Q3 2022 Washington Real Estate Investment Trust Earnings Call
Welcome to the Elm communities third quarter 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 third quarter earnings call on the call with me today are Paul Mcdermott, President and Chief Executive Officer, Steve Breathy Executive Vice President and Chief Financial Officer, Susan Iraq, Senior Vice President and Chief Information Officer Grant Montgomery, Vice President and head of research through him.
<unk>, Vice President Chief Accounting Officer, and Treasurer, and Steven <unk>, Vice President Finance.
But that is being webcast through the investors section of our website communities Dot 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.
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 will refer to certain of these risks in our SEC filings reconciliations of the GAAP and non-GAAP financial.
[noise] 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'd like to turn the call over to Paul.
Thank you Amy.
Everyone and thank you for joining our third quarter 2022 earnings call.
This change in just a few months both in the broader financial markets. The fed continues to try to control rising inflation and for our company as we break from our past and move on from being wash REIT.
Becoming elm communities represents the start of a new trajectory.
Listening us to capitalize on the opportunity to be a differentiated provider of multifamily homes.
It marks the culmination of our multifamily portfolio transformation geographic expansion and technology forward infrastructure transformation.
I am pleased to report a very strong third quarter, which Steve will discuss in more detail, but first I'd like to cover the progress that we've made in our transformation and how the launch of our resonate focus brand fits into the execution of our growth and operational strategy.
We have made the break from a business to business commercial company and become a business to consumer provider of apartment homes.
We focus on the largest and most underserved renter cohorts.
In fact, 97% of our apartment homes are affordable to households that earn the area median income.
20% of our apartment homes are now located in the sunbelt.
We're targeting economies with diverse innovative industry that drive outsize job creation wage growth and in migration.
Our portfolio's allocation in the Atlanta, and Washington markets enables our participation in growth, while also providing relative insulation during economic downturns.
Atlanta's regional economy is projected to fare well in the face of increased macroeconomic headwinds in 2023, maintaining job growth of approximately 1% and positive economic traction According to Oxford economics.
Longer term job and GDP growth of one 8% and two 4% from 2022 to 2026 are projected to continue Atlanta's track record of National outperformance.
Washington is job growth in 2023 is also projected to continue a pace growing one 4%. According to Oxford economics, continuing its long history of counter cyclical outperformance during periods of national economic stress.
Markets are projected to grow more than the national average in 2023.
We've targeted a deep underserved and undervalued base of mid market demand.
Mid market renters comprises the largest share of apartment demand in each of our markets yet only a limited share of new supply is affordable for these runners.
Thus the demand is deep and competition from new supply is limited.
Mid market renters are underserved on multiple levels as the quality and maintenance level of physical asset service and overall resident experience in his apartment market segment is often of a lower caliber. Additionally.
Additionally, we see that they are undervalued as residents at these price points to a lower standard of care for their space at Mercy of a lower level of respect.
In turn residents place a lower level of trust and service providers.
We see the opportunity to elevate what home can be for our residents and our new name represents a combination of the words elevate at home.
Our new mission is to elevate the value living experience and create a place. Our residents are proud to call home by continuously focusing on service efficiency and innovation.
Our vision is to be the most trusted owner and operator of residential communities by elevating the standards for value living.
Our clarified vision and mission statement support our strategy to deliver what the deepest cohorts in the apartment market need and in turn to create value for our stakeholders.
Delivering a superior value living experience starts with making the most of every dollar spent at our community.
It means providing customer service that goes beyond responding to resident inquiries it needs anticipating the needs of our residents and empowering our teams to add value with every interaction.
Knowing what our residents value and providing amenities that meet their needs. It means investing in smart home and building automation.
That is impactful and makes sense at mid market price points.
It means ensuring that on time rent payments are reported to the credit bureaus to help build resident credit scores.
It means delivering industry, leading environmental performance for value oriented community.
All of this means we are committed to producing strong recurring results for our investors.
While redefining our mission and launching our new resident focus brands are important to execute our growth and operational strategy.
