Q1 2024 Elme Communities Earnings Call

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Operator: Greetings, and welcome to Elme Communities' first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the previous presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Amy Hopkins, Vice President of Investor Relations. You may begin.

Greetings welcome to communities first quarter 2024 earnings conference call.

At this time all participants are in a listen only mode.

Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Operator: Note. This conference is being recorded I will now turn the conference over to your host Amy Hopkins Vice President of Investor Relations you may begin.

Amy Hopkins: Good morning, and thank you for joining our first quarter earnings call. Today's event is being webcast with a slide presentation that is available in the investors section of our website and will also be available on our webcast replay. Before we begin our prepared remarks, I would like to remind everyone that this conference call contains forward-looking statements that involve known and unknown risks and uncertainties, which may cause actual results to differ materially, and we undertake no duty to update them as actual events unfold.

Amy Hopkins: Good morning, and thank you for joining our first quarter earnings call. Today's event is being webcast with a slide presentation that is available on the investors section of our website and will also be available on our webcast replay before we begin our prepared remarks I would like to remind everyone that this conference call contains forward looking statements that involve known and unknown risks and uncertainties.

Amy Hopkins: We refer to certain of these risks in our SEC filings. Reconciliations of the GAAP and non-GAAP financial measures discussed on this call are available in our most recent earnings press release and financial supplement, which was distributed yesterday and can be found on the investors page of our website. And with that, I'll turn the call over to our president and CEO, Paul McDermott.

Amy Hopkins: Which may cause actual results to differ materially and we undertake no duty to update them as actual events unfold, we refer to certain of these risks in our SEC filings reconciliations of the GAAP and non-GAAP financial measures discussed on this call are available in our most recent earnings press release and financial supplement which was distributed yesterday and can be found on the investors page of our web.

Paul T. McDermott: Thanks, Amy, and good morning, everyone. I'm joined today by Tiffany Butcher, our Chief Operating Officer, Steve Freishtat, our Chief Financial Officer, and Grant Montgomery, our Head of Research. Tiffany will speak to our operating trends and initiatives, and Steve will cover our balance sheet and guidance points. Grant is here to answer market-level questions during Q&A. I'll start with a high-level overview of the trends we are seeing across our portfolio. Our Washington Metro portfolio is positioned very well heading into our busiest leasing month.

Paul T. McDermott: And with that I'll turn the call over to our President and CEO Paul Mcdermott.

Paul T. McDermott: Thanks, Amy and good morning, everyone.

Paul T. McDermott: I'm joined today by Tiffany Butcher, our Chief operating Officer, Steve <unk>, Our Chief Financial Officer, and Grant Montgomery, Our head of research Tiffany will speak to our operating trends and initiatives and Steve who will cover our balance sheet and guidance points granite is here to answer or market level.

Paul T. McDermott: Questions during Q&A.

Paul T. McDermott: On the demand side, we see solid trends, and our communities are delivering the stable performance that we would expect from our mid-market strategy. We have seen the expected uptick in activity into the spring leasing season, and market rents for the Washington metro area continue to trend above the U.S. on average. This is shaping up to be a very good year for the Washington Metro, which comprised roughly 85% of our multifamily NOI in the first quarter, and our significant presence in Northern Virginia, the growth engine for the region, further enhances our positive outlook.

Paul T. McDermott: I'll start with a high level overview of the trends, we are seeing across our portfolio.

Paul T. McDermott: Our Washington Metro portfolio is positioned very well heading into our busiest leasing months.

Paul T. McDermott: On the demand side, we see solid trends in our communities are delivering stable performance that we would expect from our mid market strategy.

Paul T. McDermott: We have seen the expected uptick in activity into the spring leasing season.

Paul T. McDermott: And market rents for the Washington Metro area continued to trend above the U S on average.

Paul T. McDermott: This is shaping up to be a very good year for the Washington Metro, which comprise roughly 85% of our multifamily NOI in the first quarter.

Paul T. McDermott: And our significant presence in northern Virginia, the growth engine for the region further enhances our positive outlook.

Paul T. McDermott: In Atlanta, while absorption is improving, our fundamentals reflect the impact of elevated supply. We knew that we were going to experience occupancy pressure in the first quarter, and we are pleased to see positive momentum in April. As we enter the spring and summer leasing seasons, we believe that we have the tools in place to drive demand and improve our profitability, which Tiffany will discuss in more detail during her prepared remarks.

Paul T. McDermott: And Atlanta, while absorptions approving our fundamentals reflect the impact of elevated supply.

Paul T. McDermott: We knew that we were going to experience occupancy pressure in the first quarter and we are pleased to see positive momentum in April.

Paul T. McDermott: As we enter the spring and summer leasing seasons, we believe that we have the tools in place to drive demand and improve our profitability, which Tiffany will discuss in more detail during her prepared remarks.

Paul T. McDermott: We continue to monitor the supply and demand dynamics within our markets and sub-markets, and our research points to positive trends in both the Washington Metro and Atlanta. In the Washington metro, where supply has been more moderate and demand has been solid, our sub-markets overall are at a supply-demand equilibrium with our net inventory ratio at 2% in line with the long-term average. Subsequently, the region, our sub-markets, and our portfolio are experiencing solid rent growth, and the Washington Metro market is currently one of the best-positioned markets in terms of supply-demand balance nationally, according to RealPay.

Paul T. McDermott: We continue to monitor the supply and demand dynamics within our markets and Submarkets and our research points to positive trends in both the Washington Metro Atlanta.

Paul T. McDermott: And the Washington Metro where supply has been more moderate and demand has been solid our sub markets overall are at a supply demand equilibrium with our net inventory ratio at 2%.

Paul T. McDermott: In line with the long term average.

