Good day, and welcome to the Elme Communities Fourth Quarter 2024 Earnings Conference Call. As a reminder, today's call is being recorded. And at this time, I would like to turn the call over to your host, Amy Hopkins, Vice President, Investor Relations. Amy, please go ahead.

Good morning, and thank you for joining our fourth 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. Presenting on the call today will be Paul McDermott, our CEO; Tiffany Butcher, our COO; and Steve Freishtat, our CFO. And with that, I will turn the call over to Paul.

Thanks, Amy. Welcome everyone, and thank you for joining us this morning. I'll start by addressing the announcement we made in conjunction with our earnings release. I will also cover our 2024 achievements and the impact of the new administration's focus on government efficiency. Tiffany will discuss our operating trends and platform initiatives, and Steve will discuss our 2025 outlook. Yesterday, we announced that the Elme Board of Trustees has launched a review to evaluate strategic alternatives. This decision is consistent with our commitment to act in the best interest of the company and our shareholders, and to focus on maximizing shareholder value. We remain very confident about the long-term prospects of our portfolio and the continued success of our value-add renovation pipeline and platform initiatives. However, shares of Elme continue to trade at a discount to our estimate of the company's private market value. While we regularly evaluate credible alternative opportunities to maximize value on behalf of our shareholders. After extensive Board-led strategic planning, the Board has decided that a formal proactive process is appropriate at this time. As such, the Elme Board of Trustees has initiated this formal review and retained financial and legal advisors. As is always the case with this type of process, there is no guarantee the review will result in any transaction or specific outcome, and we don't intend to disclose developments unless and until the company determines that disclosure is appropriate or required. While there isn't more we can say about the process at this time, we are confident we are taking the right steps to maximize value for shareholders. For the rest of the call, we will focus on our financial results, other business initiatives and outlook. Turning to 2024 highlights, operationally, it was a significant year, as we advanced our multiyear platform initiatives. We reached a key milestone with the successful launch of our shared Services department, Elme Resident Services, which streamlined our resident account management, collections, and renewal processes, and improved our operating efficiency. We also launched Phase 1 of our managed Wi-Fi initiative and the related NOI growth will be ramping up throughout 2025. I'm proud of the transformation efforts put in by our teams last year and look forward to continuing to progress our initiatives and platform efficiency this year. Turning to the priorities of the new administration, there has been plenty of speculation, so we'll stick to the facts and what's happening on the ground. The Washington Metro is widely recognized for its diverse and growing private sector economy. Approximately 97% of job growth over the last 12 months has been driven by industries other than the federal government. Federal jobs only represent about 11% of regional employment, as over 80% of the 2.1 million civilian positions in the federal government across the country are located outside the DMV. Elme's direct exposure to federal jobs is limited. Of the two-thirds of our Washington Metro resident base, for whom we have detailed job level data, only 6.2% work at non-Department of Defense federal government agencies in the Washington Metro area, and 4% work at federal contractors. For community level exposure, Slide 11 of our latest investor presentation maps the departments and agencies where we have the highest exposure and provides the concentrations at proximate communities. Overall, our highest direct exposure to non-DoD federal government jobs at the community level is in the low double-digits. In terms of what we are seeing on the ground, our demand trends across the Washington Metro remain solid and in line with our expectations and seasonal norms. The Washington Metro area was a top performing market in 2024, and we believe it is positioned for another strong year in 2025. Net inventory ratios remain low, and the high cost of housing creates sustained demand for value-oriented rental options. The region is positioned to continue to thrive, offering a highly skilled workforce, advanced technology infrastructure, an entrepreneurial atmosphere, and unmatched global connections. We are confident in the growth prospects of our Washington Metro portfolio and look forward to gaining more clarity soon and keeping you updated during future calls. And with that, I'll turn it over to Tiffany.

