Q3 2023 Elme Communities Earnings Call

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Hello, and welcome to the communities third quarter 2023 earnings Conference call.

Speaker 1: Hello and welcome to the Elm Communities, third quarter 2023 earnings conference call. As a reminder,

As a reminder, today's call is being recorded.

Speaker 1: But this time, I would like to turn the call over to Amy Hopkins, Vice President Investor Relations.

At this time I would like to turn the call over to Amy Hopkins, Vice President Investor Relations Amy.

Amy Please go ahead.

Good morning, and thank you for joining our third 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 a 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.

Speaker 2: Good morning, and thank you for joining our third quarter earnings call. The event is being webcast with a slide presentation that is available on the investor's 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 four 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 statements of these risks in our SEC filing.

May cause actual results to differ materially we undertake no duty to update them as actual events unfold, we refer to statement of these risks in our SEC filings.

Speaker 2: 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. And with that, I'd like to turn the call over to our CEO , Paul McDermott.

Absolutely I think that 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 and with that I'd like to turn the call over to our CEO Paul Mcdermott.

Speaker 3: Thanks Amy. We'd be delivered solid third quarter operating performance and the operating trends that we are seeing today align with our expectations and guidance for the remainder of the year. Therefore, we are maintaining the midpoint and tightening our FFO guidance.

Thanks, Amy will be delivered solid third quarter operating performance and the operating trends that we're seeing today align with our expectations and guidance for the remainder of the year. Therefore, we are maintaining the midpoint and tightening our <unk> guidance in.

Speaker 3: In terms of our recent company updates, we closed on the acquisition of a 500 home apartment complex in the Interseberg of Atlanta for $108 million, on September 29th.

In terms of our recent company updates we closed on the acquisition of a 500 home apartment complex and the inner suburbs of Atlanta for $108 million on September 29.

This acquisition rounds out our Atlanta footprint and improves our future growth profile I'll talk more about this acquisition in a minute.

Speaker 3: This acquisition rounds out our Atlanta footprint and improves our future growth profile. I'll talk more about this acquisition in a minute. Additionally, we welcomed a new member to our Board of Trustees.

Additionally, we welcomed a new member to our board of trustees there.

Speaker 3: Susan Karas is an accomplished leader in the real estate industry who brings extensive multifamily transaction experience and a deep network of relationship

It isn't caris. He is an accomplished leader in the real estate industry, who brings extensive multifamily transaction experience and a deep network of relationships.

Speaker 3: We look forward to the valuable insights that she will bring to our board.

We look forward to the valuable insights that she will bring to our board.

Speaker 3: I'll focus my prepared remarks today on our recent acquisition and future external growth expectations. Tiffany will cover our operating trends and growth initiatives, and Steve will discuss our balance sheet and guidance.

I'll focus my prepared remarks today on our recent acquisition and future external growth expectations, Tiffany will cover our operating trends and growth initiatives and Steve will discuss our balance sheet and guidance updates.

Speaker 3: Turning to our recent acquisition, we have collared Elm Druid Hills at a forward yield above 6%, including the impact of leveraging our existing expense base.

Turning to our recent acquisition, we acquired Elm Jerwood Hills at a forward yield above 6%, including the impact of leveraging our existing expense base. We were awarded the deal for a competitive bidding process, where our ability to provide certainty of execution as an all cash buyer.

Speaker 3: We were awarded the deal for a competitive bidding process where our ability to provide certainty of execution as an all-cast buyer worked to our advantage.

Our work to our advantage, we expect the acquisition to become accretive over the next 12 months.

Speaker 3: We expect the acquisition to become accretive over the next 12 months.

Speaker 3: This is an attractive real estate deal for Elm for the following reason.

This is an attractive real estate deal for <unk> for the following reasons.

Speaker 3: First, if fits squarely into our class B value ad strategy, which targets communities with rent levels that are 85 to 95% of the market median with renovation potential.

First it fits squarely into our class b value add strategy, which targets communities with rent levels that are 85% to 95% of the market median with renovation potential.

Speaker 3: This provides the opportunity to grow wrench and create value over time without directly competing with new supplies.

This provides the opportunity to grow rents and create value over time without directly competing with new supply.

Speaker 3: Elm Druid Hills offers the opportunity to renovate all 500 homes. As class A homes in the surrounding area are priced about at a 21% premium above our in-place rents, leaving more than enough room to renovate and capture our targeted return.

Elm Druid Hills offers the opportunity to renovate all 500 homes as class a homes and the surrounding area are priced about a 21% premium above our in place rents, leaving more than enough room to renovate and capture our targeted return further.

Speaker 3: Furthermore, the area is somewhat insulated by new supply with only one new delivery since 2021 and limited new supply under construction within a three mile radius.

More the area is somewhat insulated by new supply with only one new deliveries since 2021 and limited new supply under construction within a three mile radius.

Speaker 3: Second, it's located in an affluent area with a growing job.

Second it's located in an affluent area with a growing job base.

Speaker 3: Northrood Hills offers seamless accessibility to over 550,000 jobs within a three mile radius and is close to Atlanta's most important new medical development.

North through at Hill's offers seamless accessibility, so over 550000 jobs within a three mile radius and as close to Atlanta's most important new medical developments children's healthcare of Atlanta, and Emory Healthcare Executive Park expansion, which have generated over three.

Speaker 3: children's healthcare of Atlanta and Emory Healthcare's Executive Park expansion, which has generated over $3 billion in investments.

Billion in investments.

Speaker 3: Employment in our targeted income ban grew more than 17% over the past five years in the briarcliffe sub-market where average household income is $98,000, reporting an average rent to income ratio for Elm Druid Hill residents of 20%.

Employment in our targeted income band grew more than 17% over the past five years in the prior course, Submarket, where average household income is $98000 supporting an average rent to income ratio for M jewelry to help residents of 20%.

Third rent growth at Alger Red Hills has outperformed the sub market and broader Atlanta market average on a trailing five year and 10 year basis.

Speaker 3: Third, rent growth at Elm Juryd Hills has outperformed the sub market and broader Atlanta market average on a trailing five year and 10 year base.

Speaker 3: Fourth, it is an expansive property that sits on nearly 58

Fourth it is an expansive property that sits on nearly 50 acres.

Speaker 3: Elm Druid Hills is the second largest multi-family property acreage within a three mile radius, yielding a ratio of approximately 10 homes per acre, which is a significantly more land per unit than the average for new deliveries over the past five years and offers longer term redevelopment.

<unk> Hills is the second largest multifamily property acreage within a three mile radius, yielding a ratio of approximately 10 homes per acre, which is significantly more land per unit than the average for new deliveries over the past five years and offers longer term redevelop.

Options.

Speaker 3: This community is a rare find in a mature, a fluid inside the perimeter location.

This community is a rare find in a mature a fluid inside the perimeter location.

Finally, this is an exceptional price representing a deep discount to replacement cost of over 30% and we believe that this acquisition will perform very well over time and drive long term shareholder value.

Speaker 3: Finally, this is an exceptional price representing a deep discount to replacement costs of over 30%. And we believe that this acquisition will perform very well over time and drive long-term shareholder value.

We on boarded Elm Jerwood hills onto our operating platform and retained the entire community team providing continuity for existing residents.

Speaker 3: We onboarded Elm Druid Hills onto our operating platform and retained the entire community team, providing continuity for existing residents.

Speaker 3: The Elm Druid Hills team joins us with extensive local community management and leasing experience. And we could not be more pleased to welcome them to our company.

The Elm Darude Hills team joins us with extensive local community management and leasing experience and we could not be more pleased to welcome them to our company.

Speaker 3: And with that, I'll turn it to Tiffany to discuss our operating trends and growth initiatives.

