Welcome to the Elme Communities Fourth Quarter and Year End Earnings Conference Call. As a reminder, today’s call is being recorded. At this time, I would like to turn the call over to Amy Hopkins, Vice President, Investor Relations. Amy, please go ahead.

Good morning, everyone and thank you for joining us for our fourth quarter earnings call. On the call with me today are Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President, and Chief Financial Officer; Steven Freishtat, Vice President of Finance; Grant Montgomery, Vice President and Head of Research; and Drew Hammond, Vice President, Chief Accounting Officer, and Treasurer. Today’s event is being webcast through the Investors section of our website at elmecommunities.com, and a replay will be available this afternoon. We will have a slide presentation in conjunction with our prepared remarks and those slides will be available on our webcast replay. Before we begin our prepared remarks, I would like to remind everyone that this conference call contains forward-looking statements that involve known and unknown risks and uncertainties, which may cause actual results to differ materially and we undertake no duty to update them as actual events unfold. We refer to certain of these risks in our SEC filings. Reconciliations of the GAAP and non-GAAP financial measures discussed on this call are available in our most recent earnings press release and financial supplement, which was distributed yesterday and can be found on the Investors page of our website. And with that, I’d like to turn the call over to Paul.

Thank you, Amy. Good morning, everyone and thanks for joining us today. We ended the year with a strong fourth quarter performance and 2023 is off to a good start with solid operating fundamentals and favorable demand indicators. We are reiterating our 2023 guidance, which reflects double-digit same-store NOI and core FFO growth. Our investment grade balance sheet is in great shape with low leverage and ample liquidity and we have no debt maturities until 2025. We feel very good about our AFFO growth outlook and we are increasing our quarterly dividend by approximately 6%. The economic outlook continues to evolve and we will likely face a slowing economy this year. While we are not immune, our mid-market strategy is designed to outperform across cycles and to provide relative insulation during downturns when residents are more likely to trade down to a lower rent level instead of trading up. Over the past 5 and 10-year periods, our target vintages have outperformed newer vintages in our respective markets. Towards the end of last year, we began to see headlines surrounding job cuts for high-wage technology positions due to the intentional cooling of the economy by the Fed. However, in the Washington Metro, the tech-heavy, informational and professional, scientific and technical sectors continue to grow, up 2.7% and 2% respectively year-over-year. As recently highlighted in the Wall Street Journal, a study of software engineering job postings at year end found that Washington region has more job openings in this field than the San Francisco Bay Area. The strength in these jobs is particularly evident in Northern Virginia, where most of our portfolio is located and where the information sector, which includes software engineering jobs, grew at a brisk rate of 5.6% in 2022. The Washington Metro is known to have the most…

Thank you, Paul. I am grateful to you and to our team for all we were able to do together and I am looking forward to the growth ahead for our company going forward. Now starting with our operating trends, the year is off to a strong start and demand indicators continue to look good through the winter months. Year-to-date traffic and application volumes are up on a year-over-year basis, extending the trend that we experienced during the second half of last year. Effective new lease rate growth was 1.1% and the effective renewal lease rate growth was 10.1%, which blends to 5.7% for same-store move-ins that took place during the fourth quarter. Thus far this year, demand trends remained solid and lease rates have increased since December. Effective blended lease rate growth averaged 4.5% for January move-ins comprised of renewal lease rate growth of 8.8% and new lease rate growth of 1.3%. For February move-in so far, effective blended lease rate growth increased to 5.8% for our same-store communities comprised of renewal lease rate growth of 9.1% and new lease rate growth of 3.7%. Our revenue maximization strategy prioritizes occupancy over lease rate growth during the winter months. And as such, we adjusted pricing to sustain occupancy during our lightest volume months. New lease rates are on an upward trend and we are currently signing new leases with effective rate increases of over 4% on average. Looking forward, we expect new lease rates to continue to increase to the mid single-digits in the spring and summer leasing seasons followed by a decline to the low single-digits toward next winter. Renewal lease rates remain very strong and we are currently sending out renewal offers for April lease expirations with effective rate increases of over 7% on average. And so far,…