Work that was done to get us where we are today goes much deeper than our brand ethos.
Coming Elm communities marks the culmination of a multiyear effort to transform nearly every aspect of our business.
I would now like to turn it over to Susan Gerard Our Chief Information Officer, and key leader and our infrastructure transformation to talk about our progress and how the changes that we've made position us to deliver greater value for our stakeholders.
Thanks, Paul and good morning, everyone.
Have spent the past year designing a technology forward streamlined efficient cost effective and highly scalable operating model and technology platform that will deliver a better experience for our residents as well as efficiencies and capabilities that will drive better value for our stakeholders.
Efficiency is critical to making the most of every dollar we and our residents spent we prioritized efficiency when making operational decisions during our infrastructure transformation for maximizing our operating margins to making sure. We are doing everything we can with the resources, we have to provide ease of living for our residents we are.
Focused on improving what makes the difference and what we can provide most competitively.
So what have we achieved thus far.
Our ongoing focus on revenue maximization through daily pricing strategies are achieving better rents than we underwrote and our acquisition portfolio second given that we already control all our leasing and portfolio management in house Onboarding. The first set of communities has only strengthened our ability to manage leasing decision.
By removing the middleman and providing a closer connection with our community team.
Third we've recruited outstanding new talent, including key portfolio level operational positions. Our team has already begun to successfully onboard our communities.
Of course, we have harnessed the power of data as we implemented our new and improved technology platform by providing access to more data through our reorganized streamlined infrastructure and technology platform, we've reduced friction improved our analytical capabilities and better positioned our company to execute on our mission of raising.
The bar for mid market price points, while growing profitably the.
The significant changes that we've implemented has set us up to deliver growth and while we are already seeing benefits of our transformation. We believe that the real payoff is still ahead of us I would now like to turn the call back to Paul.
Thank you Susan Susan.
Susan highlighted our infrastructure transformation positions us to capitalize on the opportunity to be a differentiated provider of multifamily homes.
We are targeting a deep solid and underserved base of mid market demand.
This strategy is already delivering remarkable results and we expect to generate strong returns for investors as we continue our geographic expansion into new markets over time.
With that said investment discipline is foundational for this company and as the Fed's. Most recent shifts to more restrictive policies added another layer of uncertainty, we pivoted and faith negotiation to acquire two assets.
We do not believe that many sellers have realistically adjusted their price expectations to the shifting macro outlook and while we have the capacity to acquire $125 million of additional multifamily communities. We remain prudent about grown further in this environment until the capital market conditions improve.
I would now like to turn the call over to Steve to discuss our operating trends third quarter performance and growth outlook.
Thank you Paul and good morning, everyone.
Today, I would like to cover the operating trends that were experiencing and how those trends and the growth that we have captured to date provide us with confidence in our 2023 outlook.
I will also cover our third quarter results guidance for the remainder of 2022 and updates to our guidance for 2023.
I will start with touching on highlights for our growth outlook.
Paul and Susan discussed.
<unk> our company name.
Unveiling our mid market resident focus brands.
And beginning to bring our communities of house culminates in the start of a new trajectory for our company.
All of this coincides with a record growth outlook.
We expect to deliver historic NOI and core <unk> growth in 2023.
With same store NOI growth of 10% at the midpoint of our guidance range.
And core <unk> growth of 14% at the midpoint the strongest in over 20 years.
We have several reasons to feel confident in our ability to deliver this growth and to continue to deliver solid results beyond 2023.
First.
Our focus on value oriented price points provides stability across business cycles.
<unk> shows us that when you get into a recession.
Don't tend to trade up.
They tend to trade down to more affordable rents.
Over the past one five and 10 year periods class B rent growth has outperformed class a in both of our operating markets.
Second as Paul highlighted our portfolio's allocation to the Washington Metro provides stability during downturns in the Atlanta region is projected to fare well in the event of increased macroeconomic headwinds in 2023.
Third we have a well positioned balance sheet with low leverage and strong liquidity.
