Independence Realty Trust, Inc. (IRT) Q3 2022 Earnings Report, Transcript and Summary

Good morning. Thank you for attending today’s Independence Realty Trust Incorporated Q3 Earnings Conference Call. My name is Foram, and I’ll be your moderator for today’s call. All lines will remain muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions]. It is now my pleasure 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’s third 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 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 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 this morning. I would like to begin our call today by thanking our on-site teams who played an integral part in ensuring the safety of our residents and communities that felt the effects of Hurricane Ian in Florida and the Carolinas. I'm happy to report that we did not experience any significant damage to any of our properties. And now on to our results, in the third quarter we delivered 11.5% combined same store NOI growth and 33% core FFO per share growth on a year-over-year basis. We attribute this strength to our portfolio concentration and non-gateway markets in the attractive, Sunbelt region, where demand continues to outweigh supply. In addition, we achieved double-digit average rental rate growth of 13.3% in the quarter. We continue to balance occupancy and rental rate growth to maximize revenue for the long-term. To that point this rental rate growth combined with the start of eight new value-add projects in the third quarter, put some pressure on occupancy, but locked in attractive lease rates generating a strong revenue earning for 2023. As of today our occupancy is 95.4% in our non-value add communities. Over the past quarter and as part of our capital recycling strategy we entered into agreements of sale for two communities, one in Louisville, Kentucky and one in Terre Haute, Indiana. We also acquired a community in Charlotte, North Carolina and another in Tampa, Florida expanding our footprint in these attractive markets. And we entered into a joint venture for the development of a community in Las Colinas, Texas which is part of the Dallas, Fort Worth metropolitan area and is experiencing strong job growth and population migration. These are all exciting opportunities to grow the portfolio in core IRT markets that have favorable fundamentals. We believe it is important to be patient and selective as we allocate company capital in the current economic environment and will only acquire new communities or invest in joint ventures as part of our capital recycling strategy. We are also making progress with our value-add program having renovated 795 units this year and achieving a return on investment of 27.1%. While we remain excited about our value add program and the increased units we had from our merger with STAR, we expect to moderate are our plan in 2023 by delaying the start of renovations at communities in new value add markets until we have better clarity on the state of the economy. Currently we expect to complete between 2500 and 3000 units next year. While acknowledging current macroeconomic uncertainty, we at IRT remain confident in our portfolio and strategy that will enable us to continue to drive outsized returns. Our confidence is underlying by the following; first, real estate fundamentals remain strong and we are encouraged about our position in the multifamily sector. Second, we have an optimal portfolio footprint across key Sunbelt markets, that continue to see significant migration and job growth. And we expect to outperform during all points of market cycles. Third, this position of strength has been further bolstered by the STAR merger, which has added scale in our top markets as well enhanced our operating platform. Fourth, as you can see with our performance year-to-date, we continue to successfully execute our portfolio strategy, combining accretive leasing activity with progress on our value-add renovations and capital recycling initiatives all which will ultimately drive long-term value for our business. And finally, all of this has been done while achieving the most robust balance sheet in IRT’s history, a true signal of strength as we move forward through the current operating environment. With all that said, we are reiterating our full 2022 guidance that we previously raised for combined same store NOI growth of 13.75% and core FFO per share growth of 28%, each at the midpoint of our guided ranges. Looking forward it is important to note that we expect 2023 to be a year of continued NOI and core FFO per share growth and provide a more detailed outlook for the next year during our year-end earnings call. And now I'd like to turn the call over to Ella for an operational update.