Thanks, Steve. You’re leaving me with a great team, and we are very excited for the opportunity to continue to build on everything you helped to create over the last 8 years. Now I’ll start with our balance sheet. With an annualized fourth-quarter net debt to EBITDA of 4.8x, over $650 million of availability on our line of credit, no secured debt, and no maturities until 2025, our balance sheet is in excellent shape. In keeping with our proactive approach to managing our debt maturity ladder, on January 10, we executed a new 2-year $125 million term loan with two 1-year extension options. We used the proceeds to pay down our previous $100 million term loan with no prepayment penalty and a portion of the balance on our line of credit. Our new loan has a variable interest rate of adjusted SOFR plus 95 basis points. At a time when many banks are tightening their lending requirements, we have taken steps to ensure our financial flexibility and increase our liquidity. We feel good about our ability to successfully navigate market volatility while executing on our strategy. Now turning to our outlook for 2023. We are reiterating our 2023 core FFO guidance range of $0.96 to $1.04 per fully diluted share, which implies double-digit year-over-year growth. Same-store multifamily NOI growth is expected to range from 9% to 11%, which reflects year-over-year growth of 10% at the midpoint. Further building on the double-digit NOI growth achieved in the second half of 2022. Non-same-store multifamily NOI is expected to range from $12.75 million to $13.75 million in 2023. While this guidance range does not reflect the impact of potential acquisitions, we had more than $650 million of availability on our line of credit as of year-end, and we are running below our targeted…

Thank you, Steve. To conclude, we are where we expected to be at this point in the year. We feel good about our ability to deliver double-digit core FFO growth, which will be driven primarily by rent growth as nearly 70% of that rent growth is already locked in. We are on track to complete the transition of our portfolio to L management by this summer and to begin to see the benefits of that transition and our Smart Home initiatives in 2024. Our strategy offers growth as well as relative insulation during downturns, and we expect to benefit from sustained demand for quality, affordable rental options over the near and longer term. And now operator, I’d like to open it up for questions.

[Operator Instructions] Your first question for today is coming from Michael Lewis with Truist Securities.

Great. Thank you. Steve, you’ll certainly be missed and I wish you all the best in retirement and congratulations to Steve, other Steve, on taking over the role. My first question, I was wondering if you could provide some of the components of the same-store NOI guidance, occupancy, revenue growth, or expense growth or any details you could share?

Yes, Michael, this is Steve Freishtat and I’ll take a first crack at that. So to get to our NOI guidance, we look at our revenue growth expectation of about 8.5%. Of that is primarily driven by rental revenue growth, where we’re expecting that to be almost 7%. And as we talked about in our prepared remarks, we’ve captured approximately 5% of that already with our in-place leases and leases signed but not yet moved in. So we’re at 70%. We’re expecting that number to be 90% by June. So – and that leaves about an additional 2% of additional rent growth that is expected to be captured over the remainder of the year. The difference between the 7% and the 8.5% is smaller contributions from line items like other income and declines in bad debt. On the expense side, we’re expecting expenses to go up about 7% net of reimbursements. And that’s primarily driven by three line items. The first is payroll, which we’re seeing pressure on salaries. And we’re also ramping up positions ahead of our onboarding that we’re currently going through for our communities. The second one is taxes as we’re seeing taxes reset. We’re seeing pressure on expenses from increased taxes. And then the third one is utilities. We’re seeing utilities higher in electricity and gas for 2023, but that’s mitigated somewhat by reimbursements where we see reimbursement at about 60% to 70%. So that’s really the buildup to our 9% to 11% NOI growth.

Yes. That’s great detail. Thanks. My second question, how should we think about the upside from getting properties onto your internal property management platform? I don’t know if you have – is there an operating margin improvement that you’re measuring or seeing that you can point to? Or how do you kind of measure and quantify the longer-term benefits from that transition?

Yes, Michael, this is Steve again. I’ll take that one as well. So as we said, we are – we have onboarded as of next week, almost 40% of our communities by the end of the quarter would be at 50% and have them all on board by the end of the summer. And we think when we can get there in the mall on board that there are efficiencies that we can take advantage of. Just examples of it are centralization, better revenue management through occupancy initiatives, smart buildings and ability to produce R&M, maintenance efficiencies, and global contract strategy. So we see a lot of potential upside from being able to take advantage of opportunities of managing our own communities. But in addition to that, we’ve talked about scalability before that we’re building out a platform that is scalable. So, when we think about being able to double the unit count of this company and keep G&A essentially the same from where it is now, but that’s even an additional opportunity and an additional driver for growth.