We prioritize the strength of our balance sheet throughout the transformative capital recycling, we completed as well as through the pandemic and maintained our investment grade debt rating.
It will continue to service well as we knew we had to be prudent to all we executed.
Fourth.
We anticipate operating cost efficiencies in 2024 after our community Onboarding process is complete.
These efficiencies should provide us with another gear for increasing profitability beyond the near Horizon.
If not been factored into our record growth expectations for 2023, as we complete the internalization process all in all.
We believe that we are well positioned to grow even further should the capital markets backdrop improves.
In keeping with historical trends the third quarter was our highest volume leasing quarter and lease rate growth remained in the double digits throughout the quarter. Following the early August peak.
Effective new lease rate growth was 10, 5% and effective renewal lease rate growth with 10, 1%, which ones to 10, 3% for the same store move ins that took place during the third quarter.
For non same store move ins that took place during the third quarter effective new lease rate growth was 13, 8%.
And effective renewal lease rate growth was 18, 4%, which was 16, 3% overall, we captured very strong lease rate performance, which will carryover into 2023.
Lease rate growth in October has moderated but remains historically high with effective blended lease rate growth of seven 1% for our same store portfolio at nine 7% for non same store portfolio.
October traffic in application volumes reflect solid demand for our value oriented communities.
We are currently sending out renewal rates of 10% to 12% on average with high renewal acceptance rates, indicating that our pricing power remains strong overall, given the significant growth in market rents in our regions.
Same store occupancy every strong 95, 6% during the quarter end.
And increased to 95, 7% post quarter.
Retention was 60% during the quarter, which was in line with a year ago.
And above our historical average.
Our revenue maximization strategy prioritizes lease rate capture during the busiest leasing months and we are now focused on maintaining occupancy as we head into the winter months.
Strong demand in retention supported a healthy forward occupancy trends as we head into the winter months.
Due to the rising cost of homeownership, our renewal retention rates improve while move outs related to home purchases represented the most notable drop compared to the prior year and sequential period.
The percentage of same store move outs related to home purchases declined by over 5% year over year and nearly 4% on a sequential basis.
Looking forward.
We are positioned with historically high embedded growth, which we expect will drive outsized revenue and NOI growth in 2023.
Our mid single digit earnings or loss.
The lease of over 8% as of September 30th provide confidence in our outlook for rent and NOI growth as the market environment shifts from the very strong trends that were experiencing today.
We are on track to deliver same store multifamily NOI growth of 10% at the midpoint of our guidance range and stronger annualized growth for the three Atlanta communities acquired this year with the vast majority of that growth already embedded in our portfolio.
On the expense side, we believe we are conservatively incorporated additional inflation pressure in our 2023 expectation on top of the level that we're incurring in 2022.
Our expectations for greatest cost pressure or soon to be a non control expenses driven by higher real estate taxes and utility costs.
Surely we assume that payroll and repairs and maintenance expenses, which represent the largest components of our controllable expenses will increase further due to ongoing inflationary expectations.
We anticipate that our ability to implement expense controls will improve over the course of the year. After our properties are fully on boarded so far.
Operational and other expense controls should have a larger impact on 2024.
This provides us with confidence in our growth outlook.
Now moving on the renovations during the third quarter, we renovated approximately 100 units for a return on investment of a little over 13%, excluding the rent growth that we achieved on comparable on renovated units and a few included total rent increases in Europe , ROI would look more like 2%.
While we expect to be closer to our historical renovation run rate of approximately 600 units per year in 2023.
Our renovation program.
Offers flexibility to change the pace as the environment shifts over the past year, while market rent growth has been a record setting levels.
We've eased off our pace of renovations benefiting from double digit rent growth and preserving renovation opportunities for wind market rent growth reverts towards historical levels.
I will now cover our third quarter results, which were in line with our expectations for stronger rent growth momentum in the second half of this year.
Core <unk> was 23 per diluted share, reflecting a year over year increase of 15% driven by strong growth in rental income.
Multifamily same store NOI grew 10, 4% over the prior year due to higher base rents and lower concessions, partially offset by higher repairs and maintenance and payroll expenses.
