Elme Communities

Welcome to the Elm Community's fourth quarter and year-end 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 fourth quarter earnings call. On the call with me today are Paul McDermott, President and Chief Executive Officer, Steve Riffey, Executive Vice President and Chief Financial Officer, Stephen Freistadt, Vice President of Finance, Grant Montgomery, Vice President and Head of Research, and Drew Hammond, Vice President, Chief Accounting Officer, and Treasurer. Today's event is being webcast through the Investors section of our website at elmcommunities.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 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, 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 investor's page of our website. And with that, I'd like to turn the call over to Paul.

Thank you, Amy. Good morning, everyone, and thanks for joining us today. We ended the year with a strong fourth quarter performance, and 2023 is off to a good start with solid operating fundamentals and favorable demand indicators. We are reiterating our 2023 guidance, which reflects double-digit same-store NOI and core FFO growth. Our investment grade balance sheet is in great shape with low leverage and ample liquidity, and we have no debt maturities until 2025. We feel very good about our ASFO growth outlook, and we are increasing our quarterly dividend by approximately 6%. The economic outlook continues to evolve, and we will likely face a slowing economy this year. While we are not immune, Our mid-market strategy is designed to outperform across cycles and to provide relative insulation during downturns when residents are more likely to trade down to a lower rent level instead of trading up. Over the past five and 10 year periods, our target vintages have outperformed newer vintages in our respective markets. Toward the end of last year, we began to see headlines surrounding job cuts for high-wage technology positions due to the intentional cooling of the economy by the Fed. However, in the Washington metro, the tech-heavy, informational and professional, scientific and technical sectors continue to grow, up 2.7% and 2%, respectively, year over year. As recently highlighted in the Wall Street Journal, A study of software engineering job postings at year end found that Washington region has more job openings in this field than the San Francisco Bay Area. The strength in these jobs is particularly evident in Northern Virginia, where most of our portfolio is located, and where the information sector, which includes software engineering jobs, grew at a brisk rate of 5.6 in 2022. The Washington Metro is known to have the most stable employment of all gateway markets. This stability supported very strong credit performance throughout the pandemic, as we sustained 99% collection rates, and we expect to continue to experience solid collection trends. Furthermore, multifamily rent growth for the Washington Metro is expected to outperform the U.S. average this year. and nearly all the major gateway markets. In Atlanta, the regional economy is projected to fare well in the face of increased macroeconomic in 2023, maintaining job growth of over 1%, according to Oxford Economics. Over the long term, we continue to believe that Atlanta's industrial mix will drive outsized job creation, wage growth, and net migration, supporting sustained demand for apartments that are affordable to the largest segments of the renter market. In terms of the potential impact from new supply in a slowing economy, our price points are well below the rent levels for new deliveries. In the Washington Metro, our monthly rents are over $600 below nearby Class A communities. In Atlanta, Our monthly rents are over $500 below nearby Class A communities. Furthermore, our communities are not located in areas that are receiving high supply. Almost 88% of the new supply in the Atlanta Metro is delivering outside of Elm's submarkets in 2023 and 2024. And in Washington, development is highly concentrated in the region's core, versus our suburban focus with 84% of units under construction inside the Capital Beltway. Again, in both markets, the new supply is priced above our price points for different renter cohorts. In terms of the impact of a slowing economy on the cost of home ownership, the national cost of owning a home compared to renting a single-family starter home is the highest it's been in over 20 years. The cost of owning a home in our markets has grown more than renting an apartment over the past few years and now stands at nearly $600 per month or 28% above our rents in Atlanta and over $1,200 per month or 43% above our rents in the Washington Metro. Even after factoring the potential for home price declines, home ownership will remain unaffordable for median income renters in our markets. To summarize, our portfolio offers downside protection in a slowing economy for the following reasons. First, our resident base is less exposed to job losses. Second, our price points serve as a buffer during periods of supply pressure. Third, We do not have exposure to high-supply submarkets. And lastly, housing remains undersupplied in our markets, driving up the cost of homeownership, which is particularly impactful for median-income households. Our rent levels are affordable for the largest and most underserved renter cohorts, and our communities should benefit from sustained demand for affordable rental options over the near and longer term. We are now in the final phase of our infrastructure transformation, which includes transitioning community-level operations to ELM management. The process has been seamless thus far, and we will have nearly 40% of our homes under management by next week, over 50% by the end of the quarter, and all communities under management by the end of the summer. The full spectrum of operational benefits is extensive and we continue to identify opportunities to deliver operational upside once our community onboarding process is complete. We built an operating platform that is highly scalable, and we continue to see the opportunity to deliver positive operating leverage by growing our portfolio and expanding it into the Sunbelt markets. We are confident in our investment strategy and our ability to create value through thoughtful capital allocation. The markets that we are targeting have industries with the best long-term growth prospects and a growing need for affordable rental options for median incomes. While deal volumes remain muted, we are actively underwriting opportunities. We will be ready to act when the time is right and will only pursue opportunities that we expect will create value for our shareholders and align with our strategy and mission. This year, we plan to extend the rollout of smart home technology to all our communities. We designed our smart home initiative to improve our residents' day-to-day experience at investment levels that make sense for mid-market price points. Our initial program includes smart locks, smart thermostats, smart lights, and water leak sensors. Overall, these technologies will provide ease of living for our residents, reduce our operating expenses, advance our environmental goals, and enable a better digital experience in the form of self-guided tours for potential residents. I am pleased to share that we made substantial progress on our ESG initiatives during 2022. Delivering industry-leading ESG performance for value-oriented communities is core to our goal of elevating the standard for value living. To quickly summarize our achievements, we achieved our highest Gresby score to date, achieved our greenhouse gas and water goals, aligned our reporting with GRI standards, joined the Better Climate Initiative, increased our multifamily sustainability certifications, and expanded the number of EV chargers at our communities. As we transition our communities to ELM management, we are advancing financial inclusion by providing our residents the ability to boost their credit scores by submitting on-time rent payments to all three credit bureaus at no cost. ESG is core to our mission of delivering a superior living experience for mid-market rents, and we are pleased with the progress we made in 2022 and look forward to keeping you updated on our ESG goals. Before I turn it over to Steve Riffey to provide an update on our operating trends and to cover full year and fourth quarter performance, I'd like to say a few words of gratitude. This is Steve's last earnings call with us ahead of his retirement on February 28th. I cannot thank Steve enough for the dedication that he has shown this company over the past eight years. His leadership and vision were instrumental to our transformation, and he is leaving us with a team that is well prepared to drive our company forward. He will be greatly missed by everyone who worked with him and we wish him the best in his retirement.