Greetings, and welcome to the Elme Communities Second Quarter 2024 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, and thank you for joining our second quarter earnings call. Today's event is being webcast with a slide presentation that is available on the Investors section of our website and will be available on our webcast replay. Statements made during this call may constitute forward-looking statements that involve known and unknown risks and uncertainties which may cause actual results to differ materially, and 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'll turn the call over to our President and CEO, Paul McDermott.

Thanks, Amy, and good morning, everyone. Presenting on the call with me today are Tiffany Butcher, our Chief Operating Officer; and Steve Freishtat, our Chief Financial Officer. Tiffany will provide an update on our operating trends and initiatives, and Steve will cover our balance sheet and outlook. Grant Montgomery, our Head of Research, is here to answer market-level questions during Q&A. I'll start today's call with a brief market-level overview. The Washington Metro is a top-performing apartment market this year, and the region remains one of the best-positioned apartment markets nationally. Across our submarkets, deliveries have peaked and net inventory ratios have normalized in the low single digits. Our Washington Metro portfolio, which comprises over 75% of our homes, is benefiting from strong, stable demand, allowing us to drive occupancy above our targeted level for the year. We believe we are positioned to capture growth in the second half of the year that will set us up well heading into 2025. Turning to Atlanta. Absorption rates are accelerating and the supply overhang continues to decline. In Elme submarkets, absorption is now nearly 60% higher than the pre-pandemic period. Our operating fundamentals are showing stability with modest improvement supported by strong retention and renewal rates. Tiffany will provide more details in her remarks. While supply remains elevated, it is not expected to increase materially above the current levels in any of our submarkets, and we expect the overall level of demand relative to supply to continue to improve through 2025. Moreover, units under construction and new starts have declined significantly, pointing to better conditions in 2025 and highly favorable supply/demand dynamics forecasted for 2026 and 2027. Our residents' financial health also remains solid. The rent-to-income ratio for new leases was 23% on average in the second quarter compared to 24% a year ago, reflecting a positive credit trend relative to rental rate growth. Employment trends remain stronger for middle-income wage earners relative to high-wage earners, and the composition of job growth is shifting in favor of non-cyclical industries, which are two favorable trends for Elme. As of the second quarter, government was our largest industry exposure in the Washington Metro and healthcare was our largest industry exposure in the Atlanta Metro. Affordability and relative value remain critical to our strategy and our rent levels are several hundred dollars below both Class A rents and the cost to own a home in our markets. Move-outs to purchase homes comprised just 8% of second quarter move-outs, well below the historical level in the mid-teens. Additionally, our retention rates remained historically high, averaging 65% year-to-date as our value-oriented resident base tends to be stickier with an average tenure of about 2.7 years. As we move forward, our focus on maintaining rent levels that are affordable for the largest and most underserved segments of the rental market, combined with our efforts to enhance the Class B living experience, should continue to attract strong and steady demand from value-conscious renters. And with that, I'll turn it to Tiffany to discuss our operating trends and growth initiatives.