Thanks, Paul. Starting with supply-demand dynamics in our markets Overall, we are well positioned as we believe Elme submarkets will face less supply pressure than the U.S. and Sunbelt markets generally, with projected average annual net inventory growth of 2.2% over the next four quarters, while the U.S. and Sunbelt are expected to see 2.8% and 4.6% growth respectively. Our DMV portfolio remains very well insulated from new supply, with quarterly net inventory ratios averaging 1.7% in Elme submarkets this year, below the regional average of 2% based on current expectations. On the demand side, the trends are healthy and stable, supported by the limited availability of high-quality housing that is affordable to middle-income residents. We anticipate another year of favorable supply-demand dynamics in the DMV. In Atlanta, we expect to see gradual improvement in the supply dynamics with a more significant improvement in 2026. The weighted average net inventory ratio peaked at 4.3% in the first half of 2024 across our Atlanta submarkets and is expected to remain relatively flat in 2025, compared to the 3.8% in the fourth quarter of 2024. On a positive note, annual absorption has been very strong, and is expected to be nearly 40% higher in 2025 compared to 2024 in Elme submarkets, which should help to balance the impact of new deliveries as the year progresses. Turning to operating trends, same-store blended lease rate growth averaged 1.3% in the fourth quarter and 1.8% in January for our 2025 same-store pool. Same-store occupancy averaged 95% during the fourth quarter, up 20 basis points sequentially. Retention rates remain above historical levels, and our move outs to own remained very low during the fourth quarter at 8.5% as there is limited existing inventory, and home ownership remains unaffordable for many middle-income renters. On a year-to-date basis, same-store occupancy has trended up slightly, averaging 95.1%. We are targeting an average occupancy range of 95% to 95.5% for the year, which reflects a more normalized year in the DMV compared to strong occupancy gains in 2024. We are expecting an improvement in our Atlanta portfolio in the second half of the year as delinquency-related occupancy pressure subsides, and the supply-demand dynamic imbalance improves. Turning to renovations, we completed about 500 full renovations in 2024 at an average cost of $17,000 per unit, achieving an average renovation ROI of approximately 17%. In 2025, we expect to complete another 500 full renovations at a similar cost per unit, yielding a targeted 17% ROI. For our renovation program, we are targeting communities that have the greatest potential for outsized rent growth and maintain flexibility to adjust the pace of renovations as market demand shifts. Lastly, I'll speak to our operating initiatives. In 2024, we captured approximately $1.8 million of additional NOI growth from these initiatives, which is in line with expectations that we communicated at the start of the year. In 2025, we expect to capture $1.8 million of additional cumulative growth, which will mark the achievement of our three-year target of $4.25 million to $4.75 million announced in early 2023. Beyond our three-year target, we are in the process of rolling out managed Wi-Fi and expect to capture $300,000 to $600,000 of additional NOI in 2025 from Phase 1 of our initiative, which includes seven communities. Looking forward, once Phase 1 of our managed Wi-Fi initiative has been fully integrated into our lease roll, which we expect to occur in mid-2026, we expect to capture approximately $1 million to $1.5 million of additional NOI per year, with further upside from future phases. And with that, I'll turn it over to Steve to cover our 2025 outlook.

Thanks, Tiffany. Turning to our 2025 guidance and related assumptions. We expect same-store multifamily revenue growth to range from 2.1% to 3.6% in 2025. Embedded revenue growth, or the growth that has already been captured based on 2024 leasing, was about 70 basis points at the start of the year and 80 basis points at the end of January. The building blocks that add up to the midpoint of our guidance range include approximately 1% of rent growth driven primarily by our Washington Metro portfolio, 0.7% of growth in fee income from our operational initiatives, approximately 25 basis points of bad debt improvement, and approximately 20 basis points of occupancy growth. Moving on to expenses, same-store operating expenses are projected to range from 2.75% to 4.25% for the year. Non-controllable expenses are projected to grow 2% to 3% and controllable expenses are projected to grow between 4% and 5%, which includes technology expenses related to our managed Wi-Fi and other ROI initiatives. Watergate 600 NOI is expected to range from $11.5 million to $12.25 million, representing a decline of approximately 6% at the midpoint due to an anticipated decline in occupancy over the course of the year and higher utility expenses. We expect occupancy to end the year between 81% and 82%, representing a decline of approximately 3%, compared to current occupancy of 84.7%. While the sale of Watergate 600 is not included in our guidance, we continue to look to opportunistically monetize the property. Interest expense is expected to range from $37.35 million to $38.35 million for the year. In December, we executed the first of two one-year extension options on a $125 million term loan, which is now set to expire in January 2026, and we have no other debt maturing before 2028. Our balance sheet remains in very good shape, with annualized adjusted net debt to EBITDA of 5.7 times during the fourth quarter. Over 60% of our total capacity available on our line of credit, and no secured debt. Turning to Core FFO, the drivers of our 2025 Core FFO per share at the midpoint include $0.04 of growth from our same-store multifamily portfolio, offset in part by a $0.01 decline from Watergate 600, $0.01 decline from higher G&A, and a $0.05 decline from other items. And with that, I'll turn it back to Paul.