Paul T. McDermott: Subsequently the region, our Submarkets and our portfolio are experiencing solid rent growth and Washington Metro market is currently one of the best positioned markets in term of supply demand balance nationally according to real page.

Paul T. McDermott: While Atlanta has had an unprecedented level of supply, market demand is improving. Annual absorption increased by almost three times in Q1 2024 compared to the prior year period, limiting the accumulation of supply coming to the market.

Paul T. McDermott: While the Atlanta has had an unprecedented level of supply market demand is improving.

Paul T. McDermott: Annual absorption increased by almost three times in Q1 2024 compared to the prior year period, limiting the accumulation of supply coming to the market.

Paul T. McDermott: In fact, the supply overhang is in a better position as of Q1 2024 versus Q1 2023 due to market level absorption being 25% higher and Elm sub-market level absorption being 60% higher than the pre-pandemic period. Furthermore, over 50% of Elm's Atlanta homes are in sub-markets that should reach peak annual supply by mid-year, and 80% should reach peak annual supply by Q3 of 2024. While additional completions are scheduled in our operating markets this year, units under construction and new starts have declined significantly, pointing to better conditions in late 2024 and into 2025.

Paul T. McDermott: In fact, the supply overhang is in a better position as of Q1 2024 versus Q1, 2023 due to market level of absorption being 25% or higher and elm submarket level of absorption being 60% higher than pre pandemic.

Paul T. McDermott: Period.

Paul T. McDermott: Furthermore, over 50% of Elms Atlanta homes are in Submarkets that should reach peak annual supply by mid year, and 80% should reach the peak by Q3 of 2024.

Paul T. McDermott: While additional completions are scheduled in our operating markets this year.

Paul T. McDermott: Units under construction and new starts have declined significantly.

Paul T. McDermott: Turning to better conditions in late 'twenty, four and into 2025.

Paul T. McDermott: Units under construction are down 20% in the Washington Metro since reaching their peak and nearly 20% in Atlanta. Annual unit starts are down even more significantly, declining by almost 50% in both Atlanta and the Washington Metro over the past year. Starts in Atlanta are back to their 10-year average, while in Washington Metro, starts are nearly 40% below the 10-year average. Overall, market-level data indicates that Washington Metro is very well positioned from a supply perspective, and while Atlanta remains out of supply-demand equilibrium, absorption remains strong, especially in Elm submarkets, and the supply overhang is improving.

Paul T. McDermott: Units under construction are down 20% in the Washington Metro since reaching their peak and nearly 20% in Atlanta.

Paul T. McDermott: Annual unit starts are down even more significantly declining by almost 50% in both Atlanta, and the Washington Metro over the past year.

Paul T. McDermott: Starts in Atlanta are back to their 10 year average, while in Washington Metro starts or nearly 40% below the 10 year average.

Paul T. McDermott: Overall market level data indicates that Washington Metro is very well positioned from a supply perspective, and while Atlanta remains out of supply demand equilibrium absorption remained strong, especially in elm submarkets and the supply overhang is improving.

Paul T. McDermott: As we progress through 2024, we anticipate job growth and continued in-migration to drive strong performance in the Washington Metro and a gradual normalization of conditions in Atlanta. Turning to resident credit, employment growth is strong, and the sectors that drive demand for our communities and our residents' financial status remain solid. The median rent to income ratio across our portfolio for new leases was 24%, reaffirming our belief that our rental rates remain affordable for our new residents. And with that, I'll turn it over to Tiffany to discuss our Operating Trends and Growth Initiative.

Paul T. McDermott: As we progress through 2024, we anticipate job growth and continued in migration to drive strong performance in the Washington Metro and a gradual normalization of conditions in Atlanta.

Paul T. McDermott: Turning to resident credit employment growth is strong and the sectors that drive demand for our communities and our residents' financial status remains solid.

Tiffany: The median rent to income ratio across our portfolio for new leases was 24%.

Tiffany: Reaffirming our belief that our rental rates remain affordable for our new residents.

Paul T. McDermott: And with that alternative over to Tiffany to discuss our operating trends and growth initiatives.

Tiffany M. Butcher: Thanks Paul. Overall, the fundamental trends that we're seeing are in line with our expectations at the start of the spring leasing season. Traffic volumes and blended spreads improved in April, and the marketing initiatives that we have recently implemented, which include enhancements to our digital marketing platform and strategy, are delivering good results. Turning to our results for the first quarter, lease rate growth improved on a sequential basis for both our Washington Metro and Atlanta portfolios.

Tiffany: Thanks, Paul overall, the fundamental trends that we're seeing are in line with our expectations at the start of the spring leasing season traffic volumes and blended spreads improved in April and the marketing initiatives that we have recently implemented which include enhancements to our digital marketing platform and strategy are delivering good results.

Tiffany M. Butcher: Turning to our results for the first quarter lease rate growth improved on a sequential basis for both our Washington Metro Atlanta portfolios.

Tiffany M. Butcher: During the first quarter, we generated solid effective blended lease rate growth of 2.3% for our same store portfolio, comprised of renewal lease rate growth of 6.2% and an average new lease rate decline of 2.1%. Same-store resident retention was 65% during the quarter, reflecting continued strength. Retaining residents is delivering better economics than turning homes, and we continue to focus on maximizing rent growth by prioritizing renewals. Alongside our focus on retention, we continue to achieve strong renewal rate growth. For May and June lease expirations, we're signing renewals at an average rate of 4.5%.

Tiffany M. Butcher: During the first quarter, we generated solid effective blended lease rate growth of two 3% for our same store portfolio comprised of renewal lease rate growth of six 2% and an average new lease rate decline of two 1%.

Tiffany M. Butcher: Same store resident retention was 65% during the quarter, reflecting continued strength.

Tiffany M. Butcher: Painting residents is delivering better economics than turning homes, and we continue to focus on maximizing rent growth by prioritizing renewals.

