 30, giving us pricing power and the strong demand for leasing months.
So far in Q3, our resident retention rate of 59, 8% up 520 basis points from Q2 2022.
Selecting 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 apparel to provide you with an update on our investment opportunities.
I'd like to start off with an update on our longstanding value add program and.
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 $11959 per unit.
And these units achieved an 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 800 units, which is lower than our initial projection of 2000 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 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.
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 4000 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 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 five 5% effective economic cap rate.
And in June we entered into a new joint venture for the development of a 378 unit community can be built in Austin, Texas. The community is located in north Austin within walking distance the commuter rail and in close proximity to the domain and several employment centers site.
Site improvements began last months with the completion of the project is scheduled for May 2024.
Committed to invest an aggregate $29 7 million into this joint venture of which $14 $7 million has already been funded.
The you all costs of the project is 575%.
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 four 1%.
We are still marketing our Canadian tire hub with some of the preliminary views on pricing at a five 4% economic cap rate combine.
Combined these two communities held for sale would have a blended cap rate of four 7%.
And lastly in August and expect to close on the community in Charlotte North Carolina. The recently completed property contains 234 units and will be 86% occupied at closing.
Purchase price is $80 million generating a stabilized economic cap rate of four 3% I'd now like to turn the call over to Jim.
Thanks, Al and good morning, everyone, beginning with our second quarter 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 star merger.
During the second quarter core <unk> grew to $58 6 million up from $22 million, a year ago and core <unk> per share grew 30% to 26 per share up from <unk> 20 per share in Q2 2021. This growth as a result of the completion of our merger with star and the related accretion as well.
All of the sizeable organic rent growth we've experienced throughout the combined portfolio.
<unk> 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 include value add communities, we did see similar NOI growth of 14% at our same store non value added communities, which reinforces the fundamental strength of our core markets.
On the property operating expense side combined same store operating expenses grew six 9% in the second quarter led by higher repairs and maintenance cost contract services and payroll.
The increase in repairs and maintenance was driven mainly by the timing of spring projects as well as some 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 Starwood 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 Iot approximately $2 $5 million in payroll cost 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 onto the balance sheet, we would like to highlight appendix a in our supplement we provide our Q2 2022 combined same store results broken down between legacy Iot and sorry communities as you will see the 15, 3% NOI growth at the legacy Star communities as a result of strong rental and other property revenue growth as well as the execution of our <unk>.
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 $15 million of ATM proceeds available from forward equity sales.
Earlier this week, we completed a new $400 million term loan and used the proceeds to repay 2024 maturities and reduced borrowings outstanding on our line of credit.
This new term loan will mature in January 2028, and will bear interest at sofa, plus 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 silver 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 seven four times down from eight five times, a year ago, and we continue to target low seven by the end of this year and mid <unk> 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 in the economic strength of our markets. Our guidance now includes a <unk> <unk> per share midpoint of $1 seven per share a <unk> <unk> increase from our previous guidance for.
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.
With higher revenue growth is partially offset by operating expenses that we now expect to grow by six 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 market, our remaining guidance on G&A property management expenses.
As interest spend transaction volume and capital expenditures are largely unchanged from our prior guidance.
Now I'll turn the call back to Scott Scott.
Jim <unk>.
This morning was to convey our confidence and our expanding portfolio and ability to execute our strategy under various and sometimes volatile market conditions.
Our current year results were on top of exceptional performance in 2020 in 2021 since 2019 IRT has delivered 31% cumulative combined same store NOI growth there.
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 demands and accelerating our organic growth through our value add program.
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 with bank of America 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 Kim again to ask a question press Star one.
As a reminder, if you are using a speaker phone. 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 .
Okay.
Thank you.
I wanted to ask about your same store revenue guidance, which you revised up but at 10, 9% at the midpoint. It still seems a little modest given it's about 200 basis points below you or at least 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.
This new range.
Yes, I mean I think.
Right now the guidance has for the year occupancy average occupancy at 95, 3% and we've just been.
Thinking about Q4 revenue growth for lease over lease basis, and we're just moderating 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.
Exhibiting cap rate compression.
Can you comment on this dynamic.
Buyers underwriting in terms of growth in the near term and how do you react to this continued.
Strong demand in your markets.
So you said the cap rate compression.
Yes.
Because what we're seeing so it's been an interesting market.
Yeah. So the cap rates are expanding I mean, what we're seeing is valuations peaked probably six months ago and.
Transactions basically stalled during the volatility is there 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 year end, which equates to a 50 to 100 basis point expansion and in the markets.
We're in we're seeing about a four to four 5% cap rate right now.
<unk> capital's.
Really chicken quality so.
<unk> markets are going to be wider than that but for Atlanta, Dallas Raleigh markets four.