And with that I'll turn it to Tiffany to discuss our operating trends and growth initiatives.

Thanks, Paul.

Speaker 4: I'll start by re-everating that our outlook for the Seamstor multi-family NOI growth remains in a high single digits, which represents very strong performance during a year of transition.

I'll start by reiterating that our outlook for the same store multifamily NOI growth remains at a high single digits, which represents very strong performance during a year of transition we generated effective blended lease rate growth of 3% during the quarter for our same store portfolio comprised of renewal lease rate growth of five 1% and new lease rate growth is there.

Speaker 4: We generated effective blended lease rate growth of 3% during the quarter for our same store portfolio, comprised of renewal lease rate growth of 5.1%. And new lease rate growth of 0.1%. Renewal rates remain strong throughout the fall, and we continue to experience very strong resident retention, averaging 61% during the quarter.

A 0.1% renewal rates remained strong throughout the fall and we continue to experience very strong resident retention, averaging 61% during the quarter. Thus far we assigned renewal offers for October and November lease explorations of five 5% on average representing a stable trend compared to the third quarter average.

Speaker 4: Thus far, we have signed renewal offers for October and November leaf explorations, a 5.5% on average, representing a stable trend compared to the third quarter average.

We expect blended lease rates to moderate over the remainder of the year towards the low single digits.

Speaker 4: We expect blended leaf rates to moderate over the remainder of the year towards the low single digit.

Speaker 4: Our focus on building occupancy earlier this year put us in good position heading into the winter. And we continue to experience the pricing power needed to maintain occupancy within our targeted range.

Our focus on building occupancy earlier this year put us in good position heading into the winter and we continue to experience the pricing power needed to maintain occupancy within our targeted range.

Speaker 4: Same-store occupancy average 95.6% during the quarter, up 20 basis points compared to the prior year.

Same store occupancy averaged 95, 6% during the quarter up 20 basis points compared to the prior year.

Speaker 4: Same-sword multi-family average effective rent per home increased 4.9% in the third quarter compared to the prior year.

Same store multifamily average effective rent per home increased four 9% in the third quarter compared to the prior year.

Speaker 4: Turning to renovation, we achieved an average renovation ROI of approximately 14% year to date. And we're on pace to complete over 300 renovations this year. Including the renovations we expect to complete at Druid Hill, starting in late 2024, our pipeline now stands at approximately 3,300 homes, which represents more than enough runway to drive renovation led value creation for the foreseeable future.

Turning to renovations, we achieved an average renovation ROI of approximately 14% year to date and we're on pace to complete over 300 renovations this year.

Including the renovations, we expect to complete it true at hills, starting in late 2024, our pipeline now stands at approximately 3300 homes, which represents more than enough runway to drive renovation led value creation for the foreseeable future.

Turning to rent to income the rent to income ratio for new residents remains in line with our historical average the average rent to income ratio for new leases signed in the third quarter was 24%, indicating that our rent levels are affordable to our new resident.

Speaker 4: Turning to rent to income, the rent to income ratio for new residents remains in line with our historical average. The average rent to income ratio for new leads was signed in the third quarter with 24% indicating that our rent levels are affordable to our new residents.

Furthermore, our communities continue to offer a compelling value proposition versus class a product.

Speaker 4: Furthermore, our communities continue to offer a compelling value proposition versus class A product, a cornerstone of our strategy.

Cornerstone of our strategy.

Speaker 4: Even as new supply has caused ranked compression between class A and class B communities in our market, particularly in high supply areas, the affordability gap between our communities and newly subs in their submarkets remains greater than 30%.

Even as new supply has caused rent compression between class a and class b communities in our markets, particularly in high supply areas. The affordability gap between our communities and new lease ups in their submarkets remains greater than 30%.

Speaker 4: The durability of these gaps exist due to our acquisition's discipline targeting communities well below market media and price points and allocating capital to submarkets that are not as impacted by new supply. Only one quarter of our submarkets currently have a community in lease up.

The durability of these gaps exist due to our acquisition discipline targeting communities well below market medium price points and allocating capital to sub markets that are not as impacted by new supply.

Only one quarter of our Submarkets currently have a community and lease up.

Speaker 4: Moving on to our growth initiatives, we have completed the transition of community-level operations while retaining 93% of our community teams, which has positioned us to now focus on driving operational improvements to increase profitability.

Moving on to our growth initiatives, we've completed the transition of community level operations, while retaining 93% of our community teams, which has positioned us to now focus on driving operational improvements to increase profitability.

Speaker 4: Thus far, we have achieved interest expense saving by accessing rent payments earlier, began capitalizing on new fee income opportunities, revised our vendor payment process to take advantage of rebates, identified opportunities to share resources and team members amongst communities that are located in close proximity, and we are 75% of the way through our smart home technology rollout.

As far we have achieved interest expense saving by accessing rent payments earlier.

And capitalizing on new fee income opportunities.

Revised our vendor payment process to take advantage of rebates identified opportunities to share resources and team members amongst communities that are located in close proximity and we are 75% of the way through our smart home technology rollout.

Speaker 4: We are pleased with these initial accomplishments and the progress we have made thus far. And we are excited about the opportunity to make continued progress next year.

We are pleased with these initial accomplishments and the progress we have made thus far and we are excited about the opportunity to make continued progress next year.

Speaker 4: We continue to expect to generate between $4.25 and $4.75 million of FFO from these initiatives. Above what we would have otherwise generated through 2025, with additional opportunity beyond that based on centralizing components of the leasing and maintenance process. We look forward to providing more details we continue to make progress on our centralization plans. And without alternate over to Steve to cover our balance sheet and out.

We continue to expect to generate between four point to five and $4 $75 million of F. F O from these initiatives.

Above what we would have otherwise generated through 2025 with additional opportunity beyond that based on centralizing components of the leasing and maintenance process.

We look forward to providing more details we continued to make progress on our centralization plans and with that I'll turn it over to Steve to cover our balance sheet and outlook.

Speaker 5: Thanks, Tiffany. Our balance sheet is in very good shape, with no secured debt and no debt materities until 2025, with options to extend our 2025 Terminal maturity another two-year.

Thanks, Stephanie our balance sheet is in very good shape with no secured debt and no debt maturities until 2025 with options to extend our 2025 term loan maturity another two years.

Speaker 5: Our annualized adjusted NetDet to Ivita remains in line with our targeted range and is expected to trend to the mid-5 by URI.

Our annualized adjusted net debt to EBITDA remains in line with our targeted range and is expected to trend to the mid fives by year end.

Following the acquisition of Ellman Jewett Hills, our liquidity position remains strong with approximately $550 million or 80% of the total capacity available on our line of credit.

Speaker 5: Following the acquisition of Elm Druid Hills, our liquidity position remains strong with approximately $550 million, or 80% of the total capacity available on our line of credit.

Speaker 5: In terms of our capital allocation strategy going forward, we are focused on finding opportunities to recycle capital out of lower growth, higher CAPEX communities, and furthering our geographic expansion.

In terms of our capital allocation strategy going forward, we are focused on finding opportunities to recycle capital out of lower growth higher capex communities and furthering our geographic expansion.

Now turning to our outlook for the balance of the year.

We are tightening our core <unk> guidance range to <unk> 97 to.

Speaker 5: We are tightening our core FFO guidance range, the 97 cents, the 99 cents per fully deluded share.

99 cents per fully diluted share.

Speaker 5: As Tiffany discussed, our operating fundamentals are trending in line with our expectations, and we are seeing stable traffic and occupancy trends into the...

As Tiffany discussed our operating fundamentals are trending in line with our expectations and we are seeing stable traffic and occupancy trends into the winter.

Speaker 5: We are confident that we will achieve high single digit same store NOI growth for the year. And we are reiterating our same store NOI guidance range of eight to nine.