Third quarter repairs and maintenance expenses were higher in part due to increased turnover compared to the prior year period.
We expect full year same store multifamily operating expenses to increase by approximately 5% overall.
We expect multifamily same store NOI growth to accelerate in the fourth quarter because of the very strong lease rate growth, we captured during the summer leasing season.
Average effective monthly rent per home for the quarter increased 10, 6% compared to the prior year period on a same store basis and over three 5% sequentially.
Again, the acceleration in growth reflects the impact of the very strong lease rate growth, we captured during our busiest summer leasing costs.
Other NOI, which represents Watergate 600 grew six 2% in the third quarter compared to the prior year driven by higher rental and parking income.
600 has a high quality institutional tenant base.
Seven year weighted average lease term.
Now turning to guidance first time I pointed out that we are confident that our growth is underway.
And therefore, we pre released 2023 guidance on September 20 <unk>.
I will not reiterate all of those points and they can be found in our press release, but I will point out the following key highlights of our 2023 outlook.
Core <unk> for 2023 is expected to range from 96 to $1 <unk> per fully diluted share, which implies approximately 14% growth year over year based on the midpoint of the 2022 and 2023 core <unk> guidance range is the highest since 2000.
We expect most of this growth to be driven by rent growth much of which has already been captured in our existing leases, which supports our ability to grow our dividend if we make that capital allocation decision to do so in the future.
Same store multifamily NOI growth is expected to range from 9% to 11%, which reflects year over year growth of 10% at the midpoint further building on the double digit NOI growth expected in the second half of 2022.
Non same store multifamily NOI is expected to range from 12, and three quarters to 13 and three quarter million dollars in 2023, which now excludes the impact of the prior 2022 assumed acquisitions guidance.
While this guidance range does not reflect the impact of potential acquisitions, we have more than $650 million of availability on our line of credit as of quarter end.
And we are running at lower than our targeted leverage levels.
We will continue to evaluate acquisition opportunities in our target markets and we will pursue further acquisitions when they create additional value for our shareholders.
G&A net of core adjustments is expected to range from 26 in the quarter to 27 in the quarter million dollars.
Which reflects a small year over year increase of less than 2% at the respective midpoint due to temporary costs associated with transitioning our community level operations in house.
We expect G&A to decline in 2024, and then to remain stable as we scale our portfolio. When the time is right to do so.
With that said I will also update our outlook for the balance of the year.
We are reiterating the midpoint and tightening our 'twenty two core <unk> guidance range of 87 to 89 per share.
We are reiterating the midpoint and tightening our full year same store multifamily NOI growth guidance to eight and three quarters to 900 a quarter percent.
At the midpoint this represents 11.5% NOI growth for the fourth quarter.
NOI growth for same store and trove combined is expected to be between 12, and a half and 13%.
We are reiterating the midpoint and tightening our guidance range for non same store multifamily NOI to be between 22, and a quarter in 'twenty, two and three quarter million dollars.
Other same store NOI, which consists solely of Watergate 600 is expected to range from <unk> 13 in the quarter to 13 and three quarter billion.
Our <unk> guidance range assumes no further acquisitions are completed this year compared to prior guidance, which assumed $125 million of acquisitions.
This adjustment did not impact our 2022 or 2023 core <unk> guidance.
Incorporating our updated assumption regarding acquisitions, we expect our net debt to adjusted EBITDA to be below five times at year end.
G&A net of core adjustments for severance and structuring cost is now expected to range between 26, and $26 5 million, which reflects a slight increase in the midpoint.
Our G&A guidance excludes the impact of transformation investments for our future platform.
And our full integration, which we now expect to be approximately $10 million, a decline of $1 million compared to our prior guidance.
Interest expense is now expected to range between 24, five and $25 million, which is lower than our prior guidance due to the removal of our previous $125 million acquisition assumption during the second half of the year.
We expect our core <unk> payout ratio for the year to be in the mid seventies.
And we are establishing an <unk> growth profile.
