Independence Realty Trust Inc

NYSE:IRT

Earnings Call Transcript 2022-Q1

[Operator]

Hello everyone, and a warm welcome to the Independence Realty Trust’s First Quarter 2022 Earnings Release. My name is Emily and I will be coordinating your call today. [Operator Instructions].

And now, I have the pleasure of turning the call over to our host, Lauren Torres. Please go ahead.

[Lauren Torres, Investor Relations]

Thank you, and good morning, everyone. Thank you for joining us to review Independence Realty Trust’s first quarter 2022 financial results. On the call today are Scott Schaeffer, Chief Executive Officer; Ella Neyland, Chief Operating Officer; Farrell Ender, President of IRT; and Jim Sebra, Chief Financial Officer.

Today’s call is being webcast on our website at www.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 p.m. Eastern Time today.

Before I turn the call over to Scott, I’d like to remind everyone that there may be forward-looking statements made on this call. These forward-looking statements reflect IRT’s current views with respect to future events financial performance and the merger with Steadfast Apartment REIT, which will be referenced herein as STAR.

Actual results could differ substantially and materially from what IRT has projected. Such statements are made in good faith pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to IRT’s press release, supplemental information and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations. Participants may discuss non-GAAP financial measures during this call.

A copy of IRT’s earnings press release and supplemental information containing financial information, other statistical information and a reconciliation of non-GAAP financial measures to the most direct comparable GAAP financial measure is attached to IRT’s current report on the Form 8-K available at IRT’s website under Investor Relations. IRT’s other SEC filings are also available through this link. IRT does not undertake to update forward-looking statements made in this call or with respect to matters described herein, except as may be required by law.

With that, it’s my pleasure to turn the call over to Scott Schaeffer.

[Scott Schaeffer, Chief Executive Officer]

Thank you, Lauren, and thank you all for joining us today. After unexceptional 2021, when we more than doubled the size of our portfolio and accelerated our deleveraging efforts. We are pleased to report that our momentum continues as we delivered 16.2% combined same-store NOI growth and almost 40% core FFO per share growth in the first quarter of 2022.

Our December 2021 merger with STAR resulted in the combination of two high quality portfolios and non-gateway markets with outsized growth fundamentals. And now, more than two years since the onset of the pandemic, we continue to deliver strong results that reflect the resiliency of our markets and the success of our strategic initiatives.

We have increased our exposure to non-gateway markets in the Sunbelt region, which currently represents approximately 71% of our NOI. Our markets continue to see high residential demand as population growth exceeds new supply.

These trends are expected to continue with the Sunbelt area benefiting from outsize job creation and increasing wages as people seek a lower cost of living, better tax. policy and growing economic opportunity.

We believe IRT has a long runway for growth, whether that be through investing in our existing communities or expanding our presence in current IRT markets. We have a sizable renovation pipeline, and we'll continue to invest in our redevelopment efforts through our long standing value-add program.

This program has historically generated unlevered ROI of approximately 20% and should provide over $800 million of incremental growth and shareholder value. In addition, we will explore new investment opportunities and look to advance our joint venture relationships.

We have been exploring single family home rental development opportunities, and recently closed on a joint venture that acquires development in Huntsville, Alabama. This JV marks our entrance into the single family home rental space, and as a notable scale in the market we know well.

This is a natural expansion of our strategy, and we'll be focused on the same non-gateway markets in the Sunbelt region. Our joint venture already owns and operates 178 homes, and the single community is in the process of completing the second phase of the community with another 222 homes.

In addition, we're excited to announce that in April, we acquired the first multifamily property in Nashville that was completed through our Joint Venture Development Program. Farrell will go in to greater detail on these transactions. But they're both exciting opportunities, which reflect the creative capital allocation at attractive cap rates and value creation at IRT in two markets that we have targeted for additional investment.