Tiffany M. Butcher: Alongside our focus on retention, we continue to achieve strong renewal rate growth for May and June lease expirations were signing renewals at an average rate of 4.5% move.

Tiffany M. Butcher: Moving on to occupancy, average same-store occupancy declined slightly to 94.4% during the quarter, driven by the impact of new supply and the timing of evictions in our Atlanta portfolio, offset in part by strong occupancy levels in our Washington Metro portfolio. Occupancy trended up towards the end of the quarter to 95.1%, which represents a 70 basis point improvement compared to the average daily level during the quarter. We're very pleased with the demand patterns that we're seeing across our Washington Metro portfolio, and average occupancy for our Washington Metro communities increased 30 basis points year over year to 96%.

Tiffany M. Butcher: Moving onto occupancy average same store occupancy declined slightly to 94, 4% during the quarter driven by the impact of new supply and the timing of evictions in our Atlanta portfolio offset in part by strong occupancy levels in our Washington Metro portfolio.

Tiffany M. Butcher: Occupancy trended up towards the end of the quarter to 95, 1%, which represents a 70 basis point improvement compared to the average daily level during the quarter.

Tiffany M. Butcher: We're very pleased with the demand patterns that we're seeing across our Washington Metro portfolio and average occupancy for our Washington Metro communities increased 30 basis points year over year to 96%. We continue to expect strong and stable occupancy in the Washington Metro portfolio over the course of the year.

Tiffany M. Butcher: We continue to expect strong and stable occupancy in the Washington Metro portfolio over the course of the year. In Atlanta, while elevated supply and evictions drove a slight sequential decline in occupancy, we expect occupancy to gradually improve as the year progresses. As Paul mentioned, 80% of our land submarkets should reach peak supply by the third quarter, and strong absorption is mitigating the supply overhang. While we continue to work through the eviction backlogs formed when the government rent assistance programs ended last summer, our credit metrics are improving.

Tiffany M. Butcher: In Atlanta, while elevated supply and evictions drove a slight sequential decline in occupancy, we expect occupancy to gradually improve as the year progresses.

Tiffany M. Butcher: As Paul mentioned, 80% of our Atlanta, Submarkets should reach peak supply by the third quarter and strong absorption is mitigating the supply overhang.

Tiffany M. Butcher: While we continue to work through the eviction backlogs formed when the government rent assistance programs ended last summer our credit metrics are improving.

Tiffany M. Butcher: Following enhancements to our credit screening process and the implementation of new technology, including ID Verify, and other training and process changes, the number of new delinquencies is declining on a month-to-month basis. Additionally, we are pleased to see local counties begin to take steps to address the backlog within the court system, as evidenced by a recent ruling in Fulton County, which expedites the timeframe between filing and obtaining a writ of possession.

Tiffany M. Butcher: Following enhancements to our credit screening process and the implementation of new technology, including E verify and other training and process changes the number of new delinquencies is declining on a month to month basis.

Tiffany M. Butcher: Additionally, we are pleased to see local counties begin to take steps to address the backlog within the court system.

Tiffany M. Butcher: Evidenced by a recent ruling in Fulton County, which expedites the timeframe between filing and obtaining a rid of possession.

Tiffany M. Butcher: Looking forward, we believe that the combination of higher credit standards, elevated fraud protection, and normalizing eviction delays should drive improving occupancy and lower bad debt across our Atlanta portfolio. As for renovation, our renovation returns are outperforming our expectations while attracting higher-income residents looking for value relative to Class A. During the first quarter, we generated a strong average ROI of approximately 17% on 120 home renovations. We continue to expect to complete over 400 full renovations and over 100 home upgrades this year.

Tiffany M. Butcher: Looking forward, we believe that the combination of higher credit standards.

Tiffany M. Butcher: Elevated fraud protection and normalizing eviction delays should drive improving occupancy and lower bad debt across our Atlanta portfolio.

Tiffany M. Butcher: Turning to renovation our renovation returns are outperforming our expectations, while we're tracking higher income residents looking for value relative to class a.

Tiffany M. Butcher: During the first quarter, we generated a strong average ROI of approximately 17% on 120 home renovations.

Tiffany M. Butcher: We continue to expect to complete over 400 full renovations and over 100 home upgrades this year.

Tiffany M. Butcher: Looking forward, renovations continue to be a key growth driver for Elm. Our identified pipeline of nearly 3300 homes represents over 35% of our portfolio, which is more than enough runway to deliver renovation-driven value creation for the foreseeable future. Moving on to our operational upside, our initiatives are progressing at a healthy pace and contributing to our top line through additional fee income and our bottom line through operating expense control and efficiency.

Tiffany M. Butcher: Looking forward renovations continue to be a key growth driver for al.

Tiffany M. Butcher: Alright, Gentiva pipeline of nearly 3300 homes represents over 35% of our portfolio, which is more than enough runway to deliver renovation led value creation for the foreseeable future.

Tiffany M. Butcher: Moving on to our operational upside our initiatives are progressing at a healthy pace and contributing to our topline through additional fee income and our bottom line to operating expense control inefficiencies.

Tiffany M. Butcher: We continue to expect to generate between 1.7 and 1.9 million of additional NOI and FFO from operational initiatives in 2024, on top of the 0.9 million of upside that we delivered last year. Combined, this represents approximately 60% of the 4.25 to 4.75 million total from 2023 to 2025. Furthermore, we're rolling out managed Wi-Fi across our portfolio, starting with six communities, which are scheduled for installation during the fourth quarter. Our managed Wi-Fi program should generate solid returns and additional upside beyond the targeted 4.25 to 4.75 million FFO per year in 2025 and beyond.

Tiffany M. Butcher: We continue to expect to generate between one seven and one 9 million of additional NOI and <unk> from operational initiatives in 2024 on top of the point $9 billion of upside that we delivered last year.

