Welcome to the Elme Communities Third Quarter Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Amy Hopkins, Vice President, Investor Relations. Amy, please go ahead.

Good morning, everyone, and thank you for joining us for our third quarter earnings call. On the call with me today are Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Susan Gerock, Senior Vice President and Chief Information Officer; Grant Montgomery, Vice President and Head of Research; Drew Hammond, Vice President, Chief Accounting Officer and Treasurer; and Steven Freishtat, Vice President, Finance. Today's event is being webcast through the Investors section of our website at elmecommunities.com, and a replay will be available this afternoon. We will have a slide presentation in conjunction with our prepared remarks, and those slides will also be available on our webcast replay. Before we begin our prepared remarks, I would like to remind everyone that this conference call contains forward-looking statements that involve known and unknown risks and uncertainties, which may cause actual results to differ materially. We undertake no duty to update them as actual events unfold. We refer to certain of these risks in our SEC filings. Reconciliations of the GAAP and non-GAAP financial measures discussed on this call are available in our most recent earnings press release and financial supplement, which was distributed yesterday and can be found on the Investors page of our website. And with that, I'd like to turn the call over to Paul.

Thank you, Amy. Good morning, everyone, and thank you for joining our third quarter 2022 earnings call. Much has changed in just a few months both in the broader financial markets as the Fed continues to try to control rising inflation and for our company as we break from our path and move on from being a Wash REIT. Becoming Elme Communities represents the start of a new trajectory, positioning us to capitalize on the opportunity to be a differentiated provider of multifamily homes. It marks the culmination of our multifamily portfolio transformation, geographic expansion and technology forward infrastructure transformation. I am pleased to report a very strong third quarter, which Steve will discuss in more detail. But first, I'd like to cover the progress that we have made in our transformation and how the launch of our resident-focused brand fits into the execution of our growth and operational strategy. We have made the break from a business-to-business commercial company and become a business-to-consumer provider of apartment homes. We focus on the largest and most underserved renter cohorts. In fact, 97% of our apartment homes are affordable to households that earn the area median income. 20% of our apartment homes are now located in the Sunbelt. We're targeting economies with diverse, innovative industries that drive outsized job creation, wage growth and end migration. Our portfolio's allocation in the Atlanta and Washington markets enables our participation in growth while also providing relative insulation during economic downturns. Atlanta's regional economy is projected to fare well in the face of increased macroeconomic headwinds in 2023, maintaining job growth of approximately 1% and positive economic traction according to Oxford Economics. Longer term, job and GDP growth of 1.8% and 2.4% from 2022 to 2026 are projected to continue Atlanta's track record of national outperformance. Washington's job growth in 2023 is also projected to continue at pace, growing 1.4% according to Oxford Economics, continuing its long history of countercyclical outperformance during periods of national economic stress. Both markets are projected to grow more than the national average in 2023. We've targeted a deep, underserved and undervalued base of mid-market demand. Mid-market renters comprise the largest share of apartment demand in each of our markets, yet only a limited share of new supply is affordable for these renters. Thus, the demand is deep and competition from new supply is limited. Mid-market renters are underserved on multiple levels as the quality and maintenance level of physical assets, service and overall resident experience in this apartment market segment is often of a lower caliber. Additionally, we see that they are undervalued as residents at these price points see a lower standard of care for their space and received a lower level of respect. In turn, residents place a lower level of trust in service providers. We see the opportunity to elevate what a home can be for our residents and our new name represents a combination of the words Elevate and home. Our new mission is to elevate the value living experience and create a place our residents are proud to call home by continuously focusing on service, efficiency and innovation. Our vision is to be the most trusted owner and operator of residential communities by elevating the standard for value living. Our clarified vision and mission statement support our strategy to deliver what the deepest cohorts in the apartment market need and in turn, to create value for our stakeholders. Delivering a superior value living experience starts with making the most of every dollar spent at our community. It means providing customer service that goes beyond responding to resident inquiries. It means anticipating the needs of our residents and empowering our teams to add value with every interaction. It means knowing what our residents value and providing amenities that meet their needs. It means investing in smart home and building automation that is impactful and makes sense at mid-market price points. It means ensuring that on-time rent payments are reported to the credit bureaus to help build resident credit scores. It means delivering industry-leading environmental performance for value-oriented community. All of this means we are committed to producing strong recurring results for our investors. While redefining our mission and launching our new resident-focused brand are important to executing our growth and operational strategy, the work that was done to get us where we are today goes much deeper than our brand ethos. Becoming Elme communities marks the culmination of a multiyear effort to transform nearly every aspect of our business. I would now like to turn it over to Susan Gerock, our Chief Information Officer and key leader in our infrastructure transformation to talk about our progress and how the changes that we've made position us to deliver greater value for our stakeholders.