Thank you, Scott. We delivered a solid third quarter led by our ability to drive rent growth in our markets. As Scott mentioned, our average rental rate increased 13.3% in Q3, which is even stronger than the 12% increase delivered in Q2 of this year. More specifically, markets where we saw the highest lease-over-lease effective rent growth in Q3 where Tampa at 22%, Myrtle Beach at 21%, Atlanta at 15%, and Dallas at 14%. To put it in perspective, our markets with the lowest rent growth were Chicago, Birmingham, and Houston but they were still averaging 9% to 10% rent growth in the quarter. These rental rate increases put some pressure on our Q3 occupancy levels, along with the addition of eight new properties which started value-add renovations in the quarter. In response, we offered some upfront concessions to fill vacant units and balance our occupancy goal with our rent growth goals. This was a strategic decision to lock in a higher rental rate as we head into the end of the year and considering the economic uncertainty. These efforts increased our occupancy at our same store, non-value add communities to 95.4% as of today. Looking at rental rate trends in the fourth quarter to date, new leases for our combined same store portfolio have increased 7.1%, while renewed leases were up 8% for a blended lease-over-lease rental rate increase of 7.7%. This lease-over-lease rent growth in Q4 of 2022 is in line with our guidance and is on top of the 14.2% growth delivered in the fourth quarter of last year. Our favorable loss to lease was at 12% as of September 30th, giving us continued pricing power in 2023. We continue to see good retention throughout the portfolio with a Q3 average resident retention rate of 57%. While our Q4 resident retention rate is 50%, it's still a bit early and we expect it to rise over the coming months as our residents make their renewal decisions. The rate at which residents who are moving out to buy or rent a home is declining and stands at approximately 18% of move out for Q3 2022, this is down from approximately 21% in Q2. For the residents who are moving into our communities we continue to see good demand and demographic statistics. New residents over the last 90 days have had an average income of approximately $90,000 with 22% migrating into our markets from other states. We continue to see in migration from the West Coast, North East, and the Northern Illinois markets. I echo Scott's comment that we believe we are well-positioned for continued growth into 2023 with our earn in, loss to lease, and solid renter demand fundamentals in our markets. I would like to now turn the call over to Farrell to provide you with an update on our investment opportunities.

Thanks Ella. I'd like to first provide an update on our long-standing value add program. In the third quarter, we completed renovations on 457 units. For these completed renovations our renovation costs was $14,022 per unit and these units achieved on average a $262 per unit increase in monthly rents over comparable unrenovated units. This yields an unlevered return on investment of 22.4%. Year-to-date we've completed 795 units and achieved a return on investment of 27.1%. For full year 2022 we now expect to renovate approximately 1400 units, down from our previously guided target of 1800 units. This change is primarily due to a significantly higher retention rate on our unrenovated units at our value add communities. Beginning in the fourth quarter and throughout 2023 we will be including an additional 10 properties to our value add program. These 10 properties are comprised of 3350 units and we expect to achieve a return on investment in these properties consistent with prior value add projects. As Scott mentioned earlier for 2023, we now expect to renovate between 2500 and 3000 units. We made the decision to delay some renovations at communities mostly located in new markets where we do not yet have established renovation teams on the ground. So, starting these is not a question of if but rather a question of when. Now onto our capital recycling program which is focused on building our presence in markets with strong fundamentals, and exiting properties with less attractive growth opportunities. As of the quarter end we had two properties, one in Louisville, Kentucky and the other one in Terre Haute, Indiana classified as held for sale with the sale of the Louisville property closing yesterday. These dispositions are expected to generate an aggregate sales price of approximately 103 million, an expected blended cap rate of 4.7%. Regarding acquisitions, we expand our presence in Charlotte, North Carolina by acquiring in August a recently constructed 234-unit multifamily community for $80 million. In September, we acquired a 348-unit multifamily community in Tampa for $98 million. This community was built in 2012 and is an ideal candidate for our value add program in a top market positioned for long-term consistent growth. Combine these properties were purchased at a blended stabilized economic cap rate of 5.2%. And lastly we entered into a joint venture for the development of a 275-unit multifamily community to be built in Dallas, Texas. More specifically the property is located in Las Colinas, a massive planned community with residential and retail space, as well as 25 million square feet of office space, home to over 30 Fortune 500 companies. We expect this project to be completed in the third quarter of 2024 and have committed to invest an aggregate $25.6 billion into this joint venture of which $9.3 billion was funded last month. Currently we have a $100 million committed to six different projects with $71.5 million funded to date. We expect the opportunity to purchase these communities as they complete construction and stabilize between late 2023 and late 2024. Before turning the call over to Jim, I'd like to provide some brief information on our expectations for new deliveries in our sub markets for 2023. Currently STAR [ph] has projected new unit deliveries in our sub markets based on a weighted average exposure at 2.2% of existing inventory, dropping to 1.8% in 2024. The vast majority of these new deliveries are Class A, which do not compete directly with our well located, infield Class B communities. Asking rent at newly built communities on average are priced $521 per month higher than our communities. Additionally, we do not solely evaluate the growth in supply for our markets, but we also consider growing demand. Over the past several years our submarkets have experienced robust demand for apartments and that trend is expected to continue into 2023 and 2024. Currently Co-STAR [ph] expect demand for apartments in our markets to grow by 2.3% in 2023 and by another 2.4% in 2024. I'd like to now turn the call over to Jim.