Tiffany M. Butcher: Combined this represents approximately 60% of the four point to five to $4 $75 million total from 2023 to 2025.

Tiffany M. Butcher: Furthermore, we're rolling out managed Wi Fi across our portfolio, starting with six communities, which are scheduled for installation during the fourth quarter.

Tiffany M. Butcher: Our managed Wifi program should generate solid returns and additional upside beyond the targeted at four point to five to $4 75 million upside in 2025 and beyond.

Tiffany M. Butcher: Before I turn the call over to Steve, I want to extend my appreciation to the Elme team for the dedication and commitment that they have shown to elevating the living experience for our renters. Our teams are embracing the changes that we're implementing, and we look forward to continuing to drive better profitability and customer service as we progress on our platform initiative. And with that, I'll turn it over to Steve to cover our results, the 2024 Outlook, and the ballot.

Speaker Change: Before I turn the call over to Steve I want to extend my appreciation to the EM team for the dedication and commitment that they have shown to elevating the living experience for our renters.

Tiffany M. Butcher: Our teams are embracing the changes that we're implementing and we look forward to continuing to drive better profitability and customer service as we progressed on our platform initiatives.

Tiffany M. Butcher: And with that I'll turn it over to Steve to cover our results 2020 for outlook and balance sheet.

Steven Freishtat: Thanks, Tiffany. We continue to expect same-store multifamily NOI growth to range from 0.25% to 2% in 2024. As we previously communicated, we expect NOI growth to be weighted to the back half of the year, driven by improving bad debt trends in our Atlanta portfolio and rent growth in our Washington Metro portfolio. While interest rate expectations have shifted, we continue to expect interest expense for the year to range from $37.25 to $38.25 million.

Steve: Thanks, Tiffany we continue to expect same store multifamily NOI growth to range from 0.25% to 2% in 2024.

Steve: As we previously communicated we expect NOI growth to be weighted to the back half of the year driven by improving bad debt trends in our Atlanta portfolio and rent growth in our Washington Metro portfolio.

Steven Freishtat: While interest rate expectations have shifted we continue to expect interest expense for the year to range from 37.25 to $38 to $5 million.

Steven Freishtat: Our outlook now predicts fewer rate cuts in 2024, and although this puts some upward pressure on interest expense, it is being partially offset by our continued focus on managing our cash and debt balance. We feel the current interest expense guidance range is still appropriate. Turning to our balance sheet, annualized adjusted net debt to EBITDA was 5.7 times a quarter end, in line with our targeted range, and we continue to expect our leverage ratio to finish this year in the mid five times range.

Steven Freishtat: Our outlook now predicts fewer rate cuts in 2024, although this puts some upward pressure on interest expense.

Steven Freishtat: Being partially offset by our continued focus on managing our cash and debt balance we feel the current interest expense guidance range is still appropriate.

Steven Freishtat: Turning to our balance sheet annualized adjusted net debt to EBITDA was five seven times at quarter end in line with our targeted range and we continue to expect our leverage ratio to finish this year in the mid five times range.

Steven Freishtat: Our liquidity position remains strong with about $540 million, or approximately 80% of the total capacity available on our line of credit at quarter end. With no secured debt and no debt maturities until 2025, with options to extend our 2025 term loan maturity another two years, our balance sheet remains in very good shape. To wrap it up, we are largely where we expect to be at this point in the year. Our mid-market focus remains well-positioned, and we are pleased to see positive momentum building in April.

Steven Freishtat: Our liquidity position remains strong with about $540 million, where approximately 80% of the total capacity available on our line of credit at quarter end.

Steven Freishtat: With no secured debt and no debt maturities until 2025 with options to extend our 2025 term loan maturity. Another two years, our balance sheet remains in very good shape.

Steven Freishtat: To wrap it up we are largely where we expect it to be at this point in the year, our mid market focus remains well positioned and we are pleased to see positive momentum building in April.

Steven Freishtat: The technology and process improvements we have implemented are driving higher fee income, expense compression, and lower delinquency rates, and our renovations are yielding very strong returns. As we head into peak leasing season, we are focused on maximizing revenue and delivering on the operational upside that is embedded in our platform. With that, I would like to open the floor to questions.

Steven Freishtat: The technology and process improvements, we have implemented are driving higher fee income expense compression and lower delinquencies and our renovations are yielding very strong returns.

Steven Freishtat: As we head into peak leasing season, we are focused on maximizing revenue and delivering on the operational upside that is embedded in our platform and with that I would like to open it up for questions.

Operator: Thank you. 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 question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for.

Operator: For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. Once again, please press star one on your phone at this time, if you wish to ask a question.

Operator: Once again, please press star 1 on your phone at this time if you wish to ask a question. And please hold while we poll for questions. And the first question today is from Anthony Paolone from J.P. Morgan. Anthony, your line is live.

Operator: Please hold while we poll for questions.

Operator: On the first question today is coming from Anthony Powell on from J P. Morgan Anthony Your line is life.

Anthony Paolone: Yeah, thanks. Good morning. I was wondering if we could talk about just the Atlanta market a bit more. And can you give us a sense as to how much of that is now just cash paying versus a piece of it still being bad debt, and just trying to think through over the course of this year, kind of where you think you'll land there in terms of real cash paying occupancy and kind of cleaning out some of these delinquencies.

Anthony Paolone: Yeah. Thanks, good morning.

Anthony Paolone: I was wondering if we could talk about just the Atlanta market a bit more and can you give us a sense as to like when we look at these occupancy numbers for the portfolio. How much of that is is now just.

Anthony Paolone: Cash paying versus a piece of it still being bad debts, and just trying to think through over the course of this year kind of where you think you'll land there in terms of real cash paying our occupancy and kind of cleaning out some of these delinquencies.