Thanks, Paul. The positive momentum we began to experience in April has continued, and blended lease rate growth and occupancy improved sequentially during the second quarter across both the Washington and Atlanta metros. Effective blended lease rate growth increased to 3.2% for our same-store portfolio during the second quarter, comprised of renewal lease rate growth of 5.4% and new lease rate growth of 0.2%. New lease rate growth increased to 0.4% in July, showing continued improvement. Renewal lease rate growth was 4.6% in July, and we're signing renewals at an average rate of 4% for August and September lease expirations, reflecting gradual moderation in renewal rates through year-end, which is in line with our expectations. Same-store resident retention remains very strong at 65% during the quarter, highlighting the longer-term nature of our resident base and our heightened focus on customer service excellence as part of our 2024 platform initiatives. Moving on to occupancy. Same-store average occupancy increased sequentially to 94.6%, and ending occupancy increased to 95.5% in the second quarter, driven by strong demand in the Washington Metro, offset in part by the impact of new supply and the timing of evictions in our Atlanta portfolio. Through July, same-store occupancy has averaged 95.3%, representing a 70 basis point increase relative to the second quarter. The demand patterns that we're seeing in Northern Virginia, where the majority of our Washington Metro communities are located, are exceptional, and occupancy averaged 96.1% for our Washington Metro communities during the quarter, increasing to an average level of 96.6% in June and 96.7% in July, which is above the upper end of our targeted range, allowing us to continue to push rents during the busiest leasing months. In Atlanta, while the market is experiencing an unprecedented level of new supply, market demand is improving, and Atlanta occupancy averaged 89.5% during the quarter, increasing to 90.6% in July. Additionally, we have 24 homes, or just over 1% of our Atlanta portfolio, that are temporarily out of service due to a fire which detracted from our occupancy improvement. Although the timing of evictions could continue to pressure occupancy, we're seeing stable demand patterns, and we're focused on driving higher occupancy over the second half of the year. Turning to bad debt. Reducing bad debt is a top priority and the proactive steps that we have taken are delivering better credit performance overall. We expect to benefit from lower year-over-year bad debt in the second half of this year, and even more so into 2025, as higher credit standards and credit protections at the front end of the leasing process and normalizing eviction delays at the back end drive credit performance to a more normalized level. Turning to renovations. During the second quarter, we generated an average ROI of approximately 17% on 150 home renovations. We now expect to complete approximately 475 full renovations and over 100 home upgrades this year. Looking forward, renovations continue to be a key growth driver for Elme. Our identified renovation pipeline of nearly 3,300 homes represents over 35% of our portfolio, which is more than enough runway to deliver renovation-led value creation for the foreseeable future. Our operational initiatives remain on track as we elevate our platform to new levels of success. We're pleased to report that in June, we successfully launched our shared services department known as Elme Resident Services, focused on streamlining community operations and enhancing process efficiencies across resident account management, collections, and renewals. We're excited to welcome our shared services team into their new roles within Elme. This launch was supported by the successful rollout of several new technologies, including an AI platform that saves team members time by managing electronic communication with current residents, automating payment and collection efforts, and entering service requests. We're already beginning to see an increase in resident engagement with this new tool. We're also implementing new software to manage balances after move-out, reducing the amount of time our team spends attempting to collect and track payments from former residents. Lastly, we've partnered with a provider of flexible payment options to give our residents the ability to choose when they pay during the month while we receive cash from the provider when rent is due. With all of these tools as part of our program and a strong team in place, we are confident in our ability to achieve our multi-year goals related to this effort. This successful launch of Elme Resident Services is a key milestone to achieving the $1.7 million to $1.9 million of additional NOI and FFO from operational initiatives in 2024, which aligns with our 2023 to 2025 upside target of $4.25 million to $4.75 million. Beyond the initiatives that comprise our 2023 to 2025 upside target, we're also rolling out managed Wi-Fi across our portfolio in phases, starting with approximately 2,000 homes in Phase I, which are scheduled for installation during the fourth quarter. And with that, I'll turn it over to Steve to cover our 2024 outlook and balance sheet.

Thanks, Tiffany. Starting with guidance. We are tightening our 2024 core FFO per share guidance range to $0.91 to $0.95, maintaining our midpoint of $0.93. We are tightening the range and raising the midpoint of our same-store multifamily NOI growth assumption, which is now expected to range from 0.75% to 1.75% in 2024, due to stronger-than-expected performance in our Washington Metro portfolio. We now expect interest expense for the year to range from $37.5 million to $38.25 million. While we expect fewer rate cuts in 2024 than our outlook going into the year, our continued focus on managing our cash and debt balance as well as successful execution of our new revolving credit facility has helped us stay within our initial range, though at a slightly higher midpoint. Turning to our balance sheet. Annualized net debt to adjusted EBITDA was 5.6 times at quarter end, in line with our targeted range, and we continue to expect our leverage ratio to finish this year in the mid-5 times range. As previously discussed, subsequent to quarter end, we entered into a new four-year $500 million revolving credit facility to replace the prior facility, which had been due to mature in August 2025. The new facility has two six-month extension options and an accordion feature that allows us to increase the aggregate facility to $1 billion. Our liquidity position remains strong with over $320 million available on our new revolving credit facility as of August 1. With no secured debt and the only maturity prior to 2028 being the $125 million term loan, our balance sheet remains in excellent shape. To conclude, our second quarter performance reflects continued strength in the Washington Metro and improving trends in our Atlanta portfolio. Our renovations continue to yield very strong returns with plenty of runway ahead. Additionally, our operational initiatives are on track and the successful launch of our shared services department represents our latest platform enhancement. Looking forward, we are still in the early innings with our operational initiatives and we are setting the stage for further ROI-driven initiatives in 2025. And with that, I will open it up to Q&A.