That should provide us with additional flexibility to grow the dividend.
And with that I will now turn the call back to Paul.
Thank you Steve.
Becoming elm communities represents much more than just a name change.
Start of a new growth and value creation trajectory.
We are now in the final phase of our infrastructure transformation and have successfully begun transitioning property level operations in house.
We are delivering historical growth.
A strong balance sheet, a revamped operating platform.
And a clear strategy and mission meeting the needs of the deepest renter cohorts yet we are trading at one of the highest implied cap rates.
The tailwind we pursued in our transformation.
<unk> strong growth over the coming years.
While the value. We created is currently being masked by the challenging macro environment, we are well positioned given our geographic mix and mid market renter focus and we are confident in our ability to continue to deliver profitable growth.
Now operator, I'd like to open it up for questions.
At this time, we'll be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.
We ask that while posing your question you. Please pickup your handset if listening on speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
Your first question for today is coming from Anthony Powell alone with J P. Morgan.
Thank you and good morning.
I guess first question is you mentioned in the press release about evaluating opportunities that will create additional.
Value, but you also talked about not doing acquisitions. So can you just maybe elaborate a bit on what some of the other if there was or just other things, you're considering or what those might be.
Tony It's Paul.
When we talked about the acquisitions or the lack thereof.
Going into the fourth quarter.
We've talked to a number of different investors and what we're seeing out there.
Even though our letter levered competitors.
There's really a lot of pricing and yield discovery taking place.
As for our team we're repricing risk we.
Our moderating some of our growth assumptions.
We've talked to the Levered folks that they are experiencing obviously higher interest rates. They are seeing their leverage decreased by 5% to 10% and we're also seeing folks increasing their residual cap rate on the back end by plus or minus 50 basis points.
Interestingly also we're seeing a lot of folks.
<unk> away from large deals, we're seeing transactions, Tony I think that we feel like now is the time for patience and discipline, we think the cap rates are coming to us.
And we will move when we see the right opportunity.
The opportunities that that.
We passed on.
<unk> had more to do with the renovations in the yields.
And.
When we look at those.
A big part of our renovation story is maintaining that affordability gap.
And just for a moment I'd like grant to comment on the affordability and kind of its importance to our portfolio sure. Paul It is really central and we are maintaining that its been expanding.
Within the Washington region.
There is a 26% premium for new products.
Over.
Our in place effective rents and in Atlanta at even a higher 33% and so thats in the $650 to 700 dollar range, which.
Really.
<unk> quite a bit of price installation and differentiation of our product versus the new product Thats coming online.
Thanks, Grant and Tony I, just again want to reiterate reiterate like Steve said in his.
In his remarks that.
We are still we still do have a pipeline we are still underwriting opportunities we just.
Increased our metrics.
For what we need going in in this environment. We think it's the right thing to do but I want to assure you that we when we do see the right opportunity.
We will do our best to execute on it.
Okay, I understand and then I guess I guess, along similar lines, but on the other side of this with Watergate.
It actually seems like the assets performing pretty well and pretty steadily. So is the idea to keep that for now or lack of.
Liquidity in the office market or how should we think about that.
The Watergate it has almost <unk>.
Seven years of work.
On it and.
Tony when we look at our portfolio in its totality probably by year end. It is expected to be less than 10% of our total NOI. We are seeing traffic on it we did increase occupancy.
During the course of this year.
I'd like to see a few more data points on D. C office right now it's a as you said, it's not a very liquid.
Dynamic.
In the investment sales market right now, especially in D. C office and so it is a.
Non core holding and it is something that we would like to monetize but we want to.
Wait and make sure we can create the most value for our shareholders.
Okay. Thank you.
Thank you Tony.
Your next question is coming from John Pawlowski at Green.
Green Street.
Good morning, and thanks for the time I just have a few quick questions on the transformation Paul is the senior management team.
Will oversee the internal operating platform fully built out now fully hired both at the corporate and <unk>.
<unk> level or is there more hiring to do.
There is some additional hiring to do.