Thanks, Paul, and good morning, everyone. We have spent the past year designing a technology forward, streamlined, efficient, cost-effective and highly scalable operating model and technology platform that will deliver a better experience for our residents, as well as efficiencies and capabilities that will drive better value for our stakeholders. Efficiency is critical to making the most of every dollar we and our residents spend. We prioritized efficiency when making operational decisions during our infrastructure transformation from maximizing our operating margins to making sure we are doing everything we can with the resources we have to provide ease of living for our residents. We are focused on improving what makes a difference in what we can provide most competitively. So what have we achieved thus far? First, our ongoing focus on revenue maximization through daily pricing strategies are achieving better rents than we underwrote in our acquisition portfolio. Second, given that we already control all our leasing and portfolio management in-house, onboarding the first set of communities has only strengthened our ability to manage leasing decisions by removing the middleman and providing a closer connection with our community teams. Third, we've recruited outstanding new talent, including key portfolio level operational positions. Our team has already begun to successfully onboard our communities. Fourth, we have harnessed the power of data as we implemented our new and improved technology platform. By providing access to more data through our reorganized streamlined infrastructure and technology platform, we've reduced friction, improved our analytical capabilities and better positioned our company to execute on our mission of raising the bar for mid-market price points while growing profitably. The significant changes that we have implemented has set us up to deliver growth. And while we are already seeing benefits of our transformation, we believe that the real payoff is still ahead of us. I would now like to turn the call back to Paul.

Thank you, Susan. As Susan highlighted, our infrastructure transformation positions us to capitalize on the opportunity to be a differentiated provider of multifamily homes. We are targeting a deep, solid and underserved base of mid-market demand. This strategy is already delivering remarkable results, and we expect to generate strong returns for investors as we continue our geographic expansion into new markets over time. With that said, investment discipline is foundational for this company. And as the Fed's most recent shift to more restrictive policies added another layer of uncertainty, we pivoted and ceased negotiations to acquire two assets. We do not believe that many sellers have realistically adjusted their price expectations to the shifting macro outlook. And while we have the capacity to acquire $125 million of additional multifamily communities, we will remain prudent about growing further in this environment until the capital market conditions improve. I would now like to turn the call over to Steve to discuss our operating trends, third quarter performance and growth outlook.