Great. And I’ll try to squeeze in one more, if I can. It seems like there is more investor demand and liquidity in the market for multifamily than for some of the other property types for all the advantages that you spoke about. But there is still this bid-ask spread that’s kind of limiting transaction. So I’m wondering what are your target returns for acquisitions today or how are you looking at potential deals given what’s happened in the cost of capital? And I know you’re still looking, but maybe there is a pause here as that betas kind of shakes out. So how are you kind of thinking about that and what might be attractive?

Well, in terms of Michael, our observations on what we’re seeing in the marketplace right now, first and foremost, there is not a lot of product in the market on a relative basis, like if you look at the year-over-year numbers of what is in there. A lot of the brokers that we interact with as well as the owners have a large BOV pipeline. And we expect groups that are in the Odyssey funds, they are waiting on appraisals from Altus. And I think as you know, appraisals tend to lag the markets anywhere from six months to nine months. We think those appraisals are going to hit. We think second quarter will have a lot of mark-to-market activity. And we believe that we are going to start – we will have a more robust second half of the year, as we have said before. These are funds that are still dealing with the denominator effect and have to go through their own processes on mark-to-market. But really, the sellers that we are seeing right now, they are only selling either, there is a liquidity requirement, i.e., a Q or they are funding other parts of their operations. As you alluded to, I don’t think there is any question that there is enough capital, but we would also say and in talking to folks that are thinking of taking product to the market, the ask is really coming towards the bid. I think the gap is going to be closing, and we will be closing as we progress through the year. In terms of kind of what we look for right now, I mean look, a lot of the institutional capital remains on the sidelines. A lot of that private capital is the most active, and they are trying…

And that’s great detail. Thanks a lot for answering my question.

Your next question for today is coming from Alan Peterson at Green Street.

Hey everyone. Thanks for the time. I was just hoping you guys could share the breakout between the legacy Mid-Atlantic same-store portfolio and the new 23 additions. Just your expectations on NOI growth between those two groups would be super helpful.

Yes. I mean so our 23 same-store pool, so there were two communities that came into the same-store pool this year. And we are seeing growth in the Atlanta portfolio higher than D.C. So – but D.C. is, Amy, go ahead.

This is Amy. Our Atlanta communities are contributing about 60 basis points to our NOI growth for the full year.

Perfect. Thank you. And in regards to the recent term loan extension, I was just hoping you can provide some color around the banks. And if there is any banks that are starting to close off lending or lending activity for multifamily product today, did you guys have any difficulty with that term loan extension versus, call it, this time 2 years ago?

I am sorry, Alan, can you repeat the question? We lost the voice for just a second.

Yes. In regards to the term loan extension, I was just hoping if you could provide any color if there is any difficulty right now getting those term loan extensions through given that banks – some banks may have closed off lending activity for multifamily activity today.

Yes. Alan, this is Steve Freishtat. What we have heard from the banks is that they are being more selective in this market that they are choosing to do, first off, shorter term loans, our term loan was a 2-year, maybe a couple a year or 2 years ago, it would have been a 5-year. But the banks are selecting based on relationships and based on the sector that companies are in. So, for us being in the multifamily sector, I think we had an easier time than if this was not – we had our portfolio from a year ago with office. But what we saw was the banks are doing shorter terms of 2 years. The pricing has not changed that much, but the upfront fees have gotten a bit more extensive as we are looking for higher returns.

That’s helpful. Thank you. And then just one more on the internalization of management for the portfolio. Have you guys had any difficulties in retaining on-site staff? Are you having to go out into the marketplace and hire new personnel, or are you able to transfer the staff at the property very smoothly?

Alan, we have just finished our fourth wave, and we have had tremendous success in recruiting and getting people to change jerseys. We are heading into Wave 5. We have a lot of acceptances there. But we also have beefed up our recruiting and we are supplementing the folks that are coming on board from our third-parties with people from the outside. We obviously build our own regional management team. And so we are making great progress. And – but for the most part, we have been able to retain and we had incentives for people to change jerseys and come to our company.

Awesome. I appreciate the time, guys and congrats to both of the Steves on the call.

Thanks Alan.

Your next question for today is coming from Yang Ku at Wells Fargo.