Looking ahead, we are confident in our ability to implement our strategic initiatives, capturing incremental growth and strengthen our total company platform with increased economies of scale. This is reflected in our increased guidance for the full year 2022 as we are now targeting 12.5% combined same store NOI growth, and 25% core FFO per share growth, each at the midpoint of our guided ranges.

While we continue to be mindful of economic headwinds, we have strong visibility on delivering these results as we head into peak leasing season. We will remain patient and disciplined in our efforts to create long term value for our stakeholders.

I'd like now to turn the call over to Ella Neyland for an operational updates.

[Ella Neyland, Chief Operating Officer]

Thanks Scott. As Scott touched upon, we kicked off 2022 with strong operating results, led by our ability to maintain high occupancy levels at our communities and drive rent growth.

In the first quarter, our average occupancy rate was 95.4%, up 10 basis points compared to a year ago. And we delivered a 10.4% increase in our average effective rental rate, both on a combined same-store property basis.

On a lease-over-lease basis for the combined same-store portfolio, new lease rates increased 15.7% and renewal were up 10.2% during the first quarter, yielding a blended lease-over-lease rental rate increase of 12.8% for the leases expiring in Q1, 2022.

We're pleased to note that the strong trends continue in the second quarter today, with new leases for our combined same-store portfolio having increased 15.8%, while renewed leases are up 9.5%. So far, in Q2, our resident retention rate is 54.6%, up about 370 basis points from Q1, 2022.

As mentioned last quarter, our property management and revenue management system integration is complete, and we are on track to deliver $31 million in synergies as we implement the best practices from both companies. This includes $8 million of annual operating synergies and $23 million of annual corporate expense savings.

I would now like to turn the call over to Farrell to provide you with an update on our investment opportunities.

[Farrell Ender, President]

Thanks, Ella. Since the inception of our value-add program in 2018, we've remained focused on renovating our existing properties where we see the potential for outsized rent growth. This continued in the first quarter as we completed renovations on 143 units, which is lower than anticipated due to a higher resident retention rate.

For these 143 completed renovations, our renovation costs was $12,436 per unit and units achieved on average of $331 increase in monthly rents over comparable on renovated units. This yields an unlevered return on investment of 32%.

Our value-add program currently has 12 communities undergoing renovations with an additional 10 communities that will be added this year. We have also designated seven communities as completed.

We have a pipeline of approximately 20,000 value-add units which includes about 12,000 former STAR units. This year we expect to renovate 2,000 units from the combined portfolio and ramp up to 4,000 units per year thereafter.

As Scott mentioned earlier, we're excited about the progress of our joint venture program, which focuses on new multifamily development and now single family rentals. Recently, one of these investments came full cycle. In September, 2021, we invested in a joint venture that was developing three communities in the national market.

Just last month, we acquired the first of those communities from the joint venture for $25.4 million. This price translates into a 5.47% effective economic cap rate better than current market transactions and is an example of how these joint venture investments provide value to our shareholders.

As our first investment in the single family rental space, on March 31, we entered a joint venture referred to as Virtuoso, consisting of a two phase development with 400 single family home rental units located in Huntsville, Alabama. The development of 178 homes in phase one was completed in late 2021, and it's 85% occupied today.

The average rental rate for lease homes is $1,563 per month, or $1.79 per square foot. We expect the development of the remaining 222 homes in phase two to be completed and acquired by the joint venture in the second quarter of 2022.

IRT's investment is expected to total $37.1 million, of which $16.4 million was funded on March 31. Our Virtuoso joint ventures ideally positioned in a Huntsville market with easy access to major retail and a commute to the Cummings Research Park in less than 10 minutes.

As an update, construction efforts are progressing well across the three of our joint ventures, and we're pursuing several other opportunities in our existing markets. We provide an update on our joint ventures on the investment and development activity page of our supplements.