To wrap it up, our 2025 outlook reflects another good year of performance from our Washington Metro portfolio and improving trends in Atlanta. Across Elme submarkets in the DMV, strong supply-demand dynamics and limited value-oriented housing options create a favorable leasing environment. In Atlanta, we anticipate a gradual improvement in market dynamics, paving the way for a strong 2026. Before turning to Q&A, we'd like to reiterate that we do not have any additional information or updates to provide at this time regarding the strategic review beyond the information we've already provided. Therefore, we request that you focus your questions on our results, business initiatives, and outlook. We appreciate your cooperation. And now, operator, I'd like to open it up for questions.

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

Great. Thank you. Good morning. I guess my first question revolves around just the potential impact of what's happening with the new administration in your market. You all have been effectively a pure play in that market for a long, long time, and there have been sort of changes in different agencies moving people and doing things of that nature. Like what's been the experience in the past when there is, say, a big change in the government near a property? Like is there a way to put some brackets around how that has affected leasing or rents? Any anecdotes there would be helpful?

Anthony, it's Paul. Let's go back to and just in terms of regional impacts, I think the last event we probably would have been sequestration. And that had a tremendous impact on the industry just in terms of really kind of paralyzing some of the progress, some of the leasing, some of the growth, but I would say we're in a different time now. The federal government probably back then really was probably the central engine that drove our economy. I think now technology has really taken over, and we really are still seeing tremendous amounts of growth, especially in Northern Virginia, where the bulk of our residential portfolio in the DMV is located. I think what's obviously different about this time is, there appears to be a macro strategy of addressing government expenses, but it seems a little fractured right now moving forward. So, in terms of, we look back, as I said in my remarks, we look back at the growth in the private sector, we look where the growth is coming from, and it's not coming from the federal government, and it really hasn't been coming from the federal government for the last decade. So we're very comfortable, and Grant can talk about our resident composition and some of the demographics associated with that. But we feel very comfortable about the businesses that are growing here in the private sector and its respective impact on our residential base. Grant, do you want to add any more color to that?

Sure. Just speaking generally, just to reiterate what was in the script and it is in Slide 11 that we referred to, is that if you look at non-DoD federal jobs in the Washington region, our exposure is about 6.2%. And if you drill down to any single agency, we're sub 1% for any single agency. And so many times, we're talking one, two, three, four, five people is sort of the typical exposure to any single agency, once you get outside of adjacent agencies.

Okay. Thank you for that. And then just my follow-up question, can you give us any update or thoughts on where market cap rates might be for the types of assets typically in your buy box?

Tony, again, it's Paul. I'll just start off and kind of give you some macro observations on what we're seeing in the capital markets. For core deals, we're really seeing today's buyer kind of look for that 9% to 11% IRR, and that's translating into a 4.5% to 5% cap. For core plus deals, we're seeing ranges in that 4.75% to 5.25%. Again, depending on the type of leverage, folks shoot for an 11% to 13% IRR. And then value-add, more in that 5% to 5.5% space, we've seen it go up to 6% or even a touch higher depending on the vintage of the product, with those buyers looking for leverage 13% to 15%. For our type of product, we think we're in that value-add space, and so we feel very comfortable about the strength of our portfolio moving forward. When we look around at the markets right now, and the reason why we're optimistic about this year, there's just a tremendous amount of liquidity in the debt markets. The GSEs, both Fannie and Freddie, both have $73 billion in allocations, for a total of $146 billion. Definitely seeing a pickup in the bridge market, especially on lease-up deals, and life companies are back and they're being pretty aggressive on those 50% to 55% LTV deals. A lot of sellers, a lot of private equity sales coming to the market. We're seeing a tremendous amount of BOVs being conducted in this region, some merchant builders. But I think the larger PE firms that are looking at, maybe opportunistically redeploying other capital into other asset classes and geographies. The other thing I'd note, Tony, is we're definitely seeing bigger deals coming back now. I think late '22, '23, and last year, particularly, a lot of in that 40 to 75 space. Even the deals we've seen come out since January 1, a couple of deals over $100 million. So people are definitely moving to the aisle, and a number of the originators that we talk to really use a term they use just about getting out and getting in front of the market. The buying, we've just seen buyers all across the spectrum, and I think our big macro takeaway from this is we're continuing to see a tremendous amount of capital flow into the living sector in general. And so, we think that I think the numbers I saw 2024, we saw about $137 billion being done in transaction volume. This year, I think the numbers people are forecasting are more towards like $150 billion. So another big year ahead. We think there are going to be a lot of recaps coming before some of these liquidations. But I would tell you, even going back to what we feel was a good acquisition of Druid Hills, the discount to replacement costs are shrinking. And that was a key element for us, and we think they're going to continue to decline as the year progresses.