We are confident that we will achieve high single digit same store NOI growth for the year and we are reiterating our same store NOI guidance range of 8% to 9%.

Speaker 5: Inclusive of Elm Druid Hills, we now expect our non-same store multi-family NLI to range from 13 million to 13.75 million dollars.

Inclusive of Ellen Jewett Hills, we now expect our non same store multifamily NOI to range from 13 million to $13 $75 million.

We are tightening our guidance ranges for other same store NOI, which consists of Watergate 600.

Speaker 5: We are tightening our guidance ranges for other same-store NOI, which consists of Watergate 600 and GNA.

And G&A.

We are updating our interest expense guidance to reflect the impact of acquiring Elm Druid Hills.

Speaker 5: We are updating our interest expense guidance to reflect the impact of acquiring Elm Druid Hill.

With the internalization of community level operations now behind US, we will no longer be recognizing transformation costs going forward.

Speaker 5: With the internalization of community-level operations now behind us, we will no longer be recognizing transformation costs going...

Speaker 5: Finally, we continue to expect our core AFFO payout ratio for this year to be at or below our mid-70s target.

Finally, we continue to expect our core <unk> payout ratio for this year to be at or below our mid seventy's target.

In terms of our valuation the public markets are valuing our multifamily business at an implied cap rate in the mid 7% range, which we do not believe reflects the long term embedded value of our multifamily portfolio as.

Speaker 5: In terms of our valuation, the public markets are valuing our multifamily business at an implied cap rate in the mid-7 percent range, which we do not believe reflects the long-term embedded value of our multifamily portfolio.

Speaker 5: As we advance our operational initiatives, execute value-add renovations at strong returns, capitalize on smart home technology investments, and continue to identify opportunities to improve and grow our portfolio, we expect to improve our valuation and earn a lower implied cap rate over time. And now, I thank you.

As we advance our operational initiatives execute value add renovations at strong returns capitalize on smart home technology investments and continue to identify opportunities to improve and grow our portfolio, we expect to improve our valuation and earn a lower implied cap rate over time.

And now I'd like to open it up for questions.

Speaker 1: Thank you. At this time we will be conducting a question and answer session.

Banking at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

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Speaker 1: and for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please.

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One moment, please while we poll for questions.

Thank you. Our first question is coming from Jamie Feldman with Wells Fargo. Your line is life.

Speaker 6: Our first question is coming from Jamie Feldman with Wells Fargo. Your line is live. Great, thanks. Good morning, and thanks for taking my question.

Great. Thanks, Good morning, and thanks for taking my question.

So I guess just to start.

You gave good color on the Atlanta acquisition, you talked about potentially doing more in other markets.

Speaker 6: We gave good color on the Atlantic position. You talked about potentially doing more in other markets. Can you just talk about what you're seeing out there? I think if you just kind of leave the narrative, we've heard so far in earnings.

Can you just talk about what Youre seeing out there I think if you just kind of leave the narrative we've heard so far in earnings and even we did a call with real page a couple of weeks ago, I mean, they're actually seeing more pressure I'd be real page, you're seeing more pressure on B I think Judy you are saying the same thing I'm just because you know you've got developers of new supply that are getting.

Speaker 6: And even we did a call with RealPage a couple of weeks ago. I mean, they're actually seeing more pressure on B. RealPage is seeing more pressure on B. I think UDR is saying the same thing. Just because you've got developers of new supply that are getting really aggressive trying to fill it and they're taking tenants away. Sounds like you're not seeing that, but can you just give more color across your submarkets and tie it into kind of what you might see in the acquisition market along those lines?

Aggressive trying to fill it in there you are taking tenants away.

Looks like you're not seeing that but can you just give more color across your submarkets and tied into kind of what you might see any acquisition market along those lines.

Speaker 7: So this is Grant Montgomery talking. This wanted to give you a heads up on that. Because we really did look into that data as well that we were paid to publish. And I think one of their points that they made is that depending on the level of new supply coming to market, there was definitely an impact that was registered.

Sure. Jamie This is grandma government talking just wanted to give you a heads up on that because we really did look into that data as well that real estate to published and I think one of their points that they made is that depending on the level of new supply coming to market. There was definitely an impact that was registered.

Speaker 7: in that closing of the rent gap between Class A and B across the country nationally. And so we looked at it in a similar methodology. And what we saw is that in their data, they showed that in submarkets where you had new supply, annual supply, net inventory ratios of one to 3%, they were measuring about a 21% gap between Class A and Class B.

And that closing of the rent gap between class, a and b across the country nationally and so we looked at it in the summer when methodology.

And what we saw is that in their data. They showed that in Submarkets, where you had new supply annual supply net inventory ratios of 1% to 3%. They were measuring about a 21% gap between class a and class b in our Submarkets, we were having that.

Speaker 7: In our submarkets, we were having that same methodology of looking at new lease ups versus our product. We have actually a 30% gap in our submarket. So that's been a key part of our strategy overall is really positioning ourselves at that below the 95%.

Same methodology of looking at new lease ups versus our product, we have actually a 30% gap in our sub market. So that's been a key part of our strategy overall is really positioning ourselves below the 95% market median rents also there we're not competing head to head our most recent.

Speaker 7: market meeting rents so that we're not competing head to head. Our most recent analysis of the data using real-page information shows that we're really only competing, for example, in Atlanta against about 13% of the new product is price below that point. And so we, although certainly are in markets where supply is having an impact, we are seeing direct

Analysis of the data using real page information shows that we're really only competing for example in Atlanta about against about 13% of the new product is twice the price below that point and so we although certainly are are in markets, where supply is having an impact we're seeing direct.

Speaker 7: really less direct head-to-head because we've been disciplined from the beginning and our price significantly below those new price points.

Really less direct head to head because we've been disciplined from the beginning of enterprise significantly with a lot of those new price points.

Okay. No. That's very helpful. Yeah, I figured it had more to do with that.

Speaker 6: The progress in your submarkets is just different than some of these others, but that makes a lot of sense.

Why risk in your Submarkets.

And some of these others, but that makes a lot of sense.

Can you comment on blends renewals and new lease spreads in the non same store Atlanta portfolio.

Sure. So I would say in the St well it sounded the same store portfolio and then we can move into non same store, but at the same store portfolio, we're expecting renewals to continue to trend in a 3% to 5% range and then for effective new lease rates were seen at the D. C. Metro is trending you know kind of slightly negative and.

Speaker 4: Sure. So I would say, you know, in the seat, well, let's start with the same store portfolio and then we can move into non-same store. For the same store portfolio, we're expecting renewals to continue to trend in a three to five percent range.

Atlanta is trending towards the negative mid single digits by year end. So on a blended basis, we're expecting the D C metro area to be between 3% to 4% in Atlanta to be approximately kind of 1% you would see those same trends that I talked about for Atlanta carrying into the non same store portfolio.

Speaker 8: You would see those same trends that I talked about for Atlanta carrying into the non-same-store portfolio.

Okay. So I mean, what are your early thoughts on 'twenty four rent.

If you are seeing well turned negative.

Speaker 4: Yeah, so we're going to give our guidance in February . So we're going to be able to provide a lot more detail on the trends at that time. But, you know, overall, I would say right now it varies significantly by market and by sub market. You know what we're seeing today is a continued gradual normalization of rate growth as we head into the typical winter leasing season. You know, our DC Metro portfolio is performing very well and showing the stability that we would expect and that we've seen in our core markets over the longer term.

Yeah. So you know we're gonna give our guidance in February so we're gonna be able to provide a lot more detail on the trends at that time, but you know overall I would say right now it varies significantly by market and by Submarket. What we're seeing today is a continued gradual normalization of rate growth as we head into the typical winter leasing season.