As of the end of the first quarter, we have identified two properties as held for sale. One of these properties is located in Louisville, and the other in Terre Haute, Indiana. We expect the blended economic tax rate of these dispositions to be 3.9%, with an expected close in the third quarter of 2022. And then, tend to recycle the net proceeds to properties and markets with more attractive long term growth prospects.

I'd now like to turn the call over to Jim.

[Jim Sebra, Chief Financial Officer]

Thanks, Farrell, and good morning everyone. Beginning with our first quarter 2022 performance update, net income available to common shareholders was $74.6 million, up from $1.1 million in the first quarter of 2021.

During the first quarter of 2022, GAAP net income is inclusive of $94.7 million of gains on the disposition of four real estate assets and a $29 million one-time amortization expense associated with in place leases from our STAR merger.

As we highlighted in our 2021 year end earnings call, these assets were sold and the proceeds used to deal with a combined balance sheet post merger. During the first quarter, core FFO grew to $57.7 million, up from $80 million a year ago, and core FFO per share grew 39% to $0.25 per share, up from $0.18 per share in Q1, 2021.

This growth is a result of the completion of our merger, the STAR and the related accretion as well as the sizeable organic rent growth we've experienced throughout the combined portfolio.

IRT's first quarter combined same store NOI growth of 16.2%, driven by revenue growth of 11%. This growth was driven by a 10.4% increase in average rental rates with an increase in other income generated by STAR communities.

While this NOI growth includes value-add communities, we did see similar NOI growth of 16.1% at our same-store non value-add communities, which reinforces the fundamental strength of our core market.

On the property operating expense side, combined same-store operating expenses grew 3.2% in the first quarter, led by higher contract services and personnel expenses. The increase in contract services was driven by expenses for resident reimbursable services, as well as some small [ph] renewable costs.

For example, during Q1, 2022, we've continued to roll out our value-add services to residents, particularly at STAR's communities. The increase in contract services for this reimbursable service was more than offset by higher other income from the billing of those services to residents.

On payroll expenses, the increase in the quarter was driven primarily by increased incentive compensation to our community personnel, as well as inflationary pressure. Clearly this incremental incentive compensation is a result of our positive portfolio performance.

Before moving on to the balance sheet, we like to highlight Appendix A in our supplement will be provide our Q1 2022 combined same store results broken down between legacy IRT and STAR communities.

As you will see the 19.2% NOI growth of STAR's 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 the balance sheet. As of March 31, our liquidity position was $457 million, we had approximately $24 million of unrestricted cash, $383 million of additional capacity for unsecured credit facility, and $50 million of ATM proceeds available from foreign equity sales.

Our net debt-to-EBITDA was 7.6 times at quarter end, down from 8.2 times a year ago. We're excited on the progress we've made on the deleveraging front and still expect to achieve our leverage target of the low seven by the end of this year, and mid six is by year end 2023.

Regarding our full year 2022 guidance, we're updating our outlook on continued strong fundamentals, the economic strength in our market and our seamless merger integration efforts.

Our guidance now includes an EPS range of $0.50 to $0.52 per diluted share, and a core FFO per share range of $1.04 to $1.06. The midpoint of our core FFO per share guidance of $1.05 is an increase of $0.03 from our previous guidance.

This increase is a result of improved expectations on property NOI performance and lower Q1 2022 interest expense and how it impacts the full year. For 2022, we now expect NOI or combined same-store portfolio to increase 12.5%, an increase of 150 basis points at the midpoint.

This guidance reflects expected combined same-store revenue growth of 9.6% with the midpoint. For 2022, we are guiding average occupancy to be 95.6% in the midpoint with an increase of 10.5% in our average rental rates.

Moving on to expenses, the increase in our guidance on controllable operating expenses is primarily due to the incremental expenses we are incurring related to incentive compensation and costs associated with enhanced reimbursable residents services, as well as some inflationary pressure.