Thank you. We will now begin our question-and-answer session. Our first question comes from Cooper Clark with Wells Fargo. Your line is open.

Great. Thank you for taking the question. Wondering if you could walk through bad debt in the quarter for the whole portfolio in Atlanta specifically. I'm wondering if you still think Atlanta bad debt could get to that 3% to 4% range by the end of the fourth quarter and that full-year '24 average of 5% to 6%.

Sure. I'm happy to answer that question. In the second quarter, we observed an improvement in our bad debt across both of our markets, specifically in the Washington, D.C. area and our Atlanta portfolio. In the Washington Metro area, we are now below 1% of bad debt, which places us in a normalized range. In our Atlanta portfolio, we've seen improvement compared to where we were for the full year of 2023 and over the first quarter of '24. Currently, in the second quarter, our bad debt as a percentage of revenue in Atlanta is about 6.6%, which remains above historical norms but has stabilized. A positive trend impacting our bad debt is the momentum in some of our Atlanta communities regarding the implementation of House Bill 1203, which allows landlords to hire off-duty officers for evictions. This will significantly improve the situation in Atlanta during the latter half of the year, as we've faced challenges in gaining possession of homes due to backlog at the sheriff’s offices in various Atlanta counties. We anticipate being able to reclaim those units and eventually rent them out to paying tenants, which will help reduce our bad debt by year-end. The implementation of House Bill 1203, along with our internal efforts to streamline the collections process and enhance credit screening through our new ERS team, are key factors that will assist us in achieving a lower level of bad debt by year-end.

Okay. Thank you. That's super helpful. And I guess just switching over to the updated NOI guidance. It seems that it's mostly expense-driven. Wondering how same-store revenue shaping up relative to expectations assumed in guidance. Clearly, some D.C. strength year-to-date on the top-line.

Sure, Cooper. If we look at the NOI, we've slightly raised the midpoint to around 1.25%. For expense growth, we're anticipating it to be in the 5% to 6% range this year, which is lower than our initial forecasts. This improvement is due to a couple of factors: first, tax assessments have come in lower than expected, and second, we are seeing reduced payroll costs. Our operational initiatives are starting to produce savings. On the revenue side, we expect it to fall within the 2.5% to 3% range for 2024, driven by improvements in bad debt in Atlanta that Tiffany mentioned, although the progress has not been as quick as we anticipated at the start of the year.

Okay. Thank you very much.

Thank you. Our next question is from Anthony Paolone with JPMorgan. Your line is live.

Thanks. Good morning. In Atlanta, where do you think occupancy finishes off the year in terms of how you're seeing things now?

Hi, Tony. It's Tiffany again. In Atlanta, we're seeing occupancy trends into the low 90%. And our guidance assumes that occupancy remains at that kind of low 90% range through year-end, as we continue to see kind of gradual improvement in the supply/demand dynamics in the Atlanta market. We've continued to see solid retention, which is also helping that occupancy trend, but it's just going to be a gradual improvement. And we are continuing to adjust our pricing revenue strategy to maintain occupancy in that range through year-end.

Thanks. Could you provide an update on your spending in capital markets, specifically regarding the returns on full renovations, and share your thoughts on the current Class B cap rates in your markets?