Yeah, Our D C Metro portfolio is performing very well and showing the stability that we would expect and that we've seen in our core markets over the longer term.

Speaker 4: In Atlanta, we're seeing more of an impact from the timing of evictions as we work through our eviction pipeline, which still includes some leases that were underwritten before we owned the properties and improved our credit standards. So the impact of backfilling eviction related vacancy has created more near term impacts on rates and occupancies.

In Atlanta, we are seeing more of an impact from the timing of elections as we work through our addiction pipeline, which still includes some leases that were underwritten before we owned the property is and improved our credit standards. So the impact of back filling eviction related vacancy has created more near term impacts on rates and Occupancies are however, overall, we're still seeing very.

Speaker 4: However, overall, we're still seeing very high retention and very strong renewal rates in our Atlanta communities. And so we are working through the current eviction pipeline, which is going to set us up well for 2024.

High retention and very strong renewal rates in our Atlanta communities and so we are working through the current eviction pipeline, which is going to set us up well for 2024.

Speaker 6: Okay, and then I guess this last for me, I mean, this was the first quarter post internalization and internalization expenses. I mean, did you think about just running the business in the platform? Is there anything left to get done? Any other initiatives or this is absolutely kind of smooth sailing from here in terms of the organization?

Okay, and then I guess just last for me I mean this was the first quarter you know post internalization internalization expenses.

And as you think about just running the business and the platform is there anything left to get done any other initiatives or this is absolutely got it sailing from here in terms of.

You know the organization.

Speaker 5: Jamie, this is Steve, and you're right, from a transformation cost perspective, we had those hit in the third quarter, and we're saying we don't expect anything as far as transformation costs go.

Jamie This is the this is Steve and you're right from a transformation cost perspective, we had those hit in the third quarter and we're saying, we don't expect anything as far as transformation costs going forward.

Speaker 5: You know, everything's internalized and we, you know, we focused, you know, one, now running the business, running it, you know, well and efficiently, you know, getting our policies and procedures in place. And, you know, we're definitely talked about the four and a quarter to four 75 of, of, of upside, really focused on achieving that over the next 24 plus months.

You know everything is internalized and we you know we've been focused.

<unk> now running the business running at a you know well and efficiently I'm, you know getting our policies and procedures in place.

Stephanie you talked about the four in a quarter to $4 75 of upside I'm really focused on achieving that over the next 24 plus months.

Speaker 6: Okay, put other initiatives you guys are thinking about.

Okay, but are there any like other initiatives you guys are thinking about.

Speaker 6: It might come up in 24. But you feel like you're in a... Yes, sure. You know.

It might come up in 24 or do you feel that's sure G&A, Oh, sorry, yeah, what I would say absolutely and I think it really revolves around all of the different initiatives that go into creating that 4.25 to $4 $75 million of operational upside and more specifically the five kind of key areas that we see making up.

Speaker 4: I would say absolutely and I think it really revolves around all of the different initiatives that go into creating that 4.25 to 4.75 million dollars of operational upside and more specifically, you know, the five kind of key areas that

That S O mm upside first of all the smart home packages.

As I said in our prepared remarks, we've already installed smart home technology packages and 75% of our units expect to complete the remainder of this year. So that'll have a positive impact starting in 2024. We're also very focused on occupancy we are changing our processes and procedures around pre move out inspections.

Speaker 4: So that will have a positive impact starting in 2024. We're also very focused on occupancy. We are changing our processes and procedures around pre-movement inspections, marketing, et cetera, to help improve our occupancy and our days vacant. And then we have a lot of different fee income opportunities that we're working on and looking at strategically that will bring new fee revenue into the portfolio. We're also working on cash management and other expense initiatives now that we have every time.

Marketing and et cetera to help improve our occupancy and our days vacant and then we have a lot of different fee income opportunities that we're working on and looking at strategically that will bring new fee revenue into the portfolio. We're also working on you know cash management and other expense.

Speaker 4: And then we have a lot of different fee income opportunities that we're working on and looking at strategically that will bring new fee revenue into the portfolio.

Speaker 4: We're also working on cash management and other expense initiatives. Now that we have everything in house, we've been able to take advantage of the earlier collection of rents.

Initiatives now that we have everything in house are we've been able to take advantage of the earlier collection of rents and then we are very focused on centralization related opportunities and opportunities to share stuff across communities, which we can now take advantage of it seems the operations are in house. So those.

Speaker 4: And then we are very focused on centralization related opportunities and opportunities to share staff across communities, which we can now take advantage of since the operations are in-house.

Speaker 4: So those are kind of the five key areas that make up that FFO upside. And as we've said before, about 20% of that will be recognized this year. And then the remainder will be recognized across 24 and 25.

So kind of the five key areas that make up that episode upside and as we've said before about 20% of that will be recognized this year and then the remainder will be recognized across 'twenty four 'twenty five.

Great. Thank you very much.

So in Q.

Speaker 1: Once again, if you have any questions or comments, please press star one on your telephone works are then allowed

Once again, if you have any questions or comments. Please press star one on your telephone keypad.

Speaker 1: Our next question is coming from Alan Peterson with Green Street. Your line is...

Our next question is coming from Alan Peterson with Green Street. Your line is life.

Hey, guys. Thanks for the time it took me a question on the Atlanta market I know you thought you'd touched on addiction, there towards total portfolio occupancy of 91 six at the end of the quarter is that the floor for occupancy due to bad debt issues or are you guys still working through additional or incremental bad debt issues within the market.

Speaker 9: Hey guys, thanks for the time. Tiffany, a question on the Atlanta market. I know that you touched on addictions there. Total portfolio occupancy of 91.6 at the end of the quarter. Is that the floor for occupancy due to bad debt issues? Are you guys still working through additional or incremental bad debt issues within the market?

Yeah, I would say overall, we are still working through the addiction pipeline, but.

Speaker 4: You know, I would say overall, we are still working through the addiction pipeline.

Speaker 4: But on the back end, we are also putting in place effective new recent incentives to help drive occupancy of the portfolio and new marketing initiatives to make sure that we are backfilling other vacancies as quickly as possible. And then I think it's very important to note that in addition to that, we have put in place.

But on the backend we are also putting in place effective new lease incentives to help drive occupancy of the portfolio.

And you know new marketing initiatives to make sure that we are back filling those vacancies as quickly as possible.

And then I think it's very important to note that in addition to that we have put in place a new credit screening criteria and.

Speaker 4: new credit screening criteria that is also helping improve the credit quality of the residents that we're back filling in those vacant.

That is also helping improve the credit quality of the residents that we're back filling those vacancies.

Speaker 9: So out of that 91.6, how many more units or what percentage of the portfolio is still delinquent within Atlanta?

So how does that 91 six how many more.

Units are what percentage of the portfolio is still delinquent within Atlanta.

Yeah, I think the overall the bad debt within the Atlanta portfolio is going to continue to moderate and we are going to continue to see that bad debt improve month over month as we head into the remainder of this year and then into 2024.

Speaker 4: You know, I think that overall, the bad debt within the Atlanta portfolio is going to continue to moderate and we are going to continue to see that bad debt improve month over month as we head into the remainder of this year and then into 2024.

Speaker 9: Maybe just shifting over to the acquisition. Paul, I know that you mentioned that you guys are looking at a 6% yield. Is that 6% yield on a year one basis? And I know that you talked about some of the renovation upside and sounds like there's some potential densification or even expansion over the next, call it 24 months at that property. How are you guys thinking about it from call it a year three and beyond yield standpoint in terms of the underwriting?

Understood.

Maybe just shifting over to the acquisition Paul I know that you mentioned that you guys are looking at a 6% yield is that 6% yield on our year, one basis and I know that you talked about some of the renovation upside and it sounds like theres, some potential densification or even expansion over the next call. It 24 months at that property how are you guys.