At this point, it is still too early to update our guidance on real estate taxes until more information is received from tax assessments later this year. Regarding our transaction and investment volume expectations, we are providing updated assumptions given the investment activity we've announced to date, as well as the two assets we've identified is held for sale. The proceeds from the dispositions will be used to invest in communities in our targeted markets, consistent with our historical capital recycling activity.

Now I'll turn the call back to Scott. Scott?

[Scott Schaeffer, Chief Executive Officer]

Thanks, Jim. In closing, I'd like to thank our team for their incredible efforts. The past two years brought about unexpected challenges, but IRT emerged as a stronger company in the multifamily sector. And since the completion of our merger in December, we've notably increased in size and realize meaningful synergies which will drive growth.

We are confident in our strategy which is focused on capitalizing on continued macro trends and resident demand, accelerating our organic growth profile through our value-add program and continue to refine the portfolio and expand our presence in core high growth markets throughout our capital recycling and joint venture development initiatives.

We thank you for joining us today. And we look forward to speaking with many of you at Nareit's Conference in early June. Operator, we'd now like to open the call for questions.

[Operator]

Thank you. [Operator Instructions] Our first question today comes from Austin Wurschmidt with KeyBanc. Austin, please go ahead.

[Austin Wurschmidt, KeyBanc]

Great. Thank you. And good morning, everybody. Scott, over the last few years, you've added various investment opportunities to the arsenal. And you've now dipped your toe into single family rentals. And I know, historically you've been patient and disciplined in your approach. But can you just help us understand how long you in the board if considered SFRs as an investment consideration? And then, how you prioritize your capital uses today, and where SFR is maybe fit within that ranking or framework?

[Scott Schaeffer, Chief Executive Officer]

Sure, Austin, and thanks for the question. And yes, we will remain patient and disciplined. We've been looking at single family rentals for some time now. When the space or that that product started, it was a different business than it is today. We're considering it where they are built for rent in one location. So, we look at this as multifamily. It's just horizontal multifamily. It's 400 rental units all in one location. And as homeownership becomes more out of reach for the typical person, we think it's an opportunistic next step for us to take advantage of these opportunities, again, in markets that we have a presence where we want to grow and have management capability. So, it's something that we're trying out here. We are looking at some other opportunities, but it's all along with our existing capital allocation strategy.

[Austin Wurschmidt, KeyBanc]

Are you planning to take operations in-house and down the line, and I guess what build out within the ops platform is necessary to take that on?

[Scott Schaeffer, Chief Executive Officer]

We don't think there's any build out necessary. Again, this is multifamily. And, yes, we will take it in-house. We have a purchase option where we can buy out our JV partner in the near future. And when we do that, we will take over management. But we think it fits right within our existing operational platform.

[Austin Wurschmidt, KeyBanc]

And then, just last one for me. How deep is your investment pipeline in single family today? And are you more focused on one-off type single family purchases or more of the entire projects like you did with this Huntsville deal? And then I'm also curious, what price point are you focused on relative to kind of primarily Class B strategy in multifamily?

[Scott Schaeffer, Chief Executive Officer]

Not a very deep pipeline. It's something we're looking at. Again, this was an opportunity in a market that we know well. There are some other opportunities, again, in existing IRT markets that we're considering, but it's not a very deep pipeline at this point.

[Austin Wurschmidt, KeyBanc]

Got it. Thanks for the time.

[Scott Schaeffer, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from Nick Joseph with Citi. Nick, your line is open.

[Nick Joseph, Citi]

Thanks. Maybe following up on Austin's questions with single family, obviously, capital scarce and you guys have done well in terms of redevelopment and acquisitions, and some of these JV, more recent JV deals. So, how do you think about the entrance into single family from a return perspective? And maybe you can rank stack against some of the other potential uses of capital?