Tiffany M. Butcher: Great question, Tony. Happy to walk you through that. You know, I would say, as I mentioned in my prepared remarks, we have seen a month-over-month improvement in our delinquencies and in our bad debt as we've moved through the first quarter of this year. If you look back at our bad debt at the end of the fourth quarter, the improvement that we saw in the first quarter was about 2.5 percent. So our bad debt is currently in the Atlanta portfolio at about seven and a half percent.

Speaker Change: Oh, Great question, Tony happy to walk through that.

Anthony Paolone: I would say as I mentioned in my prepared remarks, we have seen a month over month improvement in our delinquencies and our bad debt as we've moved through the first quarter of this year. If you look back to our bad debt.

Tiffany M. Butcher: And in the fourth quarter.

Tiffany M. Butcher: The improvement that we saw through the first quarter was about 225%. So our bad debt is currently in the Atlanta portfolio at about seven 5%, but we are seeing that come down month over month, and we expect that by the end of the fourth quarter will be between 3% to 4% bad debt in the Atlanta portfolio.

Tiffany M. Butcher: But we are seeing that come down month-over-month, and we expect that by the end of the fourth quarter, we'll be between, you know, three to four percent bad debt in the Atlanta portfolio. So if you think about that in terms of an average for the year, we're probably in the five to six percent range.

Tiffany M. Butcher: So if you think about that in terms of an average for the year I would probably in the 5% to 6% range, but we are seeing month over month improvements in delinquencies, which is very encouraging and that's really coming from a lot of the initiatives that I talked about and the fact that we have been.

Tiffany M. Butcher: But we are seeing month-over-month improvements in delinquencies, which is very encouraging. And that's really coming from a lot of the initiatives that I talked about, such as the fact that we have been very clear in ending our policy of partial payments, which is helping to speed the eviction process. We've also made a lot of changes to our credit screening and approval process, which has really helped us to bring down the impact of any new delinquencies. So as we work through the backlogs in the court system, we're going to continue to see that month-over-month improvement in bad debt and delinquencies.

Tiffany M. Butcher: Very clear and ending our policy of partial payments, which is helping to speed. The eviction process. We've also.

Tiffany M. Butcher: Made a lot of changes to our credit screening and approval process, which has really helped us to bring down the impact of any new delinquencies. So obviously as we work through the backlogs in the court system, we're going to continue to see that month over month improvement in the bad debt and delinquencies.

Tiffany M. Butcher: Okay, I got it. Thank you. And then I think you mentioned four and a half percent renewal rates for the stuff that's being signed for June and July, if I caught that right. And I was wondering if you could give us a sense as to where you think new leases may trend over the course of the year and just an update on where you know you think blended spreads are for the portfolio over the course of the full year, like what's in the guide? Yeah,

Speaker Change: Okay got it thank you and then.

Tiffany M. Butcher: I think you mentioned, 4.5% renewal rates for the stuff that's being signed for June and July if I caught that right and I was wondering if you can give us a sense as to like where you think like new leases may trend over the course of the year and just an update on where you think blended.

Tiffany M. Butcher: Spreads are for the portfolio over the course of the full year like what's in the guide.

Tiffany M. Butcher: Yeah, sure, absolutely. I'm happy to talk through that with you.

Speaker Change: Yeah sure absolutely.

Speaker Change: Happy to talk to that so in terms of where we're signing you know may and June renewals there around the four 5% that I mentioned in my prepared remarks, as we think about that trending through the year. We do expect that renewables will moderate as we move through the back half of the year, but likely as we think about the year overall renewals.

Tiffany M. Butcher: So, in terms of where we're signing, you know, May and June renewals, they're around the four and a half percent that I mentioned in my prepared remarks. As we think about that trending through the year, we do expect that renewals will moderate as we move through the back half of the year. But likely, as we think about the year overall, renewals will be in that three and a half to four and a half percent range.

Tiffany M. Butcher: It would be in that three and a half to four and a half per cent range and then as you think about blended spreads.

Tiffany M. Butcher: And then as you think about blended spreads, we ended the quarter with a blend of 2.3%. We expect Q2 to trend, you know, up from there, and then we expect, you know, similar improvement in Q3 and Q4. So, for the year, we are projecting kind of a one and a half to two and a half percent blended spreads.

Tiffany M. Butcher: Where we ended the quarter at a blend of two 3%, we expect Q2 to trend up from there.

Tiffany M. Butcher: And then we expect a similar improvement in Q3 and Q4. So for the year, we are projecting kind of one and a half to two 5% blended spreads.

Paul T. McDermott: Okay, now, if I sneak one in for Paul, maybe just curious about any thoughts on where you see cap rates for Class B type assets right now in the market.

Speaker Change: Okay, and then if I could sneak one in for Paul maybe just curious of any thoughts on where you see cap rates for class B type assets right now in the market.

Paul T. McDermott: Sure, Tony. Let me step back and we'll talk a little bit about the landscape, what we're seeing out there. I would say that if you recall my remarks from even our 4Q, we talked about what the buyer composition looked like. We've definitely seen a kind of fundamental shift. If I were looking at 2023, I would say it was probably 80% private equity and 20% institutional. But that trend has reversed, and we're definitely seeing institutional capital move back in, where it's 80% institutional and 20% private equity. The cap rates we're seeing right now, I think, remain healthy. For the product in the best markets, we're seeing anywhere from 4.5 to 4.75 to a 5.

Speaker Change: Sure Tony.

Speaker Change: But let me step back and lets talk a little bit about kind of the landscape. What we're seeing out there I would say that if you recall my remarks from you know even our <unk>, we talked about what the what the buyer composition look like we've definitely seen a kind of a fundamental shift so I was looking at 2002.

Paul T. McDermott: 'twenty three I would say it was probably 80% private equity and 20% institutional that has that trend has reversed and we're definitely seeing a.