Thank you, Paul, and good morning, everyone. Today, I would like to cover the operating trends that we are experiencing and how those trends and the growth that we have captured to date provide us with confidence in our 2023 outlook. I will also cover our third quarter results, guidance for the remainder of 2022 and updates to our guidance for 2023. I will start with touching on highlights for our growth outlook. As Paul and Susan discussed, changing our company name, unveiling our mid-market resident-focused brand and beginning to bring our communities in-house culminates in the start of a new trajectory for our company. All of this coincides with a record growth outlook. We expect to deliver historic NOI and core FFO growth in 2023, with same-store NOI growth of 10% at the midpoint of our guidance range and core FFO growth of 14% at the midpoint, the strongest in over 20 years. We have several reasons to feel confident in our ability to deliver this growth and to continue to deliver solid results beyond 2023. First, our focus on value-oriented price points provides stability across outperform Class A in both of our operating markets. Second, as Paul highlighted, our portfolio's allocation to the Washington Metro provides stability during downturns. And the Atlanta region is projected to fare well in the event of increased macroeconomic headwinds in 2023. Third, we have a well-positioned balance sheet with low leverage and strong liquidity. We've prioritized the strength of our balance sheet throughout the transformative capital recycling we completed as well as through the pandemic and maintain our investment-grade debt rating. It will continue to serve us well as we knew we had to be prudent through all we executed. Fourth, we anticipate operating cost efficiencies in 2024 after our community onboarding process is complete. These efficiencies should provide us with another gear for increasing profitability beyond the near horizon and have not been factored into our record growth expectations for 2023 as we complete the internalization process. All in all, we believe that we are well positioned to grow even further should the capital markets backdrop improve. In keeping with historical trends, the third quarter was our highest volume leasing quarter, and lease rate growth remained in the double digits throughout the quarter following the early August peak. Effective new lease rate growth was 10.5% and effective renewal asset growth was 10.1%, which went to 10.3% for the same-store move-ins that took place during the third quarter. For non-same-store move-ins that took place during the third quarter, effective new lease rate growth was 13.8% and effective renewal lease rate growth was 18.4%, which went to 16.3%. Overall, we captured very strong lease rate performance, which will carry over into 2023. Lease rate growth in October has moderated, but remains historically high, with effective blended lease rate growth of 7.1% for our same-store portfolio and 9.7% for our non-same-store portfolio. October traffic and application volumes reflect solid demand for our value-oriented community. We are currently sending out renewal rates of 10% to 12% on average with high renewal acceptance rates indicating that our pricing power remains strong overall, given the significant growth in market rents in our regions. Same-store occupancy averaged a strong 95.6% during the quarter end and increased to 95.7% post quarter. Retention was 60% during the quarter, which was in line with a year ago and above our historical average. Our revenue maximization strategy prioritizes lease rate capture during the busiest leasing months, and we are now focused on maintaining occupancy as we head into the winter months. Strong demand and retention support a healthy forward occupancy trend as we head into the winter months. Due to the rising cost of homeownership, our renewal and retention rates improved, while move-outs related to home purchases represented the most notable drop compared to the prior year and sequential period. The percentage of same-store move-outs related to home purchases declined by over 5% year-over-year and nearly 4% on a sequential basis. Looking forward, we are positioned with historically high embedded growth, which we expect will drive outsized revenue and NOI growth in 2023. Our mid-single-digit earn-in and our loss to lease of over 8% as of September 30 provide confidence in our outlook for rent and NOI growth as the market environment shifts from the very strong trends that we are experiencing today. We are on track to deliver same-store multifamily NOI growth of 10% at the midpoint of our guidance range and stronger annualized growth for the three Atlanta communities acquired this year, with the vast majority of that growth already embedded in our portfolio. On the expense side, we believe we've conservatively incorporated additional inflation pressure in our 2023 expectation on top of the level that we're incurring in 2022. Our expectations for greatest cost pressure are soon to be in non-control expenses driven by higher real estate taxes and utility costs. Additionally, we assume that payroll and repairs and maintenance expenses, which represent the largest components of our controllable expenses, will increase further due to ongoing inflationary expectations. We anticipate that our ability to implement expense controls will improve over the course of the year after our properties are fully onboarded, plus operational and other expense controls should have a larger impact on 2024. This provides us with confidence in our growth outlook. Now moving on to renovations. During the third quarter, we renovated approximately 100 units for a return on investment of a little over 13%, excluding the rent growth that we achieved on comparable unrenovated units. And if you included total rent increases in your ROI, it would look more like 22%. While we expect to be closer to our historical renovation run rate of approximately 600 units per year in 2023, our renovation program offers flexibility to change the pace as the environment shifts. Over the past year, while market rent growth has been at record-setting levels, we've eased off our pace of renovations, benefiting from double-digit rent growth and preserving renovation opportunities for when market rent growth reverts towards historical levels. I will now cover our third quarter results, which were in line with our expectations for stronger rent growth momentum in the second half of this year. Core FFO was $0.23 per diluted share, reflecting a year-over-year increase of 15%, driven by strong growth in rental income. Multifamily same-store NOI grew 10.4% over the prior year due to higher base rent and lower concessions, partially offset by higher repairs and maintenance and payroll expenses. Third quarter repairs and maintenance expenses were higher in part due to increased turnover compared to the prior year period. We expect full year same-store multifamily operating expenses to increase by approximately 5% overall. We expect multifamily same-store NOI growth to accelerate in the fourth quarter because of the very strong lease rate growth we captured during the summer leasing season. Average effective monthly rent per home for the quarter increased 10.6% compared to the prior year period on a same-store basis and over 3.5% sequentially. Again, the acceleration in growth reflects the impact of the very strong lease rate growth we captured during our busiest summer leasing months. Other NOI, which represents Watergate 600, grew 6.2% in the third quarter compared to the prior year, driven by higher rental and parking income. Watergate 600 has a high-quality institutional tenant base and a 7-year weighted average lease term. Now, turning to guidance. First, I will point out that we are confident that our growth is underway, and therefore, we pre-released 2023 guidance on September 27. I will not reiterate all those points, and they can be found in our press release, but I will point out the following key highlights of our 2023 outlook. Core FFO for 2023 is expected to range from $0.96 to $1.04 per fully diluted share, which implies approximately 14% growth year-over-year based on the midpoint of the 2022 and 2023 core FFO guidance ranges, the highest since 2000. We expect most of this growth to be driven by rent growth, much of which has already been captured in our existing leases, which supports our ability to grow our dividend if we make that capital allocation decision to do so in the future. Same-store multifamily NOI growth is expected to range from 9% to 11%, which reflects year-over-year growth of 10% at the midpoint, further building on the double-digit NOI growth expected in the second half of 2022. Non-same-store multifamily NOI is expected to range from $12.75 million to $13.75 million in 2023, which now excludes the impact of the prior 2022 assumed acquisitions guidance. While this guidance range does not reflect the impact of potential acquisitions, we have more than $650 million of availability on our line of credit as of quarter end, and we are running at lower than our targeted leverage levels. We will continue to evaluate acquisition opportunities in our target markets, and we'll pursue further acquisitions when they create additional value for our shareholders. G&A, net of core adjustments is expected to range from $26.25 million to $27.25 million, which reflects a small year-over-year increase of less than 2% at the respective midpoints due to temporary costs associated with transitioning our community-level operations in-house. We expect G&A to decline in 2024 and then to remain stable as we scale our portfolio when the time is right to do so.