[Scott Schaeffer, Chief Executive Officer]

We look at it as returns that are very similar to our other investments in the JV program, where we're able to buy, completed operating rental housing at cap rates that are higher, so a lower cost per unit higher than what is available for just one-off transactions of existing product. So again, for us, this was opportunistic. We expect when it's all said and done and we buy out our partner, it'll be depending on values at the time. But if we were to do it today, it would be five cap-ish [ph] or slightly north of that. So when you compare that to a very heated acquisition market where 10 to 15-year old product is trading at 3.5 caps, we see this as very attractive.

[Nick Joseph, Citi]

And when you're doing your IRR calculation for this deal, specifically, what sort of rent growth are you seeing on the single family side versus if you're buying multifamily in the same market?

[Scott Schaeffer, Chief Executive Officer]

Well, I'm going to let Ferrell talk about the rent growth. But I'll tell you, Nick, I really -- we don't really use IRRs, because we don't know what the whole period is going to be when we're making the investment. And we don't know what the exit cap is going to be. So, we're looking more at year one, year two cash flow, return on equity when we're making our investment decision.

[Farrell Ender, President]

We're underwriting these not really SFRs specifically, but what's going on in the market. And what are the other SFR communities getting to. These deals are -- this one is specifically was over the whole period, 3% to 5% annual rent increases.

[Nick Joseph, Citi]

Thanks. And then just finally, I think previously, in terms of the merger integration, you talked about over $28 million of synergies. Now it sounds like it's 31. What were the additional kind of -- what's the additional 3 million there? And then, is the 31, the final numbers? Is there still an opportunity for more?

[Scott Schaeffer, Chief Executive Officer]

Man, you guys continue to push, I love it. So I think yes, the 31 million is obviously the final number. There's always could be a little bit more, but it's not going to be materially different. The final items came from a variety, just small services and small things, audit fees, tax fees, professional services for a variety of different things we use, IT type services. So it was really an amalgamation of small things, 50,000 here, 100,000 there. They just kind of continue to add up to large dollar amounts, so it's good.

[Nick Joseph, Citi]

Thanks.

[Operator]

Our next question comes from Neil Malkin with Capital One. Neil, please go ahead. Your line is open.

[Neil Malkin, Capital One]

Hey, everyone. Good morning.

[Scott Schaeffer, Chief Executive Officer]

Good morning, Neil.

[Neil Malkin, Capital One]

Hey. First one for me, on these traditional multifamily or apartment communities. We've heard, given the rise in rates, the buyer group impacted the most of the leverage buyer. Seems like they're taking some time on the sidelines to see where everything shakes out, given that they are the -- a larger part of your, I guess, competitive set, when you're looking at a product. Are you seeing opportunities to come in on re-trades, or just maybe the market backs up a little bit and comes to you, obviously, your stock price has done tremendously well, across the equity, historically low. Is now a time or do you think you're going to have an opportunity over the next three to six months to kind of be more aggressive on acquiring value-add?

[Scott Schaeffer, Chief Executive Officer]

Yes. We are -- that you're actually exactly right. We are seeing that it's impacting leveraged buyers. We're not seeing the opportunity yet. We're confident that they should start showing themselves in the next 2.3 to six months. What we're seeing -- we're still seeing that for the well located, well constructed property in our market, you're still seeing enough people in the transaction to get to where the strike prices are. Some of the tertiary markets and inferior locations, you're starting to see re-trading. And we're just -- we're being patient and seeing how this all plays out over the next couple of months.

[Neil Malkin, Capital One]

Okay. Thanks. And then, in terms of the JV, the development side, and you talked about, wanting to grow that to seeing opportunities in targeted markets. Can you maybe just elaborate a little bit on how deep that pipeline is? The kind of markets you're looking at the size, scale, economics, deal structure, that'd be great? Thank you.