Thinking about it from call it a year three and beyond yield standpoint in terms of the underwriting there.

Yeah. This is Steve again, and I'll kind of start with that and then transfer it to Paul to to kind of talk about the upside in the out years, but.

Speaker 5: Yeah, and this is Steve again, and I'll kind of start with that and then transfer to Paul to kind of talk about the upside and the out years, but the the 6% is in an eternal yield based on what we expect over the first 12 months. So yeah, it's a year one, and you know, we think that this becomes a creative, you know, within those 12 months. So, you know, from me.

The 6% is in an internal yield based on what we expect over the first 12 months and so yeah to your year one.

And we think that this becomes accretive within those 12 months. So you know from a cap rate perspective, where we're you know we're pretty excited about that we're obviously very excited about the real estate and in the opportunities here and I'll turn it over to Paul to talk about renovations and where we see the upside thanks, Steve Yeah.

Speaker 5: A cap rate perspective where we're pretty excited about that. We're obviously very excited about the real estate and the opportunity to see and I'll turn it over to Paul to talk about renovations and where we see the up.

Speaker 3: thanks Steve and i'm gonna draft a little bit off of grants comments on real page and and what he saw you know when we look at this and i think we set the bar appropriately high for our acquisition criteria i mean this is the only one we've seen and

Yeah.

And I'm Gonna draft, a little bit off of grants comments I'm real page and what he saw you know when we look at this and I think we've set the bar appropriately high for our acquisition criteria. I mean this is the only one we've seen in probably 12 plus.

Speaker 3: probably twelve to plus the eighteen months where you know we thought it it uh... had the potential uh... that we think it has uh... aside from the the spread between class days we look at the demographics of the north through the hills market how much capital's got in there of the the amount of jobs

Close to 18 months, where you know we've thought it it had.

It had the potential that we think it has.

Aside from the the spread between class as we look at the demographics of the North Route Hills market, how much capital has got in there, but the amount of jobs are around our property that are continuing to go we think we're gonna be dealing with a higher credit profile here.

Speaker 3: around our property that are continuing to go. We think we're going to be dealing with a higher credit profile here.

Speaker 3: In that, the income band for the demographics we are targeting has increased 17% over the last five years. But when I look at the property itself, and we think this was a great real estate deal.

And that you know the income band for the demographics, where we are targeting has increased 70%, 17% over the last five years, but when I look at the property itself and we think this was a great real estate deal.

Speaker 3: The property itself, we're looking at 10 units per acre right now. And if you look at the deliveries over the last five years.

The property itself you.

You know, we're looking at 10 units per acre right now and if you look at the deliveries over the last five years all the properties in that Submarket have averaged 75 units per acre. So we really do believe that there are our densification opportunities here and that this can be.

Speaker 3: All the properties in that sub market have averaged 75 units per acre.

Speaker 3: So we really do believe that there are our densification opportunities here and that this can be kind of looked at as a covered landplay. But I think for us right now, and just, you know, we've been banging on this market for a while, when we looked at buying this at 216 a door, we think replacement costs, you know, depending on land prices and entitlements, et cetera. It's probably somewhere between 310 and 340 a door. So, you know, we looked at this as a 33% discount to replace.

Kind of looked at it as a covered land play, but I think for US right now and just you know we've been banging on this market for a while when we looked at buying this at $2 16, a door. We think replacement costs, you know depending on land prices entitlements et cetera, it's probably somewhere between 310 and $3 40 a door.

So you know we looked at this as a 30, 33% discount to replacement cost.

Speaker 3: So we think that actually sets us up for a nice land basis if we did want to do some type of densification moving forward.

So we think that actually sets us up for a nice land basis, if we did want to do.

Some type of Densification moving forward.

Speaker 3: But I can tell you just, you know, because there's been a lot of discussions about cap rates, etc. We were not the highest, the feedback we've gotten, we were not the highest, bitter on this aspect. I think what the distinguishing feature for us was being all cash, offering our seller certainty of execution, and, you know, it was our observation to move now and create the value while we could. So that's...

But I can tell you just because it's been a lot of discussions about cap rates et cetera.

We were not the highest the feedback we got and we were not the highest bidder on this asset I think what the distinguishing feature for US was being all cash offering to our sellers certainty of execution.

And you know as our observation to move now.

And create the value while we could so that's that's why we moved forward with with Alger at Hill's.

Speaker 3: That's why we move forward with Elm Duret Hill.

Speaker 9: Appreciate those comments. Maybe Steve, just on the 6% yield comments and the accretion there, you guys drew down the line and I'm assuming the lines and call it the mid 6% range in terms of a funding source. Is there a longer term funding plan that gets you to that kind of accretion mark for Druid Hill?

I appreciate those comments, maybe Steve just on the 6% yield comments and the accretion there.

You guys drew down the line and I'm, assuming the lines in call. It the mid 6% range in terms of our funding sources. There are longer term funding plan that gets you to that kind of accretion mark for Druid Hills.

Speaker 5: Yeah, Alan, so our line is actually at six and a quarter right now, and we're certainly evaluating options and could look to term out a portion of our line of credit balance with either secured or unsecured debt. We'll see what the Fed does in the coming couple of months, but we do see the secured and unsecured debt market.

Operator: Hello and welcome to the Elme Communities 3rd quarter 2023 earnings conference call. As a reminder, today's call is being recorded.

The airline is actually at six and a quarter right now and we're certainly evaluating options and could look to.

Term out a portion of our line of credit balance, you know and with either secured or unsecured debt and well see what the fed does them you know and in the coming couple of months.

Amy Hopkins: At this time, I would like to turn the call over to Amy Hopkins, Vice President and Vester Relations. Amy, please go ahead. Good morning and thank you for joining our 3rd quarter earnings call. Today's event is being broadcast with a slide presentation that is available on the investor's 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.

But.

We do see the secured and unsecured debt market.

Market out there as far as our loans being made but are the the pricing them is challenging so for now we're certainly comfortable keeping the balance on the line and we still have ample capacity on our line to do them.

Speaker 5: out there as far as low and being made, but the pricing is challenging. So for now, we're certainly comfortable keeping the balance on the line, and we still have ample capacity on our line to do. And anything additional if you wanted to, but we'll continue to monitor the markets and look to do something longer term if we were to make it.

Amy Hopkins: And we undertake no duty to update them as actual events unfold. We refer to statements of these risks in our SEC filing. Our conciliations of the gap and non-gap financial measures discussed in this call are available in our most recent earnings press release and financial supplement, which was distributed yesterday and could be found on the investor's page of our website.

You know anything additional if you wanted to but you know what we'll continue to monitor monitor the markets and look to do something longer term, if we were to make sense.

Alright, maybe one last one for me in terms of.

Speaker 9: All right, maybe one last one for me in terms of forward external growth plans. I understand the comments on recycling out of higher cap ex assets into geographic expansion. Across the best use of funds today, would it be to continue to scale the platform into geographic expansion or potentially look at buyback opportunities considering where the stock is trading at?

Forward external growth plans I understand the comments on recycling out of higher capex assets into geographic expansion across.

Across the best use of funds today would it be to continue to scale the platform into geographic expansion or potentially look at buyback opportunities considering where the stock is trading up.

Paul McDermott: And with that, I'd like to turn the call over to our CEO, Paul McDermott. Thanks, Amy. We'd be delivered solid 3rd quarter operating performance and the operating trends that we are seeing today align with our expectations and guidance for the remainder of the year. Therefore, we are maintaining the midpoint and tightening our FFO guidance.