With that said, I will also update our outlook for the balance of the year. We are reiterating the midpoint and tightening our '22 core FFO guidance range of $0.87 to $0.89 per share. We are reiterating the midpoint and tightening our full year same-store multifamily NOI growth guidance to 8.75% to 9.25%. At the midpoint, this represents 11.5% NOI growth for the fourth quarter. NOI growth for same-store and Trove combined is expected to be between 12.5% and 13%. We are reiterating the midpoint and tightening our guidance range for non-same-store multifamily NOI to be between $22.25 million and $22.75 million. Other same-store NOI, which consists solely of Watergate 600 is expected to range from $13.25 billion to $13.75 million. Our FFO guidance range assumes that no further acquisitions are completed this year compared to prior guidance, which assumed $125 million of acquisitions. This adjustment did not impact our 2022 or our 2023 core FFO guidance. Incorporating our updated assumption regarding acquisitions, we expect our net debt to adjusted EBITDA to be below 5x at year-end. G&A net of core adjustments for severance and structuring costs is now expected to range between $26 million and $26.5 million, which reflects a slight increase in the midpoint. Our G&A guidance excludes the impact of transformation investments for our future platform and our full integration, which we now expect to be approximately $10 million, a decline of $1 million compared to our prior guidance. Interest expense is now expected to range between $24.5 million and $25 million, which is lower than our prior guidance due to the removal of our previous $125 million acquisition assumption during the second half of the year. We expect our core AFFO payout ratio for the year to be in the mid-70s, and we are establishing an AFFO growth profile that should provide us with additional flexibility to grow the dividend. And with that, I will now turn the call back to Paul. Thank you, Steve. Becoming Elme communities represents much more than just a name change. It's the start of a new growth and value creation trajectory. We are now in the final phase of our infrastructure transformation and have successfully begun transitioning property level operations in-house. We are delivering historical growth, have a strong balance sheet, a revamped operating platform and a clear strategy and mission, meeting the needs of the deepest renter cohorts. Yet we are trading at one of the highest implied cap rates. The tailwinds we pursued in our transformation support strong growth over the coming years. While the value we created is currently being masked by the challenging macro environment, we are well positioned given our geographic mix and mid-market renter focus, and we are confident in our ability to continue to deliver profitable growth. Now operator, I'd like to open it up for questions.

Your first question for today is coming from Anthony Paolone with JPMorgan.

