Elme Communities Q2 FY2024 earnings call

• Market Overview: The Washington Metro is a top-performing apartment market with normalized net inventory ratios, and Atlanta absorption rates are accelerating with supply overhang declining.
• Operating Trends: Blended lease rate growth improved in Q2, same-store occupancy increased, bad debt is being reduced, renovations generated an average 17% ROI in Q2 with over 475 full renovations and 100 upgrades expected, launch of Elme Resident Services with new technologies, and managed Wi-Fi rollout in phases.
• Financials: Core FFO per share guidance tightened to $0.91-$0.95 with midpoint $0.93, same-store multifamily NOI growth range revised to 0.75%-1.75%, interest expense expected to range $37.5M-$38.25M, balance sheet net debt to adjusted EBITDA 5.6 times, and new $500M revolving credit facility obtained.

The Washington Metro portfolio comprises over 75% of Elme's homes. In the second quarter, the Washington Metro benefited from strong, stable demand, with same-store occupancy averaging 96.1% and increasing to 96.7% in July, driving effective blended lease rate growth to 3.2% for the same-store portfolio (comprised of 5.4% renewal lease rate growth and 0.2% new lease rate growth). In Atlanta, absorption rates are accelerating with supply overhang declining, but occupancy averaged 89.5% in the second quarter, increasing to 90.6% in July. However, 24 homes in Atlanta are temporarily out of service due to a fire. Bad debt in Atlanta is improving with the implementation of House Bill 1203, which should help reduce bad debt by year-end.

• Core FFO per share guidance tightened to $0.91 to $0.95, maintaining midpoint at $0.93.
• Same-store multifamily NOI growth assumption revised to range from 0.75% to 1.75% in 2024, with midpoint slightly raised.
• Interest expense expected to range from $37.5 million to $38.25 million for the year.

• Bad debt in Atlanta still above historical norms with challenges in eviction backlog due to sheriff’s office backlog in many Atlanta counties.
• Supply overhang in Atlanta could still pressure occupancy despite improving trends.
• Uncertainties in the investment market including election and rate cut impacts on transactions and cap rates.

Q: Walk through bad debt in the quarter for the whole portfolio, specifically in Atlanta?

A: Tiffany states bad debt improved in both markets, DMV below 1% bad debt, Atlanta at 6.6% in Q2, with House Bill 1203 implementation to help reduce bad debt by year-end.

Q: Updated NOI guidance, how is same-store revenue shaping up?

A: Paul says revenue expected 2.5%-3% in 2024, expense growth 5%-6% with tax and payroll savings helping, driven by improving bad debt in Atlanta.

Q: Atlanta occupancy outlook for year-end?

A: Tiffany says Atlanta occupancy expected in low 90s% range with gradual improvement.

Q: Renovations and capital markets?

A: Tiffany talks about 17% ROI on renovations, Paul discusses cap rates in core, core plus, and value-add spaces, and lending conditions.

Q: Strategic expansion and potential expansion markets?

A: Paul says underwriting scrutiny on rental rates, renovation timing pushed back for new acquisitions.

Q: Changes to supply and demand assumptions in guidance?

A: Tiffany and Grant discuss strong Washington market, tight supply with net inventory ratio in Northern Virginia down to 1.7% over next four quarters, and strong job growth in demand-driving industries.

Q: Capital recycling and debt?

A: Paul says recycling considered but not top priority now, Steven talks about unsecured debt pricing in high-5s% and secured debt inside, and balance sheet optionality for acquisitions.