$4 to $4 five is what were seeing currently as opposed to three three and a half at the peak.
So 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 accretively.
Well, we look at Egypt 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 have we've only announced one acquisition and Thats one that we have had under contracts for many months now it was it was put under contract pre.
Pre certificate of occupancy and we're not going to close on it.
In the next 30 days for all set.
So we're going to we're going to stay disciplined we're going to buy when it makes sense.
Got a fan and never have we in the passport at negative leverage so I don't see us doing that going forward.
But we're in a good position with plenty of liquidity in those opportunities present themselves, we will evaluate them individually.
Great. Thank you.
Okay.
Thank you John .
Our next question comes from Neil Malkin with capital one. Please go ahead Neil.
Thanks, Good morning, everyone.
Nice quarter.
Hey.
Hey.
Kind of similar to I think Joe's last question, but in addition to the value add which is just continuing to put up I'll start numbers can.
Can you talk about just capital priorities.
I guess sources and uses.
Just given.
Just given.
Sort of the environment. We're in in terms of I think it was just announced.
Session.
Rates going up.
Evaluation and trying to find a new normal.
Can you maybe just kind of go over how that's.
Changed or adjusted your you're thinking over the next maybe 12 months or so.
Well I'm not sure it's changed much Neal so our number one priority for capital allocation is value add.
I think your car will say that we are generating 30 plus percent unlevered return on equity. So there's nowhere else were going to anyone who is going to see returns like that so that will be our number one priority.
We're still evaluating joint venture development opportunities.
We have slowed that down.
The current uncertain times, but we're still seeing some good opportunities in markets that we like that pricing seems to make sense. So 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 a number of months ago.
After that it's again, just trying to be opportunistic if we see one.
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.
Yeah.
Okay Awesome, just real quick on the cap rate you mentioned for Charlotte <unk> III was that an economic or is that nominal.
That's an economic assuming.
Occupancy at 94%.
Once we stabilize it which would be a couple of months.
Okay I appreciate it and last one for me.
In terms of.
And you talked about your affordability being around 20%, which is obviously.
Very good.
But I'm just wondering if.
Just 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.
Have you seen any pushback in rate increases.
Maybe any any notable noteworthy increases in move outs for rent increased purposes.
Yes.
Anything along those lines.
And then.
Potentially related to are you seeing any.
Tack or other sector layoffs impacting any specific assets or market. Thanks.
Okay.
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 a apartment homes for working America that want well located amenity rich well maintained department hopes that the traffic flow and the demand for that.
<unk> 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, it's about 20% rent to income from most of our residents. So in this I guess, we can now holiday 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 many people or clients that recession is it typically in a downturn like this is one of the first things that happens is there is a pullback a significant pullback in job growth.
There are a lot of layoffs, but with three 6% unemployment there are definitely enough jobs out there and most of our people again. Our residents are working 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.
Yes, no I appreciate that so I guess youre not really seeing any one.
More than normal bucket.
The rent increases.
Now, we are not and one of them.
People are.
Okay.
Thank you for your question Neal.
The next question comes from Brad Heffern with RBC. Please go ahead Brad.
Thanks, Good morning, everyone. Just a follow on on that last question. I mean is it fair to say that youre not seeing any signs of the macroeconomic pressure.
When you look at the operating performance there.
An 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 50 bps 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 whats driving that.
It seems like the guidance would suggest that maybe it'll it'll pick up a little bit again, but any thoughts on occupancy.
And another great question Brad.
As we started this year, we were very focused on any potential merger integration bumps 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 has 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 a sort of a forward looking when you set up the notices for the 30 60 90 days and in 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 are starting to harvest that two which gave us that great pricing power. So that combined with the strong traffic flows that we are saying we are very confident we will meet that guidance for occupancy for the year.
Yes.
Okay.
And Jim just given all the sort of puts and takes on acquisitions dispositions.
<unk> activity through the JV can you just walk through the capital needs.
How do you think about funding that.
Sure.
The majority of the capital and as Scott mentioned, we continue to prioritize capital into the value add program and when you kind of look at just a free cash flows of the business as well as all the demands from.
Just normal recurring capex spend incremental value add capex capex spend even this year as well as the 4000 units next year. That's all met with free cash flows from the business and there is still some extra cash flow that can be used to invest in joint ventures et cetera. So I think.
Theres very little need to.
<unk> capital either by borrowing or even equity to fund all of the business activities in a routine and recurring and routine basis.
Okay.
Okay. Thank you.
Okay.
Thank you Brad.
Next question comes from Nicholas Joseph with Citi. Please go ahead Nicolas.
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 with combination of the increase in construction costs and now <unk>.
Construction debt being both more expensive and lower leverage deliveries probably slow down in the future.
So markets like Nashville, and Austin, and Dallas that have a lot of in migration I think are going to be pretty strong over the next couple of years.