I guess first question is, you mentioned in the press release about evaluating opportunities that will create additional value, but also talked about not doing acquisitions. So can you just maybe elaborate a bit on what some of the other if there are just other things you're considering or what those might be?

Tony, it's Paul. When we talked about the acquisitions or the lack thereof going into the fourth quarter, we've talked to a number of different investors. And what we're seeing out there and even our levered competitors, there's really a lot of pricing and yield discovery taking place. And as for our team, we're repricing risk. We are moderating some of our growth assumptions. We talked to the levered folks that they're experiencing obviously higher interest rates. They're seeing their leverage decrease by 5% to 10%. And we're also seeing folks increasing the residual cap rate on the back end by plus or minus 50 basis points. Interestingly, also, we're seeing a lot of folks shy away from large deals. We're seeing transactions, Tony. I think that we feel like now is the time for patience and discipline. We think the cap rates are coming to us. And we will move when we see the right opportunity. The opportunities that we passed on had more to do with the renovations and the yields. And when we look at those, a big part of our renovation story is maintaining that affordability gap. And just for a moment, I'd like Grant to comment on the affordability and kind of its importance to our portfolio.

Sure, Paul. It is really central, and we are maintaining that. It's been expanding within the Washington region. There's a 26% premium for new products over our in-place effective rents. And in Atlanta, it's even higher, 33%. And so that's in the $650 to $700 range, which really provides quite a bit of price insulation and differentiation of our product versus the new product that's coming online.

Thank you, Grant. I want to emphasize, as Steve mentioned earlier, that we still have a pipeline and are evaluating opportunities. We have raised our standards for what we are looking for in this environment, which we believe is the right move. However, I want to reassure you that when the right opportunity arises, we will strive to act on it.

And then I guess along similar lines, but on the other side of this, with Watergate, it actually seems like the asset is performing pretty well and pretty steadily. So is the idea to keep that for now, for a lack of liquidity in the office market? Or how should we think about that?

The Watergate has almost 7 years remaining on its lease. When considering our entire portfolio, we expect it to represent less than 10% of our total NOI by year-end. We are noticing traffic on the property and have increased occupancy throughout the year. I would like to gather a few more data points on the D.C. office market currently. As you mentioned, the investment sales market for D.C. office space is not very liquid right now. Therefore, this is a non-core asset that we are looking to monetize, but we want to wait to ensure that we can maximize value for our shareholders.

Your next question is coming from John Pawlowski at Green Street.

I just have a few quick questions on the transformation. Paul, is the senior management team that will oversee the internal operating platform fully built out now and fully hired both at the corporate and regional level? Or is there more hiring to do?

There is some additional hiring to do over the next 6-plus months. We've incorporated that hiring into our 2023 guidance. We just started, John, onboarding the properties last weekend, and I'm happy to say the first few coming on at the execution was successful. But we plan on onboarding properties from now through mid-next year. And I'm sure we'll be adding additional personnel as that goes. But like I said, all of that is baked into our G&A numbers and our guidance for 2023. Steve, anything you want to add there?

Yes. I would say that at the community levels, there will be increasing support as we bring on more properties. We have had to prepare in advance for this process by strengthening our regional teams. We've recently added a new Director of Operations, along with regional managers and regional maintenance managers. Our accounting team is also set up to take over the responsibilities previously handled by third-party accountants, and our IT team is replacing their IT support. These changes are in place. As Paul mentioned, as we gradually bring more people on board, we will phase out the intermediaries and replace them with our staff.

Okay. Does any of this work trickle into 2024? Or will it be fully dug by the end of next year?

We expect to have everything we currently own on board by the summer of 2023, and it will not extend into 2024.

Okay. Last one for me, and then I'll jump back into the queue. Steve, what are your expectations for revenue and expense growth within the 10% midpoint of NOI growth next year? I apologize if I missed that earlier.

We discussed some overall facts regarding our performance. I can share my thoughts on how we anticipate this will develop over the next year or two. It appears that we will start the year quite strong, but we expect some decline as the year progresses. At the end of the quarter, we reported a loss to lease of 8.3. As we enter November, which typically sees slightly lower pricing, we're observing only seasonal patterns without any additional weakness. We're still in the 7s as we begin November. Our earnings are solid, and we're optimistic. About two-thirds of our leases expired in the second and third quarters, and we experienced significant trade-outs during those periods, contributing to revenue growth. Additionally, when looking at blended performance across the Atlanta and D.C. markets, we expect around 3% revenue growth. However, our actual results might exceed that expectation. Grant, could you provide further details?