Thanks Farrell and good morning, everyone. Beginning with our third quarter 2022 performance update, net income available to common shareholders was $16.2 million as compared to $11.5 million in the third quarter of 2021. During the third quarter core FFO grew to $64.3 million up from $22.7 million a year ago and core FFO per share grew 33% to $0.28 per share up from $0.21 per share in Q3 2021. This growth is a result of the earnings accretion associated with our merger with STAR, as well as the sizable organic rent and NOI growth we've experienced throughout the combined portfolio this year. We started 2022 with two key goals. First, we sought to fully integrate the operations of STAR and second, secure the identified synergies and related accretion. We're excited to remind you that we've accomplished both of these goals and they're delivering 33% core FFO per share growth year-over-year. IRT’s third quarter combined same store NOI growth was 11.5% driven by revenue growth of 10.6%. This growth was driven by a 13.3% increase in our average rental rates. While this NOI growth includes value-add communities, we did see similar NOI growth of 11.9% 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 9.1% in the third quarter led by higher repairs and maintenance and utility costs, as well as higher real estate taxes and property insurance. The increase in repairs and maintenance as mentioned last quarter, was driven mainly by the timing of projects as well as inflationary pressure on both supplies and services per unit terms. The increase in real estate taxes is primarily driven by some appeals we won in Q3 last year causing our expense last year to be lower than normal. We continually focus on managing expenses and inflationary pressure and are excited about some of the centralized initiatives we are rolling out now that will save us approximately 2 million a year in future payroll costs. Now turning to our balance sheet, as of September 30th our liquidity position was $326 million. We had approximately $24 million of unrestricted cash and $302 million available on our line of credit. At the end of September, we settled into in full the 2 million shares that were previously sold on a forward basis under the ATM program. The forward shares were settled at the weighted average sales price of $25 per share and IRT received net proceeds of $50 million. At quarter end our net debt to EBITDA was 7.2 times down from 8.2 times a year ago and we continue to target low 7s by the end of this year and mid 6s by year-end 2022. The proceeds from our upcoming sale of our two held for sale assets will be used to repay outstanding indebtedness [ph] and will increase our liquidity by approximately $50 million. As you think about managing the portfolio through a dynamic macro environment in the near term, it is important to stress the strength of our capital structure. In addition to a strong liquidity position, our debt refinancing that was completed in July enhanced our financial flexibility with 90% of our debt fixed and are hedged and with 90% of our maturities in 2026 and beyond. Regarding our full year 2022 outlook, we are maintaining our guidance from combining same store NOI growth of 13.75% at the midpoint. We are raising our core FFO per share growth guidance by half a penny to $1.07 and a half a penny as the midpoint. While we're slightly lowering our property revenue growth guidance to 10.7% of the midpoint, we are also lowering our projections for operating expense growth to 5.5% from 6.3% both also at the midpoint. This better reflects our performance today and greater clarity on expenses for the remainder of this year. Looking ahead to 2023, we expect inflationary pressure to impact various expenses including payroll, repairs and maintenance, and contract services. We see lease-over-lease rent growth moderating, but given our strong rent growth in 2022 with a 5% earning that will contribute to 2023 revenue growth. Our operating focus will include the further implementation of automation and realization of efficiencies within our business. We will provide full year 2023 guidance in February, but to note that we expect 2023 to be another year of growth for both NOI and core FFO per share. Now, I'll turn the call back to Scott. Scott?