Over the next <unk>.
Six plus months, we've incorporated that that hiring into our 2023 guidance.
We just started John Onboarding the properties last weekend.
And I am happy to say the first.
Few coming on at the execution was successful.
But we plan on Onboarding properties from now through mid next year.
And I'm sure, we'll be adding additional personnel as that goes but like I said all of that is baked into our.
G&A numbers and our guidance for 2023, Steve anything you want to add.
And I would say, obviously at the community levels there'll be coming on more and more as we bring on more properties. We have obviously had to get ahead of this as we're on boarding properties. So we have beefed up our regional teams are.
At additional director of operations regional managers regional maintenance managers.
We've.
Positioned our accounting team to take over what third party accounting folks had done before and it is replacing there. So those things are done, but as Paul said.
As we incrementally have more people coming on board and relieve the middleman will be replacing them with a few more of our people.
Okay does any of this work.
Trickle into 2024 or will you be fully done by the end of next year.
Well, we do.
Not not into 2024, we should have everything that we currently own today onboard by the summer of 2023.
Okay.
Last one for me then I'll jump back into the queue.
Steve what are your expectations for revenue and expense growth within the 10% midpoint of NOI growth next year I apologize if I missed that earlier.
Well I think we talked about.
Overall.
Some facts that go into it.
And I can talk about how we might think that'll blend over the course of the year or two I think it starts out a little stronger in the year and we would expect it to blend down a little bit later.
We reported.
The loss to lease of $8 three at quarter end.
We're now getting into November which is a seasonally.
A little bit lower pricing and we're only seeing seasonal patterns, though weakness other than that.
We're still in the Sevens as we look at.
On November one.
Net.
We have.
But pretty strong earn in.
Feel really good about two thirds of our leases expired.
In our second and third quarter and we've got tremendous.
Trade outs during those quarters, which provide revenue growth.
On top of all of that.
And I'm going to throw it to grant for just to add a little color here.
We're seeing say on blended across the Atlanta DC markets.
Our real page expectation of 3% revenue growth.
But how we play is even a little stronger than that with grant if you could add a little color to that sure. Steve I think it's sort of a two pronged on those one would be sub market selection.
There is quite a lot of variability there's as much variability within a market as between markets.
And many of our sub markets that we have.
Then it played in in Washington, historically or that have moved into recently Atlanta are expected to significantly outperform.
The <unk>.
Average for the region and then Additionally, if you look at how the vintages.
<unk>.
Apartments perform and those that were really central to our strategy.
Those have outperformed historically as we said in the script over the last year. For example, the vintages that we really focus on in Atlanta have outperformed the market a new product by over 200 basis points and in Washington, DC over 340 basis points. So we think there may be some additional upside.
Based on our strategy and our Submarket selection beyond what you may see it a whole regional level than what I would that I would take it from there and say.
We've really focused going into the winter months on occupancy and we've actually been growing but since quarter end.
And it's very strong and when you think about the real strong rental growth we've captured in this market.
Up to now.
We're putting our renewals out right now at 10% to 12%.
And we're expecting even the winter months high single digit.
Rent growth et cetera.
So yes, we do believe it will tail off towards December of 2023, and start out higher in the year and kind of average down.
And then in terms of just started leasing patterns on our volumes and activity there very stronger historically higher than we've seen in October and early November before.
And.
And I think that that.
Carriers really well in terms of strength. So we look at all of this.
We're expecting.
With the earn in and a healthy occupancy going into the winter months.
We stress tested and we certainly don't have the kind of rental growth in 'twenty three that we've modeled in 'twenty two.
But we feel really good about it.
Okay, but for 2023 NOI growth guidance are we talking like eight and a half revenue and 6% and expense growth gets you to 10% of those are the types of ranges you guys are thinking through.
You have the you have the revenue growth rate.
Okay.
You bet.
Thanks Scott.
Yes.
I think we project that our expense growth to be around 7% on top of what we've experienced this year, which is 5%.
The categories that we think will be the highest for next year are going to be your.