Sure, Steve. I think it's sort of two prongs on those. One would be submarket selection. There is quite a lot of variability. There's as much variability within a market as between markets. And many of our submarkets that we have been in and played in, in Washington historically or that have moved into recently Atlanta, are expected to significantly outperform the average for the region. And then additionally, if you look at how the vintages of apartments perform and those that were really central to our strategy, those have outperformed historically, as we said in the script. Over the last year, for example, the vintages that we really focus on in Atlanta have outperformed the market, a new product by over 200 basis points and in Washington, D.C., over 340 basis points. So we think there may be some additional upside based on our strategy and our submarket selection beyond what you may see at a whole regional level.

Then I would take it from there and say we've really focused going into the winter months on occupancy, and we've actually even grown a little bit since quarter end, and it's very strong. And when you think about the real strong rental growth we've captured in this market up to now, we're putting our renewals out right now at 10% to 12%. And we're expecting even the winter months high single-digit rent growth, et cetera then. And so yes, and we do believe it will tail off towards December of 2023 and start out higher in the year and kind of average down. And then in terms of just our leasing patterns and our volumes and activity, they're very strong. They're historically higher than we've seen in October and early November before. And I think that carries really well in terms of strength. So we look at all of this, and we're expecting with the earn-in, in a healthy occupancy going into the winter months. We stress test it, and we certainly don't have the kind of rental growth in '23 that we've modeled in '22, but we feel really good about it.

Okay. But for 2023 NOI growth guidance, are we talking like 8.5% revenue and 6% expense growth gets you to 10% of those the types of ranges you guys are thinking through?

Amy, you have the revenue growth, right? Yes, I think we projected our expense growth to be about 7% on top of what we've experienced this year, which is 5%. And I think the categories that we think will be the highest for next year are going to be your payroll because we're offering incentives to get people to change jerseys and come over to our team and then real estate taxes and utilities. So we've left room for those kinds of increases in there.

Your next question for today is coming from Young Ku at Wells Fargo.

I just wanted to go back to your comments regarding acquisitions. You talked about adjusting return requirements on your end. Could you maybe talk about how big the gap is between what you're willing to pay for versus what the seller's expectations are taking?

Looking at acquisitions, we can start by discussing cap rates. These rates clearly vary from one submarket to another and also depend on the age of the property. In terms of core and core-plus cap rates, there hasn't been much change. However, for value-add properties, where many buyers rely heavily on leverage, we've noticed some movement in the cap rates. Specifically, B value-add cap rates, which is our area of focus, have increased by up to 100 basis points. This is based on quarterly data. Overall transaction volumes are down, and pipelines are shrinking, but for us, the focus isn't solely on cap rates. It's also about our entry price and the potential to create value considering geographic demographics, as well as what the outcome looks like for us in the long run. We believe the market is shifting in our favor. While there are still some gaps between buyer and seller expectations, we anticipate ample volume next year, although we expect the cap rates to be higher than what we've seen in the past 24 to 36 months.

And so I mean you guys still have $125 million in capacity earmarked for acquisitions and also mentioned that the implied cap rate is higher versus peers. Is stock buyback something that you may consider instead of an acquisition?

This is Steve. Here’s how we view the situation. The capital markets are currently unsettled and haven't yet adjusted to the changes from the Federal Reserve's actions. In the long term, debt prices, equity prices, and asset values have been affected by macroeconomic disruptions which have obscured the value we've built through significant growth, a new direction, and a solid balance sheet. We believe it's best to wait until things stabilize. Additionally, as Paul mentioned, asset prices have not fully adjusted, but we anticipate that cap rates will align with us, and we are ready to generate even more value when that happens. Our approach centers on having a history of growth, a strong balance sheet, and ample liquidity, which places us in a good position as we face potential economic uncertainty or recession. This strategy should benefit us as equity prices and asset values are fully realized. Concerning share repurchases, we constantly evaluate them, but we only pursue them on a leverage-neutral basis. Currently, it does not appear to be the most advantageous option in the short term. Lastly, regarding our transformation, we believe that scale benefits us and enhances profitability, so downsizing wouldn't strengthen our position at this time.