Thanks Jim. As we enter the last two months of our calendar year and the anniversary of our merger with STAR, I'd like to reiterate the confidence we have as a team in our expanded portfolio which has undoubtedly strengthened over the past year as we seamlessly integrated STAR and exceeded our initial expectation for annual synergies. I'm proud to say that we have successfully executed our strategy under volatile market conditions and continue to invest in our business, while delivering 33% core FFO per share growth on a year-over-year basis in our most recent quarter. Going forward, we will remain disciplined in our capital allocation efforts, which will be focused on continued debt reduction and selective investments in our value add and capital recycling programs. We are also committed to driving shareholder value and returning capital to our shareholders. This was proven earlier this year, when we increased our quarterly dividend payout and put into place a share repurchase program. IRT is incredibly well positioned to succeed in the multifamily space due to the strength of our dedicated team, our 121 communities across resilient high-growth markets. We thank you for joining us today and look forward to seeing you at REITWorld Conference in San Francisco next month. Operator we would now like to open the call for questions.

Absolutely. Thank you. [Operator Instructions]. Our first question comes from the line of Brad Heffern with RBC Capital Markets. Brad your line is now open.

Thanks, good morning everyone. Can you walk through how demand looks currently, are we at a normal sort of seasonal level? And then on the concessions, are those that what you would consider to be a normal seasonal level as well?

On the demand side, as I mentioned in the call, I mean what we're seeing from a high level is demand matching up with supply overall. Obviously every market is a little bit different and we're seeing in some of our smaller markets, your Myrtle Beach and Wilmington, your Huntsville may be getting a little bit ahead on the supply side. But our larger markets like Dallas and Atlanta and Denver they're seeing 2% to 3% supply with significant population growth that should be able to more than meet the supply.

Yeah, I think Brad, this is Jim, I will just chime in there, I think if I was right I think with respect to Q4 I think certainly the level of normal I would say pre-COVID seasonality has returned to the business. But we still see good leasing demand for our units given a lower expiration curve in Q4. We do -- we certainly do kind of obviously track all that stocks and look at it every period. The concessions that were offered were offered in September and early part of October, and we're not offering concessions currently.

Okay, got it, thanks. And then Jim may be sticking with you, the fourth quarter guide implies a pretty low OPEX figure. I know you mentioned that the third quarter number was affected by the comps from the prior year, so is that improvement largely just comps? And then you gave a little commentary on 2023 out backs but is there any sort of direction that you can give us should -- would you expect it to be higher than this year, lower than this year?

Yeah, good question. I want to try to not answer the 2023 question, but I think for 2022 the big change is real estate taxes. We received some relatively high assessments, we pushed back pretty aggressively and are getting some good feedback and some good results from those assessments with the tax assessor's. And as a result, we've modified guidance for the year, given that new intelligence around real estate tax is relatively kind of a big change. In terms of 2023, we certainly see the inflationary pressures continuing on some of those key categories, repairs and maintenance, utilities, etc. Probably in the kind of the mid-single digit growth ultimately for next year. But, I would say that's kind of in line with where we are this year. But as I mentioned, we're excited about all these efficiencies in rolling out some of these centralization services that will even help us further kind of keep those inflationary pressures in check for next year.

Okay, thank you.

Thank you for your question. Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Austin, your line is now open.

Hey, good morning everybody. I just wanted one quick follow-up to Brad’s question on concessions. Where those concentrated within the value add pool, or any specific markets, just any additional detail you could offer up?

No, they weren't really -- well, yes, let me start over. They were concentrated in properties where we saw higher vacancy and they were upfront concessions in order to jumpstart occupancy and get it back to where it has historically been, which we have accomplished. And the important thing is that those concessions have now ended and have largely burned off. So, from this point forward, it is a full rent collection for the next 12 months.

Got it, appreciate the detail. And then Scott, you kind of highlighted that economic uncertainty drove the decision to dial back the renovation goals for 2023, but is the 2500 to 3000 units the right pace of redevelopment just for the current size of the portfolio, or do you envision ramping to that 4,000 units if and when sort of the fog of uncertainty begins to lift?