I can start off by talking about the renovations, and I can turn it over to Paul to talk about the capital markets. So to say in terms of renovation, we have increased the number of renovations that we're doing for the year. We're now projecting over 475 full home renovations and over 100 partial renovations or home upgrades through the remainder of the year. We're continuing to see upper teens returns. So, we averaged a 17% ROI on our renovations for the quarter and year-to-date. So that continues to remain a very good investment source for us, as well as we're investing in our managed Wi-Fi. I mentioned in my prepared remarks that we are launching a Phase I of over 2,000 units of managed Wi-Fi that will be installed in the fourth quarter, which also have very strong returns. And Paul, I'll turn it over to you to talk about capital markets.

Thanks, Tiffany. Tony, regarding the transactions market, it has been relatively flat year-over-year from a macro perspective. Many potential sellers we’ve spoken with are contemplating rate cut prospects along with an upcoming election, and they are often advised to hold back, raising questions about entering the market. The genuine sellers we’re encountering are typically those facing debt maturities, needing redemptions, or having some profit left in their investments, but this situation hasn't significantly boosted the volume. Throughout the last quarter, we have engaged with numerous investment sales professionals, who report an uptick in their pipelines for the latter half of the year, although this outlook comes with considerable uncertainties. On the buying side, we see institutional capital, private equity firms, and family offices actively involved. However, it appears that some investors, like Odysseys, are currently sitting on the sidelines. The strategic approach for many new limited partner investors is focused on acquiring properties below replacement cost and planning for flat to negative returns initially, with an anticipated recovery in the third to fifth years. This aligns with our observations as well, particularly concerning our portfolio improvements expected from 2026 to 2028. In the value-add sector, we notice renovation efforts on new acquisitions being postponed to the second and third years, influenced by supply and demand in the relevant markets. In terms of cap rates, core properties are typically seeing rates between 4.5% and 5%, core plus properties are in the range of 5% to 5.5%, subject to submarket variations, while value-add properties are trading between 5.5% and 6%. From a lending perspective, high-quality assets at 40% to 50% loan-to-value ratios are still attracting aggressive offers from insurance companies. However, Fannie Mae and Freddie Mac seem to be lagging behind their targets as of the second quarter and may soon become more competitive regarding rate buy-downs. Currently, spreads are around 150 basis points, which could be reduced to the 120s, potentially allowing for a five-year deal at 5.25% with full-term interest-only payments. If we see more product entering the market, we anticipate the agencies will take a more aggressive stance in the second half, but it ultimately hinges on getting deals back on the table amidst the impending rate cuts in September and the November election.

Great rundown. Thank you both.

Thank you. We have a question from Michael Gorman with BTIG. Your line is live.

Yeah. Thanks. Good morning. Maybe just a bit more of a strategic question as we tie together what you're seeing in the markets and fundamentally. And then just, Paul, some of your commentary there about the investment market and transaction markets. Are you seeing anything in some of your potential target markets as you track them, not only from a deal perspective but from an operating perspective that maybe has caused you to change how you're thinking about potential expansion markets just due to how they've behaved in the current cycle or how they're managing to go through the current supply cycle that we're seeing now?

Michael, I would say that from an underwriting standpoint, we are applying a lot more scrutiny on the initial rental rates based on our portfolio experience. We are considering how much decrease we might see in the first year. In most of the markets we are assessing, the second year is likely to be stable, and we anticipate positive growth in the third year. Strategically, this has pushed back the timing of some renovations in our portfolio. As you know, we have over 3,000 units that need renovation, and we are closely monitoring that. Any new acquisitions will be part of our strategy regarding when we feel ready to operationally create future value.

Okay. Great. Thanks for the time.

Thank you, Michael.

Thank you. Our next question is coming from Ann Chan with Green Street. Your line is live.

Hi, good morning. Thanks for your time. Going to your guidance, could you share what kind of changes to supply and demand assumptions are baked into the new guidance, if any?