Speaker 5: Yes, Alan. Obviously, we do consider stock buybacks and look at that, but we remain focused on a couple of things. One is we've built out a platform that is scalable and looking at growth to scale the company, but we also look at maintaining the strength of our balance sheet.

Yes, Alan So you know obviously, we do consider stock buybacks and look at that but we remain focused on a couple of things. One is we've built out a platform that is scalable and in looking at growth to scale. The company, but we also need to look at maintaining the strength of our balance sheet.

Paul McDermott: In terms of our recent company updates, we closed on the acquisition of a 500-home apartment complex in the inner suburbs of Atlanta for $108 million on September 29th. This acquisition rounds out our Atlanta footprint and improves our future growth profile. I'll talk more about this acquisition in a minute.

Speaker 5: So when we think about additional things that we can do, obviously, we said that we're trying to emit five by the end of the year. So we're very comfortable with where we're trying from a leverage perspective. Additional diversification, we could certainly recycle assets. We've got some assets maybe in the DC area that might be lower growth, have higher long-term cat effects needs that we could.

So when we think about additional things that we can do obviously, where we said that we're trying to do a mid fives by the end of the year. So we're we're very comfortable with with where we're trending from a leverage perspective additional diversification, we could certainly <unk>.

Recycle assets, we've got some you know our assets may be and in the D. C area that Oh I mean it.

Paul McDermott: Additionally, we welcomed a new member to our Board of Trustees. Susan Carris is an accomplice leader in the real estate industry who brings extensive multi-family transaction experience and a deep network of relationships. We look forward to the valuable insights that she will bring to our Board.

Might be lower growth have you know higher long term capex needs that we could recycle into higher growth assets and in the Sun belt. In addition to.

Speaker 5: you know, recycle into higher growth assets in the Sun Belt. In addition to that, you know, we've kind of mentioned all of these, but we also have the operational upside, the 4.25 to 4.75.

Kind of mentioned all of these but we also have the operational upside that four in a quarter to 475.

Paul McDermott: I'll focus my prepared remarks today on our recent acquisition and future external growth expectations.

Speaker 5: The other we're focused on executing on with the acquisition of Elm Druid Hills. Now we have a renovation pipeline at 3,300 units.

Yeah. They were focused on executing on with the acquisition of Ellen Jewett Hills now we have a renovation pipeline that 3300 units.

Paul McDermott: Tiffany will cover our operating trends and growth initiatives, and Steve will discuss our balance sheet and guidance updates. Turning to our recent acquisition, we have collired Elm Druid Hills at a forward yield above 6% including the impact of leveraging our existing expense base. We were awarded the deal through a competitive bidding process where our ability to provide certainty of execution as an all-cash buyer worked to our advantage. We expect the acquisition to become a creative over the next 12 months.

Speaker 5: The smart home technology, which we started rolling out this year, we're going to continue that in doing phase two, which allows to do self-guided tours. So we think that we've got a lot of growth drivers embedded in our portfolio that we're looking to execute on and anticipate that that'll allow us to earn a lower implied cap rate over time. And then we'll look to grow with our cost to capital when it makes sense. Obviously it doesn't pencil out right now, but if it makes sense in the future, we'll certainly finally look to do that as well.

The smart home technology, which we started rolling out this year, we're going to continue that and doing phase two which allow us to do self guided tours. So we think that we've got a lot of growth drivers embedded in our portfolio.

We're looking to execute on and and anticipate that that will allow us to earn a lower implied cap rate over time.

And then we will look to grow with our cost of capital when it makes sense, obviously it doesn't pencil out right now, but if it makes sense in the future. We will certainly look to do that as well.

I appreciate the time guys and thanks for taking my questions.

Speaker 10: Appreciate the time guys and thanks for taking the question.

Paul McDermott: This is an attractive real estate deal for Elm for the following reasons. First, it fits squarely into our Class B value-ad strategy, which targets communities with rent levels that are 85 to 95% of the market median with renovation potential. This provides the opportunity to grow rents and create value over time without directly competing with new supply. Elm Druid Hills offers the opportunity to renovate all 500 homes. As class A homes in the surrounding area are priced about at a 21% premium above our in place rents, leaving more than enough room to renovate and capture our targeted return.

Yeah.

Speaker 1: Thank you and if there are no further questions, I'd like to turn the floor back over to management for any closing costs.

Thank you.

There are no further questions I'd like to turn the floor back over to management for any closing comments.

Thank you.

Speaker 3: Thank you. Again, we'd like to thank everyone for your time and interest today, and we look forward to speaking with you and seeing you in person over the next few weeks. Thank you, everyone.

We'd like to thank everyone for your time and interest today and we look forward to speaking with you and seeing you in person over the next few weeks. Thank you everyone.

Okay.

Speaker 1: Thank you. This concludes today's conference and you may disconnect your lines at this time and we thank you for your Participation

Thank you. This concludes today's conference and you may disconnect. Your lines at this time and we thank you for your participation.

Paul McDermott: Furthermore, the area is somewhat insulated by new supply with only one new delivery since 2021 and limited new supply under construction within a three mile radius. Second, it's located in an affluent area with a growing job base. North Druid Hills offers seamless accessibility to over 550,000 jobs within a three mile radius. And it's close to Atlanta's most important new medical developments, children's healthcare of Atlanta and Emory Health Care's executive park expansion, which has generated over three billion in investments.

Paul McDermott: Employment in our targeted income ban grew more than 17% over the past five years in the Briarcliffe Submarket, where average household income is $98,000, reporting an average rent to income ratio for Elm Druid Hill residents of 20%. Third, rent growth at Elm Druid Hills has outperformed the Submarket and broader Atlanta market average on a trailing five year and 10 year basis. Fourth, it is an expansive property that sits on nearly 50 acres.

Paul McDermott: Elm Druid Hills is the second largest multi-family property acreage within a three mile radius, yielding a ratio of approximately 10 homes per acre, which is a significantly more land per unit than the average for new deliveries over the past five years and offers longer term redevelopment options. This community is a rare find in a mature affluent inside the perimeter location. Finally, this is an exceptional price representing a deep discount to replacement costs of over 30%. And we believe that this acquisition will perform very well over time and drives long-term shareholder value.

Paul McDermott: We onboarded Elm Druid Hills onto our operating platform and retained the entire community team providing continuity for existing residents.

Paul McDermott: The Elm Druid Hills team joins us with extensive local community management and leasing experience, and we could not be more pleased to welcome them to our company.

Tiffany Butcher: And with that, I'll turn it to Tiffany to discuss our operating trends and growth initiatives. Thanks, Paul. I'll start by reiterating that our outlook for the same store multi-family NOI growth remains in a high single digits, which represents very strong performance during a year of transition. We generated effective blended lease rate growth of 3% during the quarter for our same store portfolio comprised of renewal lease rate growth of 5.1%, and new lease rate growth of 0.1%.

Tiffany Butcher: Renewal rates remain strong throughout the fall, and we continue to experience very strong resident retention, averaging 61% during the quarter. Thus far, we have signed renewal offers for October and November lease expiration, a 5.5% on average, representing a stable trend compared to the third quarter average. We expect blended lease rates to moderate over the remainder of the year towards the low single digits. Our focus on building occupancy earlier this year put us in good position heading into the winter, and we continue to experience the pricing power needed to maintain occupancy within our targeted range. Same-store occupancy averaged 95.6% during the quarter, up 20 basis points compared to the prior year. Same-store multi-family average effective rent per home increased 4.9% in the third quarter compared to the prior year.

Tiffany Butcher: Turning to renovation, we achieved an average renovation ROI of approximately 14% year-to-date, and were on pace to complete over 300 renovations this year. Including the renovations we expect to complete at Druid Hills starting in late 2024, our pipeline now stands at approximately 3300 homes, which represents more than enough runway to drive renovation led value creation for the foreseeable future. Turning to rent to income, the rent to income ratio for new residents remains in line with our historical average, the average rent to income ratio for newbies was signed in the third quarter was 24% indicating that our rent levels are affordable to our new residents.