I do anticipate ramping to the 4000 once the uncertainty is behind us. And we just felt Austin that, occupancy is -- it's obviously a headline risk. I mean, you look at all the questions that we received on occupancy and the value-add clearly puts pressure on it. I mean, if you think about it, every unit, the turns, when we start the value-add process within a community, every unit that turns goes vacant for 30 to 35 days. And that clearly has a downward pressure, puts a downward pressure on occupancy. So in the current environment we decided that we were going to dial it back a little bit and all we did was we eliminated largely the markets where we were beginning to value that process and didn't have any historical experience of work going on. So that way we did not have to go out and build teams to do that because remember, we do it all in house, largely in house. We didn't have to go out and build value-add teams in those markets again, with the fog of uncertainty that you mentioned.

So you've talked historically about stabilized occupancy I think in the mid 95% range, how do we think about that value-add pool of what the right level of occupancy is as sort of the size of that moves around, and you look to manage occupancy for the overall portfolio?

Well, I think if you look at, if you look at the portfolio excluding the value add, we're at 95.5% today. We are -- Jim, was it 94.2% [ph].

Average length in the quarter.

So it's about 120 basis points on the portfolio as a whole. But I think if you then look at the value add it's about 92. So it's about a 300 to 350 basis point reduction in occupancy because of the value-add process.

Right, right, okay. And then just last one for me, I guess you've reference returns on redevelopment, you expect them to be consistent with the prior value-add projects. Returns did come down a bit this quarter from the elevated levels you've achieved. So one, can you remind us what the targeted returns are for redevelopment and could we potentially see those returns re-accelerate to where you were previously achieving I think 30% plus given sort of concessions have been dialed back at this point?

So historically, our target has been 20% and we have exceeded that over the last 18 months as you pointed out by a significant amount. We think it will normalize in that 20% range. And the reason -- the real reason that I believe that it got as high as it did was because we saw obviously tremendous rent growth across the portfolio, including the value-add and we didn't -- I had not yet experience some of the inflationary pressure on the expenses or on the costs. So, now we have a little bit more cost and some of the rent growth is moderating. But we fully expect it to stay in that 20% range. And again, it's unlevered. So it's still very attractive.

No, understood. Thanks Scott.

Thank you. Operator Thank you for your question. Our next question comes from the line of Nick Joseph with Citi. Nick, your line is now open.

Hey guys, thanks, good morning. It's actually Nick Quran [ph] for Nick Joseph right now and so two quick ones for me. First, you touched on a little bit of 5% earn in. Just wanted to know what the current loss to lease looks like, as well?

Yeah, current loss to lease in the portfolio is 12%.

Okay, great. And then sort of on the renovation, so just wondering if those returns, do you come in lower than expected, how easily can you guys pull back on that if say there's like a occupancy disruption or something along those lines?

Pretty easily, I mean it's definitely it's heavily managed. So as we did during COVID, we were able to pull back pretty significantly and we would do the same if we see costs increased significantly or premiums drop.

Great, thanks. And then just one last quick one is, what are you seeing on cap rates on dispositions and sort of where those are in the market today?

Yeah, I would say, in the third quarter we are seeing cap rates between 4% and 5%. There is not a lot of data points. There are transactions, but obviously substantially less than there have been in past quarters. It's a little bit trickier now with the run-up in the tenure, as people don't really know what their debt costs are. So we'll have to see but, our capital recycling we sold at a blended 545 [ph] -- and we're buying at a blended 522 [ph].

Super helpful, thanks guys.

Thank you.

Thank you for your question. Our next question comes from the line of Neil Malkin with Capital One. Neil, your line is now open.

Thank you. Good morning everyone. First one on the demand side, I guess, particularly the in-migration. You mentioned you continue to see strong in flows which is great. There's been some conversation or rhetoric about potentially reversion of that in migration as companies kind of reinstitute return to office. I do not think that's going to happen. But can you maybe talk about that I guess in migration as a whole, if anecdotally or from people on the ground and data or something you're seeing that there might be some little bit of a reversion in, in migration or if it continues to kind of just chug ahead at a very impressive rate?