Yeah. So I would say in terms of what we're seeing that is driving our guidance is stronger-than-expected performance in the Washington, D.C. market, and Grant can talk a little bit about the supply/demand dynamics that are impacting that. But just kind of from an operating perspective, we have continued to see strength in our new leasing both in the second quarter as new lease rate growth slipped from negative in the first quarter to positive in the second quarter, and we have continued to see increasing strength in that in the month of July as we're in our peak leasing season. We've also continued to see occupancy increase significantly as there is a strong and robust demand for our product here in the Washington, D.C. area, and Grant can talk a little bit more about the demand drivers for that. But we have continued to see from first quarter to second quarter to the month of July, the occupancy continued to improve in our portfolio. And as we mentioned in our prepared remarks, the DMV had same-store occupancy at 96.1% in the second quarter and 96.7%. So incredibly strong occupancy, driven by the high demand and lower supply environment here in Washington. Grant, do you want to comment a little bit on that?

Sure, Ann. When we assess the supply situation, our submarkets are performing exceptionally well and are poised for continued improvement in the coming quarters. In the first and second quarters, the net inventory ratio of deliveries stands at about 2.5%, significantly lower than both the national average and the Sunbelt. Over the next year, we expect this ratio to decrease further to an average of 2.3%. However, in some areas, this figure is even lower. For instance, in Northern Virginia, where more than 60% of our homes are located, the net inventory ratio drops to approximately 1.7% in the upcoming four quarters, indicating a tight supply. On the demand side, we are witnessing strong job growth across both markets, particularly in Northern Virginia, with a 1.6% increase in employment. Notably, job growth is robust in sectors like education and health, construction, and local government, which have experienced year-over-year growth between 2% and 6%. This combination of a tight supply in our key markets and steady job growth in industries that generate demand for our homes is quite promising.

Great. Thank you. And just wondering if you could also give a breakdown of the 1.3% blended rate expected for the rest of this year?

Sure. We can absolutely walk through that. So in terms of where we're expecting for the full-year to be in terms of blended lease rate growth, we're expecting kind of new rate to be in the negative 1% to positive 1% range for the full-year. We're expecting renewal rates to be in the 3.5% to 4.5% range for the full-year. And we're expecting, therefore, the blends to be in the 1.5% to 2.5% for the full-year.

Great. Thank you.

Hey, thanks for taking the follow-up. I just wanted to circle back on, Paul, some of your comments around pricing. Given your implied cap rate today and some of the pricing commentary, wondering if you thought about picking up capital recycling, specifically out of your Maryland portfolio or maybe some of your district assets. Wondering if that's something you're looking at as we kind of move through the rest of the year here?

We are continuously evaluating our portfolio and exploring recycling opportunities. As you know, we have the Watergate, which is a potential candidate for recycling, and we are observing a gradual improvement in the D.C. market. I anticipate that we will have some encouraging updates about the Watergate in the future. Additionally, beyond having a strong balance sheet with flexibility and liquidity, we also possess the assets you mentioned that could be considered for recycling. However, that isn’t our primary focus at the moment, as we are engaged in various proactive initiatives aimed at enhancing shareholder value. As we move through the remainder of the year, we will reassess these assets, though our actions will depend on current market conditions. We do not have any plans for recycling until December, but in terms of maintaining flexibility, we will likely adhere to the guidance we have shared.

Okay. Great. And then I guess just one for Steve. You've talked about potentially doing something on the unsecured side if pricing gets closer to 6%. Wondering where you're seeing pricing today in the unsecured market and thoughts around raising any incremental debt for the right acquisition opportunity as opposed to using the capacity on your LLC?

Thank you for the question, Cooper. It's quite relevant given the recent changes in the 10-year rates. Based on the fluctuations over the past week, if we were to issue new unsecured debt, it would likely be in the high-5s percentage, while secured debt might be slightly lower. Rates have become more appealing compared to the beginning of the year. We recently updated our credit facility, extending our maturity to 2028, but we still have a balance that we can consider refinancing at an appropriate time. Regarding acquisitions, we believe we have built a strong balance sheet that offers us flexibility. There are various avenues we could pursue. From a leverage standpoint, we are aligned with our targets. If an opportunity arises, I think it will align with what Paul mentioned earlier about capital recycling, which is currently our preferred method for financing any potential opportunities.

Okay. Thank you.

Thank you. 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 I look forward to keeping you updated on our progress and speaking with many of you again in the very near future. Thank you.

Thank you. This does conclude today's call. You may disconnect your lines at this time, and have a wonderful day, and we thank you for your participation.