Tiffany Butcher: Furthermore, our communities continue to offer a compelling value proposition versus class A product, a cornerstone of our strategy. Even as new supply has caused rent compression between class A and class B communities in our market, particularly in high supply areas, the affordability gap between our communities and newly subs in their submarkets remains greater than 30%. The durability of these gaps exists due to our acquisition discipline targeting communities well below market media and price points and allocating capital to submarkets that are not as impacted by new supply. Only one quarter of our submarkets currently have a community in lease up.

Tiffany Butcher: Moving on to our growth initiatives, we have completed the transition of community level operations while retaining 93% of our community teams, which has positioned us to now focus on driving operational improvements to increase profitability. Thus far, we have achieved interest expense saving by accessing rent payments earlier, began capitalizing on new fee income opportunities, revised our vendor payment process to take advantage of rebates, identified opportunities to share resources and team members amongst communities that are located in close proximity, and we are 75% of the way through our smart home technology roll out.

Tiffany Butcher: We are pleased with these initial accomplishments and the progress we have made thus far, and we are excited about the opportunity to make continued progress next year. We continue to expect to generate between $4.25 and $4.75 million of FFO from these initiatives above what we would have otherwise generated through 2025 with additional opportunity beyond that based on centralizing components of the leasing and maintenance process.

Steve Freishtat: We look forward to providing more details we continue to make progress on our centralization plans, and with that, I will turn it over to Steve to cover our balance sheet and outlook. Thanks, Tiffany. Our balance sheet is in very good shape, with no secured debt and no debt materities until 2025, with options to extend our 2025 term loan maturity another two years. Our annualized adjusted net debt to EBITDA remains in line with our targeted range, and is expected to trend to the mid-5 by year-end. Following the acquisition of Elm Druid Hills, our liquidity position remains strong with approximately $550 million or 80% of the total capacity available on our line of credit.

Steve Freishtat: In terms of our capital allocation strategy going forward, we are focused on finding opportunities to recycle capital out of lower growth, higher CAPEX communities, and furthering our geographic expansion.

Steve Freishtat: Now turning to our outlook for the balance of the year. We are tightening our core FFO guidance range to $0.97 to $0.99 per fully deluded share. As Tiffany discussed, our operating fundamentals are trending in line with our expectations, and we are seeing stable traffic and occupancy trends into the winter. We are confident that we will achieve high single digit, same-store NOI growth for the year, and we are reiterating our same-store NOI guidance range of 8 to 9%.

Steve Freishtat: Inclusive of Elm Druid Hills, we now expect our non-same-store multi-family NOI to range from $13 million to $13.75 million. We are tightening our guidance ranges for other same-store NOI, which consists of Watergate 600 and GNA. We are updating our interest expense guidance to reflect the impact of acquiring Elm Druid Hills. With the internalization of community-level operations now behind us, we will no longer be recognizing transformation costs going forward.

Steve Freishtat: Finally, we continue to expect our core AFFO payout ratio for this year to be at or below our mid-70s target. In terms of our valuation, the public markets are valuing our multi-family business at an implied cap rate in the mid-7% range, which we do not believe reflects the long-term embedded value of our multi-family portfolio. As we advance our operational initiatives, execute value ad renovations that strong returns, capitalize on smart home technology investments, and continue to identify opportunities to improve and grow our portfolio. We expect to improve our valuation and earn a lower implied cap rate over time.

Operator: And now, I'd like to open it up for questions. Thank you.

Operator: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Or moment, please, while we pull for questions. Thank you.

Jamie Feldman: Our first question is coming from Jamie Feldman with Wells Fargo. Your line is live. Great. Thanks. Good morning, and thanks for taking my question. So I guess just to start, you know, it gave good color on the Atlantic position. You talked about potentially, you know, doing more in other markets. Can you just talk about what you're seeing out there? I think if you just kind of leave the narrative, we've heard so far in earnings.

Jamie Feldman: And even we did a call with real page a couple of weeks ago. I mean, they're actually seeing more pressure on the real page is seeing more pressure on B. I think you are saying the same thing. Just because, you know, you've got developers of new supply that are getting really aggressive trying to fill it. And they're taking tenants away.

Jamie Feldman: Sounds like you're not being that but can you just give more color across your submarkets and, you know, tie it into kind of what you might see in the acquisition market along those lines?

Grant Montgomery: Sure, Jamie. So this is Grant Montgomery talking. Just wanted to give you a heads up on that because we really did look into that data as well that Real Page published.

Grant Montgomery: And I think one of their points that they made is that depending on the level of new supply coming to market, there was definitely an impact that was registered in that closing of the rank gap between Class A and B across the country nationally. And so we looked at it in the summer with methodology. And what we saw is that in their day that they showed that in some markets where you had new supply annual supply net inventory ratios of 1 to 3%.

Grant Montgomery: They were measuring about a 21% gap between Class A and Class B. In our some markets, we were having that same methodology of looking at new lease ups versus our product. We have actually a 30% gap in our some market.

Grant Montgomery: So that's been a key part of our strategy overall is really. We position ourselves at that below the 95% market median rent. So there were not competing head to head. Our most recent analysis of the data using Real Page information shows that we're really only competing, for example, in Atlanta, about against about 13% of the new product is price below that point. And so we although certainly are in markets where supply is having an impact, we are seeing direct really less direct head to head because we've been disciplined from the beginning and our price significantly low those new price points.

Jamie Feldman: Okay, now that's very helpful. Yeah, I figured it had more to do with the fly risk in your submarkets. It's just different than some of these others that make a lot of sense.

Jamie Feldman: Can you comment on blends renewals and new leaf spreads in the non same store Atlanta portfolio? Sure. So I would say, you know, in the scene, we'll start with the same store portfolio, and then we can move into non same store for the same store portfolio, we're expecting renewals to continue to trend in the 3 to 5% range. And then for effective newly straight, we're seeing that the DC Metro is trending, you know, kind of slightly negative and Atlanta is trending towards the negative mid single digits by year end. So on a blended basis, we're expecting the DC Metro area to be between 3 to 4% and Atlanta to be approximately kind of 1%.

Jamie Feldman: And you would see those same trends that I talked about for Atlanta carrying into the non same store portfolio. Okay, so I mean, what do your early thoughts on 24 rents if you're seeing the negative? Yeah, so we're going to give our guidance in February, so we're going to be able to provide a lot more detail on the trends at that time. But overall, I would say right now is very significantly by market and by sub market.

Jamie Feldman: You know, what we're seeing today is a continued gradual normalization of rate growth as we head into the typical winter leasing season. You know, our DC Metro portfolio is performing very well and showing the stability that we would expect and that we've seen in our core markets over the longer term. In Atlanta, we're seeing more of an impact from the timing of evictions as we work through our eviction pipeline, which still includes some leases that were underwritten before we owned the properties and improved our credit standards.

Jamie Feldman: So the impact of backfilling eviction related vacancy has created more near term impacts on rates and occupancies. However, overall we're still seeing very high retention and very strong renewal rates in our Atlanta communities. And so we are working through the current eviction pipeline, which is going to set us up well for 2024.

Jamie Feldman: Okay, and then I guess this last for me, I mean, this was the first quarter, you know, post internalization and internalization expenses.

Jamie Feldman: I mean, did you think about just running the business in the platform? Is there anything left to get done? Any other initiatives or this is absolutely kind of snoozing from here in terms of, you know, the organization.

