Elme Communities

Welcome to the Elm Community's second 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, 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 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 investors' page of our website. And with that, I'd like to turn the call over to our CEO, Paul McDermott.

Thanks, Amy. We delivered a very strong second quarter with same-store multifamily NOI growth of 10.9% and core FFO per share growth of 14.3% year over year. I am very pleased to share that we have officially completed the transition of community level operations to ELM management. We kicked off this strategy in 2021, and I want to thank all of the team members that contributed to countless hours to designing and implementing our new operating model. I would also like to welcome our newest community team members and thank them for all the hard work and dedication to customer service that they've shown throughout this transition. We launched our new platform with minimal disruption to our existing residents and very high community team retention. We are thrilled to have this transition behind us, and we look forward to turning our full attention to our operating initiatives. On that note, We welcome the new chief operating officer to our executive team in July. Tiffany Butcher brings extensive experience in multifamily operations that aligns well with our goals for our operating platform. I expect her leadership to enhance our ability to drive NOI growth and look forward to her participation on future earnings calls. Before I turn to our operating trends, I'd like to address our multifamily NOI guidance reduction. We had expected to see a more pronounced seasonal upswing into the spring and summer leasing seasons than we experienced in our markets. Additionally, our rebranding and transition activities had a greater impact on our ability to generate leads and push rents during the summer months than we had anticipated. These two impacts resulted in lower than expected new lease rate growth achieved during the second quarter and lower assumed new lease rate growth in the third quarter compared to our original expectations. As communities have transitioned, we have been closely monitoring community-level performance and have seen a rebound in our ability to drive rent growth as communities have re-stabilized under ELM management. Additionally, our renewal rates and occupancy trends remain in line with our expectations. Therefore, we feel good about our outlook for high single-digit same-store multifamily NOI growth this year, which represents strong performance for our core business during a period when we were executing significant changes to our internal systems. With the execution risk related to the onboarding process now behind us, we are shifting our focus to realizing the full benefits of our new multi-family platform. Turning to operating trends, we generated effective blended lease rate growth of 3.7% during the quarter for our same store portfolio comprised of renewal lease rate growth of 6.4% and new lease rate growth of 0.4%. Renewal rates remained very strong throughout the summer months and we signed renewal offers for July and August lease expirations of 5% on average, in line with our expectations for continued moderation and renewal rates over the course of the year. Our focus on occupancy continues to deliver good results, and we have driven occupancy gains across our entire portfolio since the end of last year. Game store occupancy averaged 95.6% during the quarter, up 10 basis points compared to the prior quarter. And ending occupancy was 95.9%, up 30 basis points year over year. Retention remained strong at 63% during the quarter, up 200 basis points compared to the prior year, and above our historical average in the mid 50% range due to lower move outs to own and our focus on maintaining strong retention throughout the portfolio transition to ELM management. Our geographic expansion strategy has yielded solid results thus far, and our Atlanta communities are contributing very good growth. Revenue for our same store Atlanta portfolio increased 15% year to date compared to prior year period, and NOI grew 24%. Occupancy for our entire Atlanta portfolio averaged 94.2% during the second quarter, 120 basis points above the market average due to our focus on driving occupancy. Same-store multifamily revenue increased 9.6% in the second quarter compared to the prior year, comprised of approximately 9.5% growth from our DC Metro portfolio and over 12% growth from our Atlanta portfolio. Our current rent levels translate to rental growth of approximately 5.6% year over year, which represents 90% of the rental rate growth we need to achieve the midpoint of our guidance. Turning to renovations, our price points provide the opportunity to offer like new interiors at several hundred dollars below the monthly cost of Class A apartments, which allows us to generate cash-on-cash renovation premiums in the mid-teens. We have completed over 141 renovations year-to-date at an average ROI of approximately 14%. This return does not include the market rent growth that we achieved. By executing renovations on-turn, We have the flexibility to increase or pull back the pace of renovations as revenue maximization opportunities shift. Given the very strong renewal rates we are seeing, we are strategically keeping turnover low and have therefore slowed down the pace of renovations as less homes have become available to renovate. While our total pipeline and value creation opportunity has not changed, we now expect to complete 300 to 350 renovations this year. With a 2,900-unit pipeline, we have more than enough runway to drive renovation-led value creation over the next several years. The rent-to-income ratio for new leases signed in the second quarter was in the mid-20s, consistent with our historical average, and the average income for those leases increased nearly 9% year over year. as we continue to see that income growth is keeping up with the pace of rent growth in our markets. For the first time since early 2021, the affordability outlook is improving nationwide as middle class wages grew faster than the rate of inflation in May and June. Despite improving affordability, the cost of owning a home or living in recently built apartment communities remains unaffordable for mid-market renters in our markets. Near our communities, recent deliveries are priced $440 to $680 or 28 to 32% more than our rents. The cost of owning a home is even higher differential compared to our mid-market rent levels. In addition to the relative insulation provided by our price point, Most of our communities are not located in the path of new supply next year. While at the market level, annual supply will peak for Washington DC and Atlanta in 3Q 2024, over 40% of Elm's communities are located in sub markets where supply is expected to peak this year. Overall, as we look towards 2024 and beyond, we see favorable demand dynamics for our price points supported by the financial health of our residents and improving outlook for wage growth versus inflation and the affordability of our rent levels for the deepest sections of the runner market. With that, I'd like to turn the call over to Steve Freistadt, our CFO, to discuss our transition to L management and balance sheet and guidance updates.