I'll let Ella talk about anecdotally if there's anything she's hearing about from our teams on the ground. But just looking at the data that we're looking at, we don't see a slowdown in the Carolina markets, the Florida markets, your Dallas, Atlanta. I mean, everything we are looking at showing that population job growth is going to be pretty consistent and continue in those markets.

And to follow on that also pre-COVID there was already a positive in migration to our markets for all the reasons that people saw it. Jobs were being created, businesses were moving there, they tended to be business friendly, a lot of our states have no state income tax. So during COVID-19 there was an acceleration of that as people moved into those markets and basically worked, played, and taught and exercised from home. That will probably moderate, but we will still continue to see and we still continue to see people moving in from other markets to find a quality of life and also to find a good job opportunity.

Yeah, totally agree, thanks. Other one is on leasing trend, so two things; first, what are you sending out for renewals in November, December, January? And the second part is, now that you kind of got occupancy back up and there's less exposure, concessions are gone, what are you getting on or asking for new leases and could we actually see a slight uptick to close out the fourth quarter with those sort of short-term pressures alleviated?

Yeah Neil, good question. I think, we're seeing kind of generally speaking similar rent growth trends in terms of what we're sending out for renewals and new leases as what we've already previously disclosed for the fourth quarter. There might be something now that occupancy is back to that kind of mid-95 level. We'll probably see a slightly kind of uptick in that, but it'll be on the margin in terms of overall changing the ultimate kind of lease-over-lease effective rent growth for the quarter.

Okay, thanks a lot.

Thank you for your question. Our next question comes from the line of John Kim with BMO Capital Markets. John, your line is now open.

Thank you. Can you comment more on the discrepancy in occupancy between value add and your overall portfolio? When you look at prior quarter difference like 20 basis points [indiscernible]?

Yeah, I mean, I think what Scott said normally we look to see from a management of occupancy, manage occupancy in the kind of mid 95% range, value add does have initial kind of impact to it. So, in response to Austin's question earlier, kind of how we think about occupancy at the value add portfolio is typically averaging on that 92% range, but…

So I think the important factor is that, it's when you start the value-add process at a community every unit that turns becomes vacant and since we started eight new projects every unit to turn at those communities was vacant for the better part of a month or a little bit beyond where as a couple of years ago or last year, most of the value-add work was being done at communities that were in the program for a number of years. So, there were less and less units turning and being vacant for the value at process because we had already done a lot of them. Hope that makes sense.

Okay, yeah it does. I was wondering if it was taking longer to turn the units over to supply chain issues, related issues? [Multiple Speakers]

We are in the volume now.

Will you talk also about reducing the renovation program for next year due to higher retention, but I was wondering if it was reluctant to renters to pay significant higher rents today than maybe a year ago?

We're not seeing any pushback from renters.

Especially on the value-add cause we're delivering a quality home. We're in essence delivering an apartment that looks like an A but priced at a B. So there's a lot of demand for them.

Okay, on the acquisitions you discussed you had set the cap rates both close August/September. Since then rates moved up I think 60 basis points or more. Can you just comment on where pricing would be today on those assets and how deep or competitive the bidding process was?

Yeah, I mean, so for high quality assets and good markets there are still pool of buyers, there's definitely not as many. I mean, I would say that cap rates trail the treasury. So I would imagine that there would be some increase in cap rates. There just haven't been any real data points or closings in the past two weeks as the 10 years run off. It's pretty challenging that now it has dropped back down to 4. So again, it's -- what we're seeing in this market is buyers just don't know what their debt costs are going to be. So it's challenging to commit to any price when you don't know what your overall returns are going to be. So that's what's limiting the amount of buyers. But there's still some opportunities out there. There are people that if you didn't buy in the second half of last year, there's still a lot of profit to be taken. So we do see people testing the market. It's just unclear right now where cap rates are going to settle out in this quarter with the runner-up in the treasuries.