Okay. Great context. Thank you.

Thank you. Our next question is coming from Jamie Feldman with Wells Fargo. Your line is live.

Great, thank you and good morning. Just a couple of follow-ups from some of the comments you made on the call. I guess to start, you mentioned your lease rates for the year. Can you talk about your view on seasonality? I mean it just seems like there are a lot of moving pieces in the D.C. market this year. Do you think you'll see acceleration into 2Q, 3Q, and then drop off? Are you thinking things will get better into 4Q? So can you maybe talk through your outlook for new leases and blends? I'm sorry, Jaime…

Absolutely, Jamie. This is Tiffany Butcher. Happy to walk through that. I would say if you are looking at just the Washington, D.C. portfolio, we are expecting another normal year of seasonal growth in the Washington, D.C. area with obviously peak leasing occurring during our spring and summer leasing season. In Atlanta, we expect to see gradual improvement throughout the year as we continue to see improvement in the supply-demand dynamics in that market. If you want to look at the portfolio as a whole, we're projecting our new lease rate growth to be between a decline of 2% and a positive 0.5% for the full year. We expect renewal lease rate growth of between 3% to 5.25% renewal lease rate growth continues to be a strong driver of growth for us. And then blended lease rate growth, we're projecting between 1.25% and 3% for the portfolio overall.

Okay. Thank you for that. And then I guess just thinking about your outlook for the year, I mean, are you on hold now of trying to sell assets move into other markets, Watergate, is that on hold? Or do you think are you guys just going to kind of continue with the plan you have and just the strategic review is more of a sideshow?

Well, Jamie, I mean, we put out our 2025 guidance. So all the underlying assumptions are in there. And then as far as our operations go, we are in terms of, you mentioned expansion markets, I think what we are most focused on is getting the best performance we can out of the assets that we currently own right now. And Tiffany and her team are doing an outstanding job in terms of the new initiatives, the renovations. Other capital allocations that we think are going to be accretive for our shareholders, as we want to keep our eye on the ball day-to-day, and all of the operations that we have throughout the company as we undergo this strategic review process.

Okay. And then I guess thinking specifically about Watergate, I think we're getting a little more optimistic to get some leasing done there. I think the Kennedy Center was out there as a potential option. Obviously, a lot of change going on there. Can you update us on conversations around the Kennedy Center specifically, or just your leasing prospects there? And then I know you included a $0.01 drag in guidance for operating that for the full year. If you were to sell it, do you think that takes your numbers up or down further?

Well, I think just right now, I mean, we have good walls on the property. And I think there's a lot of good activity. We've had renewal - in-place renewals that took place in 2024. As I mentioned, I believe on the last call, we are in discussions with our largest tenant that is a '27 expiration, and we feel good about the prospects there. And we're also in discussions with some of the smaller tenants for renewal in place. And obviously, better for us, better from a TI standpoint, from a free rent standpoint. So collectively, I think overall, we're feeling good. Concurrently, though Tony, excuse me Jamie, as we've said in the past, we will be opportunistic as we look at the capital markets. I would say not only has the D.C. market improved in terms of the type of activity that we're seeing in the marketplace from a leasing standpoint with tenants, the thaw seem to take place in 2024. And so, we're definitely seeing more activity now. I think even more - another arrow in the quiver for a buyer is the liquidity in the debt markets, and we're actually seeing CMBS deals done on office products downtown. So we feel like the environment is coming towards us. We feel like we have some headwinds now some tailwinds instead of headwinds. And so, we're going to try to be opportunistic, but we've got a job to do at Watergate, and that is to get it to the highest leasing percentage that we can get, and we're going to continue on that path.