Steve Freishtat: Jamie, this is Steve, and you're right from a transformation cost perspective. We had those hit in the third quarter and we're saying we don't expect anything as far as transformation costs go forward. You know, everything's internalized and we focused on one, now running the business, running it well and efficiently, getting our policies and procedures in place. And, you know, we're, Tiffany talked about the, the four in a quarter to four 75 of, of upside, really focused on achieving that over the next 24 plus months.

Steve Freishtat: Okay, but are there any like other initiatives you guys are thinking about that might come up in 24 or do you feel like? Yeah, I would say absolutely. And I think it really revolves around all of the different initiatives that go into creating that 4.25 to 4.75 million dollars of operational upside. And you know, more specifically, you know, the five kind of key areas that we see making up that FSO upside.

Steve Freishtat: First of all, smart home packages. We've, as I said in our prepared remarks, we've already installed a smart home technology packages in 75% of our units expect to complete the remainder of this year. So that'll have a positive impact starting in 2024. We're also very focused on occupancy. We are changing our processes and procedures around pre-movement inspections, marketing, et cetera, to help improve our occupancy and our days vacant. And then we have a lot of different fee income opportunities that we're working on and looking at strategically that will bring new fee revenue into the portfolio.

Steve Freishtat: We're also working on cash management and other expense initiatives. Now that we have everything in house, we've been able to take advantage of the earlier collection of rents. And then we are very focused on centralization related opportunities and opportunities to share staff across communities, which we can now take advantage of since the operations are in house. So those are kind of the five key areas that make up that FFO upside. And as we've said before, about 20% of that will be recognized this year. And then the remainder will be recognized across 24 and 25.

Operator: Great. Thank you very much. Thank you. Once again, if you have any questions or comments, please press star one on your telephone keypad.

Alan Peterson: Our next question is coming from Alan Peterson with Green Street. Your line is life. Hey guys, thanks for the time. I just need to question on the Atlanta market. I know that you touched on addictions there. Total portfolio occupancy of 91.6 at the end of the quarter. Is that the floor for occupancy due to bad debt issues? Are you guys still working through additional or incremental bad debt issues within the market?

Alan Peterson: You know, I would say overall, we are still working through the addiction pipeline, but on the back end we are also putting in place effective new recent incentives to help drive occupancy of the portfolio and new marketing initiatives to make sure that we are backfilling those vacancies as quickly as possible. And then I think it is very important to note that in addition to that we have put in place new credit screening criteria that is also helping improve the credit quality of the residents that we are backfilling in those vacancies.

Alan Peterson: So how do that 1916, how many more units or what percentage of the portfolio is still delinquent within Atlanta? You know, I think that overall the bad debt within the Atlanta portfolio is going to continue to moderate and we are going to continue to see that bad debt improve month over month as we head into the remainder of this year and then into 2024.

Alan Peterson: Understood, maybe just shifting over to the acquisition, Paul I know that you mentioned that you guys are looking at a 6% yield, is that 6% yield on a year one basis? And I know that you talked about some of the renovation upside and sounds like there's some potential densification or even expansion over the next, call it 24 months at that property. How are you guys thinking about it from call it a year three and beyond yield standpoint in terms of the underwriting there?

Alan Peterson: Yeah, I know, this is Steve again and I'll kind of start with that and then transfer to Paul to kind of talk about the upside and the out years, but the 6% is in an internal yield based on what we expect over the first 12 months. So yeah, it's a year one and we think that this becomes a creative within those 12 months. So from a cap rate perspective where we're pretty excited about that, we're obviously very excited about the real estate and the opportunities here and I'll turn it over to Paul to talk about renovations and where we see the upside.

Steve Freishtat: Thanks Steve. Yeah, Alan, and I'm going to draft a little bit off of Grant's comments on real page and what he saw. You know, when we look at this and I think we've set the bar appropriately high for our acquisition criteria, I mean this is the only one we've seen and probably 12 to plus to 18 months where we've thought it had the potential that we think it has. Aside from the spread between class A's, we look at the demographics of the North Road Hills market, how much capital has gone in there, the amount of jobs around our property that are continuing to go.

Steve Freishtat: We think we're going to be dealing with a higher credit profile here. In that, you know, the income band for the demographics where we are targeting has increased 17% over the last five years. But when I look at the property itself and we think this was a great real estate deal, the property itself, you know, we're looking at 10 units per acre right now and if you look at the deliveries over the last five years, all the properties in that sub-market have averaged 75 units per acre.

Steve Freishtat: So we really do believe that there are densification opportunities here and that this can be kind of looked at as a covered land play. But I think for us right now and just, you know, we've been banging on this market for a while, when we looked at buying this at 216 a door, we think replacement costs, you know, depending on land prices and entitlements, et cetera, it's probably somewhere between 310 and 340 a door.

Steve Freishtat: So, you know, we looked at this as a 33% discount to replacement costs. So we think that actually sets us up for a nice land basis if we did want to do some type of densification moving forward. But I can tell you just, you know, because there's been a lot of discussions about caperates et cetera, we were not the highest, the feedback we've gotten, we were not the highest bidder on this asset.

Steve Freishtat: I think what the distinguishing feature for us was being all cash, offering our sellers certainty of execution and, you know, it was our observation to move now and create the value while we could. So, that's why we move forward with Elm Druid Hill.

Steve Freishtat: I appreciate those comments. Maybe Steve just on the 6% yield comments and the accretion there. You guys drew down the line and I'm assuming the lines and call it the mid 6% range in terms of a funding source. Is there a longer term funding plan that gets you to that kind of accretion mark for Druid Hills? Yeah, our line is actually at 6 on the quarter right now. And we're certainly evaluating options and could look to turn them out.

Steve Freishtat: We want a portion of our line of credit balance with the secured or unsecured debt. We'll see what the Fed does in the coming couple of months. But we do see the secured and unsecured debt market out there as far as the loan being made but the pricing is challenging. So for now, we're certainly comfortable keeping the balance on the line and we still have ample capacity on our line to do anything additional if you wanted to. But we'll continue to monitor the markets and look to do something longer term if we were to make sense.

Alan Peterson: All right, well, maybe one last one for me in terms of forward external growth plans. I understand the comments on recycling out of higher capex assets into geographic expansion across the best use of funds today. Would it be to continue to scale the platform into geographic expansion or potentially look at buyback opportunities considering where the stock is trading up? Yes, Alan, so obviously we do consider stock buybacks and look at that.

Alan Peterson: But we remain focused on on a couple of things. One is we built out a platform that is scalable and looking at growth to scale the company. But we also look at maintaining the strength of our balance sheet. So when we think about additional things that we can do, obviously, we said that we're trying to emit five by the end of the year. So we're very comfortable with where we're turning from a leverage perspective.

Alan Peterson: Additional diversification, we could certainly recycle assets. We've got some assets maybe in the DC area that might be lower growths have higher long term capex needs that we could recycle into higher growth assets in the sun belt. In addition to, you know, we've kind of mentioned all these, but we also have the operational upside the four and a quarter to four seventy five. The other we're focused on executing on with the acquisition of Elm Druid Hills.

Alan Peterson: Now we have a renovation pipeline that 3,300 units. The smart home technology which we started rolling out this year, we're going to continue that in doing phase two, which allows to do self-guided tours. So we think that we've got a lot of growth drivers embedded in our portfolio that we're, you know, looking to execute on and anticipate that that'll allow us to earn a lower implied cap rate over time. And then, you know, we'll look to grow with our cost to capital when it makes sense. Obviously it doesn't pencil out right now. But if it makes sense in the future, we'll certainly look to do that as well.

Operator: Thank you.

Operator: And if there are no further questions, I'd like to turn the floor back over to management for any closing. Thank you.

Again, we'd like to thank everyone for your time and interest today, and we look forward to speaking with you and seeing you in person over the next few weeks. Thank you, everyone.