[Scott Schaeffer, Chief Executive Officer]

So, the markets that we're looking at are old markets that we currently operate in the Sunbelt region. We think and it's a strategy that will play out. Well, we're doing it a little different then some of the other companies that are in that space. For us, we're coming in to a development program, when all of the pre-development work is done, it's shovel ready. So it's a limited timeframe from when make our investment until there's a CEO [ph], usually 18 months give or take versus development from start to finish could be four years, five years in the current environment. So, my goal here was to limit our exposure to changes in the cycle. And you do that by coming in when you know that the building will be complete, again, within a reasonable timeframe, a year and a half, give or take.

And because we're coming in at that point, and we're putting some capital at risk, we ended up with this purchase option at a much better price than we would be able to buy it at if we just waited and came in to the transaction once the building was complete. So it's -- I think, an accretive allocation of capital for us. It will continue. We have a deep pipeline, but we are clearly prioritizing it in markets and developers and other aspects where we think we can limit the additional risk by coming in that space.

[Neil Malkin, Capital One]

And last one. I noticed that the renewal rates kind of ticked down a little bit. I think that just given loss to leases and the REITs strategy of not pushing as hard on renewals, would signal that there's more opportunity and more runway to push for longer and push higher. Can you just talk about what you're seeing on that? And if there's a reason for the backdrop on the renewable side? Thanks.

[Ella Neyland, Chief Operating Officer]

Yes. Thanks, Neil. And of course, it's still early in Q2. But as we look forward, the mix of new leases will help increase the blended rate increases later in the quarter. We're utilizing our boots on the ground entail and our revenue management systems and believe where we're really well-positioned to drive lease rate growth into the peak leasing season. But still, as you said, Neil, leaving a little bit of gas in the tank, which I think is particularly noteworthy in light of the potential economic softness that many people see coming.

But with our loss to lease of about 14.5%, and the demand for moderate income apartments and our non-gateway markets, that pricing power really sets the foundation for the raise in our 2022, full year guidance that we had for property revenue growth and NOI growth that you're exactly on point.

[Neil Malkin, Capital One]

Great. Thank you guys very much.

[Scott Schaeffer, Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question is from Anthony Powell with Barclays. Anthony, please go ahead.

[Anthony Powell, Barclays]

Hi. Good morning. I guess the question on move-ins. I just seen a lot of, I guess, very much try to push rates pretty aggressively. Are you seeing move-ins from I guess, comparable apartments in your new markets? How is the migration trending into your markets? Just curious what kind of the profile of the new tenant for you is right now?

[Ella Neyland, Chief Operating Officer]

Well, we're going to say, we're definitely seeing inbound migration in our markets. And it's interesting, because I think we've been a leader in picking some of these target markets, but you sort of pick up the Wall Street Journal in the last couple of weeks, and they highlight a lot of our markets as being markets that people are migrating into. I think they picked Austin, Texas, Nashville, Raleigh, they picked Florida and they're picking it because those are the cities where we're seeing household formation. We're seeing inbound migration. We're seeing companies move into those markets. And one of the reasons we've always picked them is because they are business friendly, population job growth, quality of life, low taxes. So yes, we're clearly seeing demand increase in those. But the interesting thing that's giving us our pricing power, is you're not seeing supply keep up with demand.

[Anthony Powell, Barclays]

Got it. And maybe follow up on that just. Are you seeing more -- maybe you talk about Class B being a sweet spot, because it kind of catches both people trending up or trending down? Are you seeing any, any trends with that as rent increases kind of increase across the board?

[Ella Neyland, Chief Operating Officer]

And again, you're exactly right, because the moderate income B class apartments have always been very sticky. Very seldom, will someone in a B class apartment move up to an A if they get a raise, but you clearly see in soft economic times, people that can't afford luxury rents moving into the B market. So, we've always had that sort of inflation protection in the B market in good times and in bad times. So yes, we continue to see demand. And I think it's not just that the gateways, the non-gateway markets that we're in, but some moderate income rents, because most of working America can afford an IRT apartment, and that's what they're looking for. They're looking for, well maintained, well positioned near good schools, near businesses, apartments. And today, clearly, the fact that our rent to income is about 19% gives us a bigger audience of residents.