Paul T. McDermott: Institutional capital move back in words.

Paul T. McDermott: 80% institutional 20% private equity.

Paul T. McDermott: The cap rates, we're seeing right now I think remain healthy.

Paul T. McDermott: And for kind of that B product that we look at with value-add components, we're seeing that anywhere from 5.25 to 5.5, maybe even upwards of 5.75. The only place that we're really seeing what I would characterize as a price retrenchment is in some of the more distressed markets, where as the tenure widens, we're seeing a little bit more volatility on pricing and retrading. I think the thing that's significant to note is that the institutional buyers that are back, they recognize that the supply issues in some of the markets around the country are really short-term in nature, and they are underwriting a recovery in, you know, 26 and 27, even into 28.

Paul T. McDermott: You know for the product and the best markets, We're seeing you know.

Paul T. McDermott: Anywhere from four five to $4 75 to a five and for kind of a b product that we look at with the value add components.

Paul T. McDermott: We're seeing that anywhere from 5% a quarter or two five and a half maybe even upwards of $5 75, the only place that we're really seeing what I would characterize as a price retrenchment is in some of the more distressed markets.

Paul T. McDermott: Where is the tenure widens, we're seeing a little bit more volatility on pricing and re trading I think the thing that is significant to note is the institutional buyers that are back.

Paul T. McDermott: They recognize that the supply issues in some of the markets around.

Paul T. McDermott: The country are really short term in nature and they are underwriting a recovery in 'twenty six 'twenty seven and even into 'twenty eight.

Paul T. McDermott: They're really looking at basis plays similar to what we did at Druid Hills, and they're looking at discounts or replacement costs in the 20 to 30% range. I still feel like, Tony, that we're suffering from a lack of inventory compared to kind of what we are used to seeing. I think a lot of the sellers are event-driven in nature, either fund life issues, equity recaps, debt maturities. And we've even noticed, just in our dialogue with the agencies, that, you know, those extension options are getting harder and harder to exercise.

Paul T. McDermott: They're really looking at basis place similar to what we did it through at Hill's and Theyre looking at discount to replacement cost in the in the 20% to 30% range.

Paul T. McDermott: I still feel like Tony that we're suffering from from a lack of inventory compared to kind of what we are used to seeing I think a lot of the sellers are event driven in nature, either fund life issues equity recaps debt maturities.

Paul T. McDermott: And we've we've even been noticed just in our dialogue with the agencies that you know those extension options are getting harder to harder to exercise Theyre, just being you know more pragmatic about the underwriting.

Paul T. McDermott: They're just being, you know, more pragmatic about the underwriting. Both the agencies that we talked with, you know, have heavy pipelines. I think they're trying to accommodate, you know, business by offering prepayment options, rate buy-downs, et cetera. But the best deals are still, you know, mission-driven and have an affordability component. I just think that people, you know, the hire for longer has set the inventory pipeline back a little bit, but we're still continuing to look at products. I wish I had a broader data set to offer you on the cap rates, but I think, you know, the ones that I quoted are what we're seeing right now.

Paul T. McDermott: Both the agencies that we talked with you know they have heavy pipelines I think theyre trying to accommodate business by offering prepayment options rate buy downs et cetera, but the best deals are still mission driven have an affordability component.

Paul T. McDermott: I just think that people you know the.

Paul T. McDermott: The higher for longer.

Paul T. McDermott: <unk> has set the inventory pipeline back a little bit, but we're still continuing.

Paul T. McDermott: To look at products, but I wish I had a broader data set to offer you on the cap rates, but I think you know the ones that I quoted are or what we're seeing right now.

Speaker Change: Okay. That's great. Thanks for all the color.

Anthony Paolone: Okay, that's great. Thanks for all the color.

James Colin Feldman: Thank you. The next question will be from Jamie Feldman from Wells Fargo. Jamie, your line is live.

Paul T. McDermott: Thank you. The next question will be from Jamie Feldman from Wells Fargo. Jamie Your line is live.

James Colin Feldman: Great, thanks. Good morning, everyone.

Speaker Change: Great. Thanks, good morning, everyone.

Speaker Change: I just wanted to focus on the balance sheet on your interest expense outlook I think in the past you guys said Ah and assumed some interest rate cuts in your guidance.

James Colin Feldman: What are you guys thinking now in terms of your interest rate outlook and then are you.

James Colin Feldman: Assuming any ramp up in capitalized interest with any of the investments you're doing in Atlanta or is it a pretty clean number through the rest of the year.

James Colin Feldman: I just want to focus on the balance sheet and your interest expense outlook. I think in the past, you guys had assumed some interest rate cuts in your guidance. What are you guys thinking now in terms of your interstate outlook and then? Are you assuming any ramp-up in capitalized interest with any of the investment you're doing in Atlanta, or is it a pretty clean number through the rest of the year? Get to Your Interest Expense Outlook

James Colin Feldman: To get to your interest expense outlook.

Steven Freishtat: Yeah, Jamie, so, you know, when we talked on the Q4 call, we talked about three interest rate cuts in the latter part of the year. Obviously, there's been different chatter from the Fed, and now we've got, you know, one rate cut in the back half of the year as our base case. As I talked about on the call, we still think that our guidance is appropriate because it's in the latter half of the year, and it's not really having an outsized impact as if we'd assumed it earlier.

Unknown Speaker: Unknown Speaker Yeah,

James Colin Feldman: Yes, Jamie So you know when we chatted in the Q4 call we talked about our three interest rate cuts and in the latter the latter part of the year. Obviously, there has been a different chatter from the fed and now we've got one one rate cut in the back half of the year as our base case.

Unknown Speaker: And then as I talked about on the call. We still think that our guidance is appropriate because it's in the latter half of the year, it's not really having an outsized impact as if we had assumed it earlier.