Payroll, because we're offering incentives to get people to change jerseys and come over to our team and then all the real estate taxes and utilities. So we've left we've left room for those kinds of increases in there.
Sure.
Okay. Thanks for the time thank.
Thank you.
Once again, if there are any questions or comments. Please press star one on your phone at this time.
Your next question for today is coming from young Ku at Wells Fargo.
Hi, Thank you for taking my question I just wanted to go back to your comments regarding acquisitions.
<unk> talked about adjusted return requirements on your end, so maybe talk about how big the gap is between what you are willing to pay for versus what the sellers the sellers expectations are today.
Sure.
Hi.
Let's I mean, when you're looking at acquisitions, maybe we can talk about cap rates start out and.
I think that they are clearly varying.
By Submarket to Submarket and vintage to vintage.
When I look at the the effects of that.
Core and core plus cap rates, we havent seen.
As much movement, but on the value add because a lot of the buyers are are very dependent on leverage we've definitely seen some movement.
On the cap rates.
<unk>.
For the B value add cap.
That is the space that we play in.
We've seen those move up to a 100 basis points.
And Thats again, Thats unlimited quarterly data everybody's everybody's pipelines are down and transaction volume is down but.
It's not for us at least it's not just about cap rates.
It's about our going in basis, as we've talked about the opportunity to create value.
Just on geographic demographics also.
What the residual looks like at the backend.
For us, but we really see as I said earlier.
We really see the market coming to us I do acknowledge that there are some bid ask gaps out there still but.
We believe that again.
Most of the sellers.
And a lot of these value add sellers that are either on floaters or on short term shorter.
Short term paper.
We think theres going going to be ample volume next year.
But we do see it at higher cap rates than.
We've experienced that over.
Over the last.
24 to 36 months.
Okay. Thanks for that color and if so I mean, you guys still have $125 million in capacity.
Earmarked for acquisitions.
And also mentioned that the implied cap rate is higher versus peers is stock buyback something that you may consider instead of an acquisition.
Yes. This is Steve.
It is how we're thinking about it I mean, the big picture is the capital markets are unsettled right now and they just have an adjusted yet to the post fed actions thinking long term here.
Debt prices equity equity prices assets, the macros have disrupted the equity markets and the math and the macrocyst with regarding us of mass the value. We've created with historic growth a new trajectory of strong balance sheet. So we think we should let that settle.
Further I'd say asset prices as Paul was talking about just not adjusted fully yet, but we think cap rates are coming to us and we're positioned to create even further value when they do.
I mean, the way, we think about us having historical growth.
Our strong balance sheet liquidity, it's right, where we should be if we're heading into more economic uncertainty or even a recession.
And I think it will serve us really well as the equity prices in the asset values adjusting our fully discovered.
Regarding share repurchases, we only would look at them when we do model them all the time.
But we only do them on a leverage neutral basis and right now it's actually doesn't pencil out as our best most likely option in the near term.
And then finally I think if you think about our transformation scales are friends and making us.
<unk> makes us more profitable so getting smaller it really doesn't make a stronger right now.
Okay.
Okay. Thank you for that color, Steve and just.
One last thing regarding Watergate and like you said there is seven years of term left it as a good property.
Just wanted to get a sense of what the physical utilization of that property has been just to get a sense on how sticky the in place leases are.
But we are I believe in the.
About 90% occupied.
92%.
We've got.
Good traffic as I said young coming through there.
And our tenants the tenants.
Our largest tenant that has been there has been there for quite some time to actually who we acquired the building off of so.
We feel confident about.
Future utilization, we would just.
We would like to take advantage of some of the traffic we've seen as well as.
Building it some time for the DC office market recovery.
Got it great. Thanks, Paul.
Thank you.
Your next question is coming from Michael Lewis at Truest Securities.
Alright, great. Thank you.
My first one for Steve.
And of a guidance question I guess, but.
What are you thinking about for the term loan next year and.
What do you anticipate the interest rate would be to refinance that.
Well sure we havent really good debt maturity ladder, but the $100 million is due in July of next year.
