Elme Communities

Greetings, and welcome to the Elm Community's first quarter 2023 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 first quarter earnings call. On the call with me today are Paul McDermott, President and Chief Executive Officer, Steven Freistadt, Executive Vice President and Chief Financial Officer, Grant Montgomery, Vice President and Head of Research, and Drew Hammond, Senior 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 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, 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 in 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 delivered strong first quarter results and are on track to generate double-digit core FFO growth this year. Beyond 2023, we expect to deliver additional upside through operational initiatives enabled by our infrastructure transformation, which we look forward to discussing in detail later on this call. I will start with an update on our operating performance, investment market conditions, and our progress on internalizing community-level management. Steve will discuss the multi-year financial impact of our operating model and technology initiatives, our first quarter financial results, and balance sheet and guidance updates. Turning to our operating performance, effective blended lease rate growth was 4.5% during the quarter for our same-store portfolio, comprised of effective renewal lease rate growth of 8% and effective new lease rate growth of 0.7%. Blended lease rates were in line with our expectations during this quarter, supported by strong renewal rate growth. We have signed renewal offers for April and May lease expirations with effective rate increases of between 6% and 7% on average. We expect renewal rates to average in the mid-single digits through the summer months, followed by the low single digits by the end of the year. We've seen a healthy upswing in new lease rates from March to April, and new lease rates are on an upward trend into May. Same-store occupancy averaged 95.5% during the first quarter, which is up 50 basis points compared to the fourth quarter, driven by our focus on building occupancy during the winter months to allow us to push rents during our busiest leasing months. We've captured a small increase in same-store occupancy since quarter end, averaging 95.6% during the first three weeks of April. We continue to see very high retention above our historical average in the mid-50% range, averaging 64% during the first quarter for our same-store portfolio, which supported our year-to-date occupancy gains. Over the longer term, we expect our focus on elevating the living experience for value-oriented renters to support retention rates that are above the market average, contributing to higher revenue and lower expenses. Our current rent levels translate to rental rate growth of approximately 5.2%, which is over three-quarters of the rental rate growth that we expect for the full year. We expect rental rate growth to be the primary driver of revenue growth for the year, supported by year-over-year reductions in bad debt, concessions, vacancy loss, and growth in ancillary income. Same-store delinquency has been improving since the Virginia Rent Assistance Program ended last July, and court timing in the jurisdictions where we are experiencing delays, such as Montgomery County, Maryland, and Cobb County and Sandy Springs, Georgia, are beginning to return to their pre-COVID scheduling timetables. Concessions are tracking to pre-COVID levels and, as I mentioned, occupancy trended slightly below our forecast in March but is showing better momentum in April. Our outlook assumes additional occupancy gains during the summer months. In terms of market rent levels overall, we are seeing an improvement along with an upward trending new lease rates. Combined with stable occupancy that has trended up in April and strong renewal rates through May and early June, we expect to deliver strong NOI growth from our multifamily portfolio this year. As the apartment market absorbs the impact of elevated supply through 2024, we expect to be less impacted than higher-ended price points. Our mid-market price points provide relative insulation from new supply. The gap between our rents and new delivery and our sub-markets, even after factoring in the impact of concessions during lease-up, is so wide that our homes do not compete with new deliveries. In the Washington Metro, our monthly rents are over $600, or 24% below the cost of new deliveries across our submarkets. In Atlanta, our monthly rents are over $430, or 22% below new supply across our submarkets. The gap compared to the cost of owning a home in our markets is even wider. as our rents are $1,200, or 38%, and $600, or 28%, below the monthly costs to own in our Washington Metro and Atlanta submarkets, respectively. Home ownership has become even less affordable in our markets over the past year, and it's resulted in a significant decline in the percentage of move-outs related to home ownership. Historically, the percentage of move-outs related to home ownership has typically ranged from 15 to 20%. It hit a new low during the fourth quarter and trended up only slightly to 8.6% in the first quarter, which is down 46% compared to the prior year. In addition to a large rent gap between our rent levels compared to new deliveries and the cost of owning a starter home, Our communities are not located in some markets that are receiving high supply. In the Washington metro area, development is highly concentrated in the region's core versus our suburban focus, with 81% of units under construction inside the Capitol Beltway. In Atlanta, almost 90% of the new supply in the Atlanta metro is delivering outside of Elm's submarkets through 2024. Executing value-add renovations at low-teen cash-on-cash returns remains part of our growth strategy. If the economy softens, we would expect to see an increase in renters prioritizing value. Our renovation programs position us to capture trade downs by offering light new interiors at several hundred dollars below the monthly cost of Class A apartments. We have completed over 80 renovations year-to-date at an average ROI of 13.5%. We expect to complete between 450 and 500 units in 2023 and for renovation-led value creation to drive higher rent and NOI growth over time. Turning to the apartment investment market, we continue to prioritize expanding our geographic footprint but recognize that opportunities to scale our portfolio may not pencil out given the current market volatility. Our geographic expansion strategy has been successful thus far, and our performance is matching up with our underwriting. As owners come to terms with the reality of a higher interest rate environment, we will be ready to act upon opportunities that we expect will create value for our shareholders. We are targeting markets that have industries with the best long-term growth prospects and a growing need for affordable rental options for median incomes. We are now just three months away from completing the final phase of our internalization process. We began onboarding our communities last October, and we already have transitioned nearly 70% of our homes to Elm Management. Transforming our operating model and technology platform has enabled our teams to drive operational improvements and technology enhancements that will increase our profitability and offer a better living experience for our residents. By integrating our corporate and community level teams, we're establishing policies, strategies, and incentive structures to achieve our goals. Our internal transformation is a game changer for both revenue and expense management, providing the operational oversight and accessibility needed to take our platform to the next level. I would now like to turn it over to Steve to discuss the anticipated impact of our operating platform initiatives and technology investments on our margin and core FFO and AFFO.