Okay. But I guess so if you were to sell it, do you think that's accretive, or dilutive to earnings?

I'm not going to speculate on the type of pricing that we're going to get, Jamie. Right now, we haven't really tested the market. So we'll both move forward. And hopefully, we can have something positive to say in future calls.

Okay. And then, I mean, I know you said not to talk about the strategic review, but I guess this would have been a question even before you announced this. Can you talk about the frictional cost if you were to sell the company, whether there are taxes that people need to factor into NAVs, or comp or just any other pieces, because I think the market naturally goes to like here's the NAV, but then there's always a drag on that. Can you just talk through some of those moving pieces?

Jamie, what I can say, first off, thank you for the thoughtful question. What I can say is the Board and the management team are committed to acting in the best interest of the company and its shareholders. There's no timetable or deadline set for the completion of this Board-led strategic review. We'll provide an update if and when appropriate. But beyond the information in our release, we don't have any information to share, or updates beyond that to provide at this time.

So you can't get into the frictional costs?

That's correct, Jamie.

Got it. Okay. And then just a final question then. You talked about your composition of jobs in the portfolio. I think you said for two-thirds. If you were to just take a guess at the remaining one-third, would the numbers be pretty similar? Or is there something different we should be thinking about in terms of the employers?

Jamie, this is Grant. I think you could extrapolate that out and say the composition would be similar.

Okay. All right, great. Thanks. And good luck with everything.

Thank you, Jamie.

Thank you. Our next question is coming from John Pawlowski with Green Street. Your line is live.

Hi, morning. Thanks for the time. Just a question for Tiffany. Your points are well taken on why D.C. is more insulated from potential shocks to federal employment. I'm just curious like on the ground, and the considerable uncertainty, forget job losses and potential job losses, but the uncertainty growing around the tenant base. I pick your favorite leading indicator of foot traffic and closing rates on tours. Are you seeing any kind of leading indicators to suggest that the uncertainty around employment is leading to a pause in leasing decisions and tenants in the market?

John, thanks for the question. Year-to-date, we are seeing very normal seasonal leasing trends. We have not seen any atypical impacts on traffic or leasing across any of our key metrics. The outlook overall for the DMV in terms of supply-demand dynamics remains incredibly strong. We think that our mid-market rent positions us well as Class B demand trends tend to be more consistent relative to other asset classes. We'll obviously continue to monitor all of the new developments very closely. We'll have to see how it plays out over the next few months. But based on what we're seeing on the ground today, and our Class B position, we think we are positioned well to have another good year in the DMV.

Okay. Then last one from me. The Atlanta same-store, the sequential growth rate was quite high. I know a few properties can really move the needle, but was this a function of bad debt improvement and volatility in bad debt? I think there was about 6% sequential growth in Atlanta this quarter. Any color there would be helpful?

Yes, John, this is Steve. And you're right for about half of it. So we had 6% sequentially, and about half of it was an improvement in bad debt that we saw in the quarter in Atlanta. The other portion of it was business interruption insurance proceeds from a property down there that had a fire earlier in 2024.

Thank you. Our next question is coming from Cole Bardawill with Wolfe Research. Your line is live.

Hi guys, thank you very much for the time. I just had one question on occupancy in D.C. You mentioned it was going to be more of a normalized year. Are you expecting any occupancy erosion this year in '25, or are you kind of expecting it to hold relatively flat?

Yes. Obviously, we had a very strong year of occupancy in the DMV last year, being in the 96% range, and we expect the DMV to remain in that 96% range next year. And then we obviously are expecting a gradual improvement in occupancy in Atlanta.

Okay. Got it. And then just one more. I noticed in D.C. and Maryland, you had some pretty high property operating expenses this quarter. I was just curious if there are any big drivers for that?

Yes. So Cole, in D.C. in the fourth quarter. So on the property for non-controllables, we saw in D.C., and it's on the utility side, we saw a couple of true-ups at some properties that hit in the fourth quarter, and really drove that in DMV.

Thank you. As we have no further questions in line at this time, I will hand the call back over to Mr. McDermott for any closing remarks.

Yes. We'd like to thank everyone for their time today, and we're looking forward to seeing many of you and talking to you in person over the coming weeks. Thank you, everyone.

Thank you. This does conclude today's conference, and you may disconnect your lines at this time. And we thank you for your participation.