[Anthony Powell, Barclays]

And maybe one more for me. Thanks, maybe one more in the single family, I guess, opportunity. What's the supply outlook and the development outlook for these kinds of highly amenitized kind of communities being built? Just curious, it seems like it's not traditional thing a family obviously, is kind of built for purpose. Are you seeing more zoning fees being allowed? Are you seeing more developers getting into it? I'm just curious about maybe the long term opportunity for you in this space, which seems to make sense given kind of the need for rental?

[Farrell Ender, President]

So, I think that's what's attractive about this space is that you had to get any type -- what we're seeing is smaller development. And if you want it like 80 to 120 units, if you want larger developments are moving further out, with today's work from home and there's a lot of demand for that. Remember, these, these mostly aren't highly amenitized. They might have a clubhouse in a pool, but they don't offer the amenities that are typical apartment community offers in regards to pets bars and car washes and whatnot. But the demand, I think, is going to far exceed supply, at least in the near term. I mean, they're looking at -- it just went from basically no product to about 8,000 units a year now that maybe we'll get to 20, it's predicted to demand is three, four times that in the next several years. So we think there's good opportunity there, which is why like Scott said opportunistically in the markets we're in if we see something that's attractively located, we will pursue it.

[Anthony Powell, Barclays]

All right. Thank you.

[Operator]

Our next question comes from Peter Abramowitz with Jefferies. Peter, please go ahead.

[Peter Abramowitz, Jefferies]

Yes. Thank you. Just wondering if you could kind of quantify some of the return metrics. You're looking at between the assets that you're looking to call from the portfolio and then the acquisitions that your underwriting. I guess, because you talked about kind of the difference in growth prospects. So wondering if you could sort of quantify that?

[Farrell Ender, President]

When we do the capital recycling, we really try to match them up. What we've seen in this market is, and I said this before. It's capital kind of agnostic. So we've been able to trade out of where we think our inferior markets and maybe more challenging assets into what we feel are better growth markets and better assets in the past, and we'll continue to do that. And we think we'll be able to sell and buy right around the high 3% cap rate range to neutral to earnings.

[Jim Sebra, Chief Financial Officer]

So just to be clear. The recycling, again, is where we're trading out of assets and slightly that capital into different assets that we think have better growth prospects for allocating capital otherwise, that's where we're looking at these JV programs, because it's just a much better return. And I frankly, I'm not interested in going in and, and being part of a widely marketed bidding process for a 15 year old property, that's going to trade in 3.5%. So, we would rather avoid that in the current environment, see, where cap rates settle out with these -- interest rate increases coming and allocate our capital to the value add and to well located, joint ventures in development

[Peter Abramowitz, Jefferies]

Right. I guess I'm just trying to get a sense of where you're underwriting growth for the assets that you want to bring in from an NOI and a revenue perspective versus those that that you're selling out of the portfolio?

[Farrell Ender, President]

Yes. I mean, again, we're trying to buy in the market that we think is long term, that our long term growth prospects. So we're underwriting their revenue growth much higher than we would budget for the assets that we are selling.

[Jim Sebra, Chief Financial Officer]

It's also an operating cost analysis as well. It's not just revenue growth. But we're trading out of the older assets that are much more expensive to run. So they'll have lower -- the ones we're retreating into while have they lower CapEx costs going forward.

[Peter Abramowitz, Jefferies]

John, thank you.

[Jim Sebra, Chief Financial Officer]

Thank you.

[Operator]

Those are the questions we have for today. So I'll now turn the call back to the management team to conclude today's call.

[Scott Schaeffer, Chief Executive Officer]

Thank you again for joining us, and we look forward to speaking with you again next quarter. Have a nice day everyone.

[Operator]

Thank you, everyone for joining us today. This concludes our call. You may now disconnect your lines.