And just one last regarding Watergate. Like you said, there are 7 years of term left. It's a good property. I just wanted to get a sense of what the fiscal utilization of that property has been just to get a sense on how sticky the in-place leases are.

We are currently around 92% occupied. We have good traffic, especially from younger demographics. Our largest tenants have been renting from us for a long time, and they were the previous owners of the building. This gives us confidence about future utilization. We want to capitalize on the traffic we've been seeing while also allowing some time for the recovery of the D.C. office market.

Your next question is coming from Michael Lewis at Truist Securities.

My first one for Steve, kind of a guidance question, I guess. But what are you thinking about for the term loan next year? And what do you anticipate the interest rate would be to refinance that?

We have a really good debt maturity ladder, but the $100 million is due in July of next year. We were working on some potential portfolio deals that don't pencil out now that might come back to us later. So we were keeping that option open. Right now, what we've assumed in our guidance is that we'll refinance the term loan. It is swapped to fixed. I think you noted in your notes, Michael, to 2.3% through July. I think we'll plan on refinancing it in a short enough term that we can prepay it without penalty. I anticipate that we will have opportunities to acquire, and we'll probably have to assume some debt, so we're going to want some debt that we can repay. Looking at what that pricing might be, what we're assuming is low 5s after the fixed period.

My second question is about acquisitions. The company has made significant progress, and I appreciate the rebranding. However, when I examine the third quarter portfolio, it appears that 80% is still in the DC, Virginia, and Maryland apartment segment, with only 10% in office properties. There are no acquisitions included in the 2023 guidance, although it seems like there might be some in the pipeline. I'm curious about how much acquisition volume you believe is necessary to position the portfolio more effectively. Additionally, with some expected proceeds from office properties and current available funds, it seems feasible. I understand the transaction market is showing some improvement, but what total deal volume do you think is required to achieve your desired portfolio goals?

I think I'll start by letting Paul discuss the strategic aspects. This is Steve. There are multiple paths to reach our goals, especially given the current disruptions causing us to wait for prices to stabilize. When we presented our webcast last June, we aimed to achieve 40% presence in the Sunbelt region. Currently, we're at 20%, and we've done well in our allocations. To achieve our goals, one approach is to scale our growth by utilizing new capital. Alternatively, as asset prices stabilize, we can also engage in some recycling. Moreover, we've been in discussions about NAV to NAV unit deals that could facilitate rapid progress, and these opportunities could return when capital markets are favorable. We just need to allow time for options to emerge, and we’ll make the right investment decisions at the appropriate time. For now, our focus is on creating shareholder value. From the outset, we've prioritized three objectives alongside maintaining a strong balance sheet. First, we aimed for profitable growth, and we're on track for outstanding growth next year. Second, we sought geographical diversification, achieving our 20% goal and exploring various strategies. Third, we're focused on scaling, and we identified ways to scale more rapidly before the capital markets shifted due to the Fed. I believe those opportunities will arise again.

Michael, it's Paul. I expect some level of stabilization in the second half of '23. As Steve mentioned, the Fed won't maintain this indefinitely. We are keeping in contact with those we have spoken to. Additionally, just because we’ve paused, I don’t want anyone to think that we’re not actively touring properties, exploring target submarkets, and keeping communication open with both brokers and property owners in those areas. I would like to add to what Steve said about scale; everything we’ve experienced has confirmed our desire to potentially double the size of the company. Now we have the infrastructure in place to achieve that, and it’s now about executing on the right opportunities at the right time. As I mentioned earlier, patience and discipline are essential. The market remains dynamic, and many sellers, as well as buyers, are waiting to see how the Fed's decisions unfold. I am confident that we will find opportunities to scale, either individually or through portfolios in '23. However, we are not relying solely on that at this moment due to the current market conditions.

The next question is a follow-up question coming from John Pawlowski.

Can you just remind us if there are any known move-outs of Watergate 600 for next year?

I don't believe there are, John. I'll double check on that, but I don't believe there are.

And if there are no further questions, I'd like to turn the floor back over to management for any closing comments.

Thank you. Again, I'd like to thank everyone for your time and interest today, and we look forward to speaking with many of you over the next several weeks. Thank you.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.