We were working on some potential portfolio deals that don't pencil out now that might come back to us later so.
So we're keeping that option open right now what we've assumed in our guidance is that we will refinance the term loan.
It is swapped to fixed I think you noted in your in your notes.
To two 3% through July I think we will plan on refinancing it short in a short enough term that we can prepay without penalty.
I anticipate that we will have opportunities to acquire and we will probably have to assume some that will go to once that we can repay.
Looking at what that pricing might be what we're assuming is low fives after.
After the fixed period.
Okay great.
And then my second one about I guess, it's coming back to the question about the acquisitions right. So.
The company, obviously has come a long way I liked the rebranding.
But when I when I look at the third quarter composition of the portfolio Youre still 80% D C Virginia, Maryland.
Apartment Youre about 10% office.
There is no acquisitions in the 2023 guidance, although it sounds like there may be some.
I was just kind of curious like.
How much acquisition volume do you think you ultimately need to do to put this portfolio, where it needs to be and eventually youll have some proceeds from office you've got you have some dry powder right now so I think you could do it.
The transaction market I understand a little bit comes up but whats. The total volume of deals you think you need to do to get this portfolio, where you ultimately want it to be.
Well I think I'll start it and let Paul talk about it strategically this Steve.
I think theres more than one way to get there and clearly there's disruptions. So we're waiting for prices to settle et cetera, I think when we rolled out in our webcast June a year ago, we targeted to be like 40%.
In the Sunbelt.
We're 20% there today.
We've done a pretty good job of allocating so how do you do that well one thing is.
<unk> scale when you grow and you continue to use new capital and go there. Another way is once you have asset prices settled down and rediscover you also do some recycling.
Et cetera.
But a third way and we actually were in a pretty good discussions and they might come back to us when the capital markets makes sense.
But we were looking at the NAV unit deals.
And we had some opportunities that could have moved us there really quickly. So I think we just need to let things play out and I think the options will present themselves.
We'll do the right capital for the right opportunities at the right time, but today all we're saying is we need to make sure that we only create shareholder value we were solving for three things from the very beginning.
In addition to keeping the balance sheet strong number one is we wanted to profitable growth and we're delivering historic growth for next year. Okay.
And the.
The second thing was really we wanted to geographically diversify we made we got to 20% and we just talked about some of the options in the playbook that you just asked as well about the third thing is scale.
And we think scale can help us.
We saw some ways to scale faster before the capital markets got worse because of the fed and I'm not sure. The fed's going to do this forever. So I think those those opportunities may present themselves.
Yeah, Michael it's Paul.
I do expect.
Some type of settling in the second half of 'twenty three to Steve's point, the fed is not going to do this forever.
We are keeping in touch with the folks that we have those conversations with.
And as well I don't want to because we've.
Pushed pause I don't want anyone thinking for a moment that we're not still actively touring properties visiting the submarkets that are on our target list and maintaining our dialog with both the brokers and the owners.
Respective sub markets.
The only thing I'd add to really what Steve said in terms of scale is that Ed.
Everything that we've gone through.
Right now we've always said look we'd like to we can double the size of the company will now we built out the infrastructure to do that and I.
Now, it's just a matter of executing on the right opportunities at the right time I said it earlier.
Patience and discipline is the order of the day I think the ground still moving under our feet in a lot of particularly a lot of sellers want to see where the fed shakes out as well as buyers.
And so.
I'm confident that we're going to we are going to see either from a one off basis or from a portfolio basis opportunities in 'twenty three the scale, we're just not.
We're not predicating everything on that at this moment just given the dynamics that are taking place in the marketplace.
Okay I appreciate it thank you guys.
Thanks, Michael.
The next question is a follow up question coming from John Pawlowski, John Your line is live.
Thanks can you just remind us if there are any known move outs of Watergate 600 for next year.
I don't believe there are John .
I'll double check on that but I don't believe there are.
Okay. Thank you.
Okay.
And 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 we look forward to speaking with many of you over the next several weeks.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.