Steven Freishtat: And then we're, of course, trying to manage our cash and debt balance. As far as capitalized interest goes, there's really no projects that I'm aware of, that we're aware of, that we're going to be working on that would have any sort of a material impact on capitalized interest, so it should be a pretty clean year from an expense perspective.

Unknown Speaker: So and then we're of course trying to manage our cash and debt balance as far as capitalized interest there's really no projects that I'm aware of that we're aware of that we're working on that we're going to be working on that would have any sort of a material impact on capitalized interest. So it should be a pretty clean year from an interest expense.

Steven Freishtat: Expense perspective.

James Colin Feldman: Okay, all right, that's helpful. And then I guess just thinking about liquidity, any I know you talked about the apartment transaction market, but any latest thoughts on Watergate and the appetite from investors to potentially buy it or how you're thinking about getting that done and timing? Uh, yeah.

Speaker Change: Okay, Alright, that's helpful and then I guess just thinking about liquidity.

Steven Freishtat: Any I know you talked about the apartment transaction market, but any latest thoughts on Watergate, an appetite from investors to potentially buy it or how youre thinking about getting that done and timing.

Paul T. McDermott: Yeah, Jamie, it's Paul. Just to start out with Watergate, we're actually in pretty good, positive discussions with our current rent roll, extensions, trying to create more walls there. We did have our first transaction, of note, you know, with Market Square being sold in the first quarter this year. We're definitely seeing, I would say, probably more foreign capital than domestic coming into D.C. right now, looking for some of these iconic assets that are clearly on sale.

James Colin Feldman: Yeah, Jamie it's Paul just to start out with the Watergate.

James Colin Feldman: We're actually in pretty good.

James Colin Feldman: Good positive discussions with our current rent roll.

James Colin Feldman: Extension trying to create more work.

Paul T. McDermott: There.

Paul T. McDermott: We did have our first transaction, what I would say of note with market square being sold in the first.

Paul T. McDermott: First quarter. This year, we're definitely seeing I would say probably more foreign capital and domestic coming into D. C. Right now looking for some of these iconic assets that are clearly on sale.

Paul T. McDermott: I think the challenge remains really the lending community trying to embrace office as a vehicle or an asset class right now. But I think with our extensions, and we've definitely seen a pickup in interest, our goal to monetize this asset in the next 12 to 15 months has not changed, and we feel like we'll be able to accommodate that time frame.

Paul T. McDermott: I think the challenge remains really the lending community.

Paul T. McDermott: Trying to embrace office as a as a vehicle or an asset class right now, but I think with our extensions and we.

Paul T. McDermott: We've definitely seen a pickup in interest or.

Paul T. McDermott: Our goal to monetize this asset in the next 12 to 15 months has not changed.

Paul T. McDermott: And we feel like we will be able will be able to accommodate that timeframe.

Paul T. McDermott: Okay, and then so what? What would be inappropriate or in terms of cap rate or value? What do you think, Steven? What's the range to even think about?

Paul T. McDermott: Okay, and then so what what would be an appropriate for.

Paul T. McDermott: Just in terms of cap rate or value.

Speaker Change: Like what do you think Steven Whats the range to even think about.

Paul T. McDermott: Well, I'm going to go off of our fourth quarter markdown, you know, where we took a break down on the asset, and that will obviously be the number that we're shooting for in terms of where it goes. I think a lot of that is going to be predicated right now. If your crystal ball is better than ours, I'm forecasting where the 10-year is going. That's going to have, obviously, a lot to do with it, but we hope to get as close to that range as possible, Jamie.

Paul T. McDermott: Well I'm going to I'm going to go off of our fourth quarter markdown.

Speaker Change: You know, where we are you know we took a write down on the asset.

Paul T. McDermott: And that will obviously be the number that we're targeting for shooting for in terms of a in terms of where it goes I think.

Paul T. McDermott: A lot of that is going to be predicated right now.

Paul T. McDermott: If your crystal ball is better than ours forecasting where the 10 years going.

Paul T. McDermott: That's going to have obviously, a lot to do with it but.

Paul T. McDermott: We hope to get as close to that range as possible Jamie.

Jamie: Okay, great. Thank you for that and then I guess just to get a little bit more granular on some of the rent numbers well.

James Colin Feldman: Okay. Great. Thank you for that. And then, I guess, just to get a little bit more granular on some of the rent numbers. Well, I guess just to start, can you talk about your absolute level of bad debt in Atlanta today as a percentage of rental revenue or whatever your preferred metric might be? Yeah, sure, Jamie.

Paul T. McDermott: Well I guess just to start can you talk about your absolute level of bad debt in Atlanta today, as a percentage of rental revenue or or whatever your preferred metric might be yeah sure Jamie as I was mentioning in the answer to the last question.

Tiffany M. Butcher: Yeah, sure, Jamie, as I was mentioning in the answer to the last question, if you look at our first quarter, our bad debt was 7.5% in Atlanta. That has come down, so we are trending closer to the, say, 6.5% range as we're heading into the second quarter. As I mentioned, that is continuing to come down on a month-over-month basis, so we're projecting that as we head through the end of the year, we'll be in the 3% to 4% range of bad debt as a percentage of revenue in the fourth quarter, which, if you think about it as an average for the year, is probably going to be in the 5% to 6% range.

James Colin Feldman: And then also, just to get more granular, so thinking about, I know you provided the renewal and new lease and blends for the year. How would you break that out between Atlanta and DC? [inaudible] Yeah, sure. I'll

Speaker Change: If you look at our first quarter, our bad debt was seven 5% in Atlanta.

Speaker Change: That has come down that we're trending closer to the say six 5% range as we're heading into the second quarter as I mentioned that is continuing to kind of come down on a month over month basis. So we're projecting that as we had through the end of the year will be in the 3% to 4% range.