Thanks, you think start slow and that benefits supply in 253 years.
Yes, we're already seeing it with a lot of the sponsors that we're talking to you on the JV side.
So I think it's going to start.
Particularly through the system regards to just reducing the amount of deliveries again over the next two to five years.
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.
Yes, I mean, I think you saw a little bit of a Nick when we when the pandemic first started back in 2020, we quickly toggled off a few of the properties and the value add program.
Solid just traffic drops so for US. The first question is just traffic flow.
The value add communities when evaluating continue to move forward or not and obviously that traffic flows are a big determinant on based on the macroeconomics to rent being poised for people, losing their jobs, etc. So thats. The first key indicators that will determine the on and off nature of the value add and Nick It's also completely within our control because we self perform.
All of this work so 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, where Schmidt with Keybanc capital markets. Please go ahead Austin.
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 were trading.
At our inside class, a assets and you referenced or or.
Someone referenced earlier that theres been any upward pressure on cap rates in your markets and so I am just wondering if at what point do you kind of pivot back and look again at doing more of the value add one off deals.
Cost capital permits and or through just funding through additional capital recycling.
Well again in Austin. Thank you, it's a great question and we're constantly looking at it and the.
The attractiveness of the value add is that we're literally providing a an apartment community that competes with brand new construction.
At a at a better price point.
And then what the residents would have to pay again for new development. So again it gives us it gives us that debt.
Benefit of.
Comparable comparable property at a lower price.
As we are out leasing.
We started to pivot a little bit repetitive, 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 at 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 debt.
Buyers head 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 this market that makes sense for us.
At a better return from day one.
That now changes back.
We were able again to pivot quickly.
And.
Our focus more on again, the 15 to 20 year old value add type communities.
Okay. 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 better than feared if youre able to successfully appeal.
Any of the sizable increases you've received thus far.
Great question, we have assessments in about on about two thirds of the portfolio.
We do not have any formal tax bills in yen, we haven't received the millage rates yet on those assessments assessments as I mentioned in the prepared remarks assessments are higher than we originally anticipated this year than budgeted are tax assessor taxes our tax.
We will fight all of these in a few all of these and we hope we are successful Dallas and Atlanta are two particular outliers.
And the real estate tax world, but were hopeful hopefully we can deliver better than what we've guided to.
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 needing.
Needing to dial back maybe the new and renewal rent increases.
In order to stabilize or even bring occupancy higher is it sounds like 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 at 95% occupancy is full occupancy and our focus has been to balance rent growth with occupancy to generate the highest potential revenue.
So really it's traffic driven and lease conversion driven so we will continue with the rent increases as you can all 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, its a traffic issue and more of a macroeconomic issue.
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.
But right now we're there's no need to do that.
Understood. Thanks for the answers in the for the time.
Great. Thank you.
Thank you for your question.
The next question comes from Wes Golladay with Baird. Please go ahead Wes.
Yes, good morning, everyone.
The buyback in place and cap rates are historically low you have increased appetite to step up dispositions and buy shares at these levels.
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.
Those sales and what is available to buy in the market.
The stock buyback will 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 leverage so that's another use of our capital as we continue to Delever the balance sheet.
Got it and then 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.
Currently.
Sure.
Part of it I mean, I think all of the multifamily operators have.
<unk>.
Let's 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 as the courts continue to process those evictions.
That's putting a little bit of downward pressure on the occupancy.
Great. Thanks for the time.
Sure.
Thank you.
Our next question comes from Michael Gorman with <unk>.
Please go ahead.
Yes. 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.
But can you just juxtapose that with your retention rate, which seems to be climbing pretty strongly so what's what's the tradeoff that youre seeing there.
With the 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.
It's really the increasing 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 in <unk> 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 that turns goes offline for give or take 30 days.
And that has a negative effect on occupancy.
And right now in July we started a number of new communities and we will continue to start with communities through the rest of the year and that will have a negative impact on occupancy. It's just it's just the fact.
But obviously the 30 plus percent returns on Levered equity as well.
Well worth the benefit is well worth that debt.
A little bit of occupancy pressure.
Okay, Great and then just one question on the value add.
As you continue to ramp up the pipeline towards that kind of 4000 unit target next year.
Targeting a 500 for 2022, but the capital budget for the value add didn't change as 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 the unit count.
I'm, sorry, I thought Jim was going to answer that question no I just think it's the 1800 1800 units is as an estimate we had we had initially targeted 2000 units, but when we decided to sell the Louisville property Meadows that took one one.
Third 50.
Out of the value add program and $12000 give or take a unit. It's just that 100 or 200 units somewhat on the margin. So the value AD spend this year will be about $25 million and it will be about $50 million.
In 2023.
Okay.
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 lines.