Just one final question, in a couple of weeks there's going to be the November vote, and on the ballot Orange County. The Rent Control Ordinance is on it. I'm just wondering how involved you are in the fight against the proposal and any other commentary we could have. So, fortunately we have only one asset in that County. A group of landlords got together and did challenge that ballot initiative and the judge who sits there ruled to allow it to go forward on the ballot. But also ruled that it's contrary to existing law and basically told the landlords that if it's approved you'll have your opportunity to fight it in court because it is contrary to existing law in that State. So it remains to be seen. I think you can look at this ballot initiative throughout time and it really is a failed initiative. So, if it passes it'll be fought. And again fortunately we only have one asset so we're just watching it closely.

I appreciate it. Thank you.

Thank you for your question. Our next question comes from the line of Anthony Powell with Barclays. Anthony, your line is now open.

Hi, good morning. I think you mentioned that the average income for new leases is $90,000 which seems like the top quartile income, so considering where that has been in the past and where you think that metric can go in the future?

Yeah, good question. That is the statistic for all the new leases, just for the new residents that have moved into our communities over the last 90 days. That statistic has been generally rising slightly. Historically, maybe a year ago was $78,000 I think was the number and before that maybe early part of 2020 it was $72,000. So it's been steadily rising as I guess wages have been rising as well.

Great, thanks. And maybe one more on supply. I think you talked about kind of the broader supply metric, the demand metrics in your markets. Are there any markets where you think supply could actually be a challenge and also are there any markets where you think the supply risk is overstated?

So again, our smaller markets, your Huntsville, your Wilmington's, your Myrtle Beach's are having elevated supply and we are seeing that. I think it's short-lived. I mean I think by 2024 we will be through that. Some larger markets that have some supply concerns are Nashville and Houston. But again the amount of people moving to those markets should absorb that but they are elevated in those markets. Our larger markets are Atlanta. I guess Atlanta, Dallas, and Denver are really only seeing 2% to 3% supply growth which is pretty healthy.

Okay, thank you. That's all I have.

Thank you for your question. Our next question comes from the line of Linda Tsai with Jefferies. Linda, your line is now open.

Hi, good morning. What's your sense of real estate taxes next year, I know increases are appealed and volatile, but any view of how we should think about this headed into 2023?

I mean again, we will give formal guidance in February 2023 but some of the initial indications is that real estate tax growth for next year is going to be in that kind of mid-single digit range again, 4%, 5%, 6%. There was some talk earlier this year where we are seeing some of the high reassessments coming in from the tax assessors that given the movement in the market that you could actually see maybe negative tax growth next year, I don’t think that's likely. But we're thinking this kind of in that single digits right now.

Got it. And then in terms of the 2500 to 3000 communities you're renovating in 2023, what's the process of getting a renovation team in place?

Well we have them in place, that's the beauty. I mean these are markets like Atlanta, Tampa that we have teams built out in place. So it's just a matter of growing those teams slightly to absorb the additional properties that were added to the value add portfolio.

Got it, thanks.

Thank you for your question. The final question comes from Mason Grow [ph] with Baird. Mason, your line is now open.

Hey, good morning everyone. Thanks for taking my question. How are you looking to optimize revenue going forward, are you looking more to push occupancy during a seasonally softer period, really focus on pushing rates by capturing your loss to lease?

We're always looking to balance the occupancy with the rent growth and we have a revenue management system and team in place that is constantly looking at available units in the market versus competitive pricing and our pricing. And just making sure that we balance the two while still capturing the rent growth that's available. As we look back into the third quarter, we kind of saw the volatility and we saw the tail off coming in the fourth quarter and we pushed rents a little bit harder through the end of the third quarter in order to capture as much as we could. And to build that earn in into 2023 and to put a little bit of pressure on occupancy. But as we've indicated we were able to quickly rectify that and we're now again at a very stabilized 95.5% occupancy in the non-value add communities. And that's our goal, is to stay in that 95% to 96% range while capturing as much revenue growth as the market will allow.

That's all for me. Thank you.

Thank you.

Thank you for your question. This concludes our Q&A session and I will now pass back to our management team for closing remarks. Thank you.

Thank you all for joining us today. I want you all to have a good rest of the week. Jim wants me to say go Phillies because obviously we're here in Philadelphia and we're very excited about our baseball team. But again, thanks for joining us and we'll talk to you again next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect your line.