James Colin Feldman: Bad debt as a percentage of revenue in the fourth quarter, which if you think about it as an average for the year is probably going to be in the 5% to 6% range.

James Colin Feldman: Okay.

Speaker Change: And then also just to get more granular and so thinking about I know you've provided the renewal and new lease and blends for the year, how would you break that out between.

Speaker Change: Atlanta and DC.

Speaker Change: For those metrics and same thing with like the April numbers.

Tiffany M. Butcher: Yeah, sure. I'm happy to give you that.

Speaker Change: Yeah sure I'll I'll have you I'm happy to give you that let's let's sort of start with the year as a whole and then I can go back and talk about the second quarter. If you think about the year as a whole we are assuming that the portfolio. Overall blends are in that one and a half to two 5% range, but if you break that out between dnb in Atlanta in the D. M D. We're expecting two and a half to three.

Tiffany M. Butcher: Let's sort of start with the year as a whole, and then I can go back and talk about the second quarter. If you think about the year as a whole, we're assuming that the portfolio overall blends are in that 1.5% to 2.5% range. But if you break that out between DMV and Atlanta, in DMV, we're expecting 2.5% to 3.5% blends, which are made up of, say, 1% to 2% new and 4% to 5% renewal.

Tiffany M. Butcher: 5% blend, which is made up of say, 1% to 2%, new and 4% to 5% renewal and if you look at Atlanta, we are expecting blends to be in the negative two to negative 4% which is high.

Tiffany M. Butcher: And if you look at Atlanta, we're expecting blends to be in the negative 2% to negative 4% range, which is high, negative single-digit, say, 7% to 9% negative new lease rate growth and renewals in the positive 1.5% to 3.5% range. So that's where we're expecting kind of the full year to shape up. If you look at where we're trending for Q2, we're expecting kind of blends in this, say, 2% to 3% range for the portfolio as a whole.

Tiffany M. Butcher: Negative single digit say say, 7% to 9% negative new lease rate growth in renewals and a positive $1 five to three 5% range.

Tiffany M. Butcher: So that's where we're expecting kind of the full year to shape up if you look into where we're trending for Q2.

Tiffany M. Butcher: We're expecting kind of blends in this eight 2% to 3% range for the portfolio as a whole and if your blood. If you break that out between D. M. D. In Atlanta, we're expecting blends in the D. M D to be in the three and a half to four 5% range, which is made up of 2% to 4%, new and 4% to 6% renewal growth.

Tiffany M. Butcher: And if you break that out between DMV and Atlanta, we're expecting blends in DMV to be in the 3.5% to 4.5% range, which is made up of 2% to 4% new and 4% to 6% renewal growth. And if you look at Atlanta, we're trending into the sort of negative 3% to negative 5% negative blends, which is made up of a very similar new high negative single-digit new lease rate growth of negative 7% to negative 9% on a positive renewal growth of 1.5% to 3.5%. I would say that April is trending slightly ahead of those two Q averages, but we feel very good about where we're trending for Q2.

Tiffany M. Butcher: If you look at Atlanta, we're trending into the sort of negative three to negative 5% negative blend, which is made up of a very similar a new high negative single digit new lease rate growth of negative 7% negative 9% of a positive renewal growth of 1.5% to 3.5% I would say that April was trending.

Tiffany M. Butcher: Lately ahead of those <unk> averages, but we feel very good about where we're trending for Q2.

James Colin Feldman: Okay, and then just the benchmark, the bad debt number you're talking about for 24, how does that compare to the bad debt number in 23? For like a year-over-year comparison.

Tiffany M. Butcher: Okay, and then just a benchmark so the bad debt number you were talking about it for 24, how does that compare to the bad debt number in 'twenty three.

Tiffany M. Butcher: Just sort of like a year over year comp yeah.

Tiffany M. Butcher: Yeah, no, great question. So if you look at the fourth quarter for 23, we were at a negative 10% for the Atlanta portfolio. You're just talking about the Atlanta portfolio, correct? Correct. Yeah, so in the fourth quarter, we were at negative 10% for the Atlanta portfolio, which is obviously then showing the two and a half percent improvement over the first quarter that I mentioned. If you look at full year 23, we were very close to the key number of seven and a half percent.

Speaker Change: Great question. So if you look at the fourth quarter for 'twenty three we were at negative 10% for the Atlanta, Youre, just talking to the Atlanta portfolio correct Kurt.

James Colin Feldman: for the full year. Okay. All right. Thank you.

James Colin Feldman: Correct.

James Colin Feldman: So in the fourth quarter, we were at negative 10%.

Tiffany M. Butcher: For the Atlanta portfolio, which is.

Tiffany M. Butcher: Which is obviously to enter in the two 5% improvement to the first quarter that I mentioned, if you look at full year 'twenty. Three we were very close to the Q1 number of seven 5%.

James Colin Feldman: For the full year, yes.

Speaker Change: Okay alright, thank you.

Paul T. McDermott: Thank you, and once again, it is star one if you wish to ask a question at this time. That's star one on your telephone keypad if you wish to ask a question at this time. And there are no other questions at this time. I would now like to hand the call back to Paul McDermott for closing remarks.

Speaker Change: Thank you and once again it is star one if you wish to ask a question at this time that is star one on your telephone keypad. If you wish to ask a question at this time.

James Colin Feldman: And there were no other questions at this time I would now like to hand, the call back to Paul Mcdermott for closing remarks.

Paul T. McDermott: Thank you. Again, we would like to thank everyone for their time and interest today, and we look forward to speaking with many of you over the next few weeks.

Paul T. McDermott: Thank you.

Paul T. McDermott: Again, we would like to thank everyone for your time and interest today and we look forward to speaking with many of you over the next few weeks. Thank you.

Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Paul T. McDermott: Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.