Great. Thank you and good morning. Just wanted to get your thoughts on rent controls, which seems like a hot topic these days, it looks like there have been a couple of rent control motions that are being pushed forward in Maryland. Could you provide some color regarding these and potential impact this may have on your portfolio?

Sure, Yang. First thing I would say is we – philosophically, we don’t believe rent control addresses the main issues, which are housing affordability. I think history would tell you in our research tells us that it really doesn’t work in the cost ROI. And it does not reduce the cost of housing for those who it is intended to serve. I think the best renter protection is an abundant supply of affordable housing. Regarding the near-term risk of rent restrictions, we look at the markets that we operate in right now, and I will get to Montgomery County. But primarily, where we have two assets, primarily, we had bulk of our portfolios Northern Virginia and Atlanta. And we don’t expect rent control pressure proposals over the near to medium-term. We do have a small amount of exposure in Montgomery County, which represents 6% of our NOI, which is not – which had post-pandemic rent restrictions, but we see proposals, but we know that nothing is put in place, but the threat is there. Our job is really to work with the local officials and work with the lobbyists here on the hill to try to find a more palatable solution than rent control. I think personally, having been in an affordable business, I think it kind of probably should fix what they have in terms of LIHTC/Voucher systems, etcetera. And we think it’s prevalent. It’s the top priority. But right now, we think it impacts probably the smallest part of our portfolio.

Got it. Thank you for the clarification. And you guys talked about strong job postings in the Metro D.C. area. I was wondering if you can talk about some immigration trends within that market specifically and in Atlanta also.

Sure. Yes. So, we have seen strong move-ins to the Washington region. We have seen greater than 75% of the move-ins are actually people coming from the Washington region. And we have also seen strong move-ins into our region. I think both in Atlanta and Washington, D.C., we looked at an analysis that of forwarding data and move-in versus move-out outpaced by about 53%. So, we are still seeing strong movement into the Greater Washington, D.C. area. There have been headlines, obviously, about the districts being a little softer. But again, even within the Washington, D.C. region, the vast majority of it is suburban with about 80% being in Northern Virginia. So, we are seeing good trends on that front of traffic.

Great. That’s helpful. And just finally for me, can you provide some color regarding some of the credit trends within your tenant base in terms of maybe trends you are seeing on average FICO scores, average income or maybe delinquency rates within your portfolio?

Sure. I think the trend that we track most closely is our rent-to-income ratios. And I think we mentioned it in our prepared remarks, we have actually seen a decline in our rent-to-income ratio in our Atlanta properties that we have owned now that are entered the same-store pool has actually decreased to about 25% as we have seen strong growth from new renters moving into our properties and also improving the credit profile versus prior ownership. And in the Washington Metro, we have seen the numbers stay steady, which even in the face of strong rent growth, and we are around 26%, which is in line with our long-term average rent-to-income ratios for our assets.

Great. Perfect. Thank you and congrats to Steve and Steve.

[Operator Instructions] Your next question for today is coming from Anthony Paolone at JPMorgan.

Thank you and good morning, and congrats as well to Steve and Steve. So, first question is just in terms of your internalization, when you did the transformation of the company, you talked about going into multiple new markets. And so you are in Georgia now, if you go to some other places on your target list, will the internalization be able to handle those, or will you have to still use some third-parties before bringing it in?

Tony, this is Paul. The internalization will be able to handle those. We have already planned for that. And I think as we alluded to when we rolled out our diversification strategy, we have always planned to both geographically diversify and obviously, that will be accompanied by diversified management. And so we plan on having boots on the ground in the major markets that we expand into.

Okay, got it. And then just second one. You had mentioned about 600 unit renovations for ‘23. Can you just remind us about how much you think you will spend on those? And also, any color on just recurring CapEx for this year, either per unit or in total?

Yes. Tony, this is Steve. For the 600 units, we are expecting about $9 million of spend related to that. And then I am sorry, can you say the second part? The recurring CapEx, so we have looked at the recurring CapEx, and we see it as 5% of our NOI, which again is for – on the multifamily side, which is significantly less than the 20% numbers that we were seeing when we have commercial.

Okay. Great. Thank you.

And if there are no further questions, I would like to turn the floor back over to management for any closing comments.

Thank you. Again, I would like to thank everyone for your time and interest today, and we look forward to speaking with many of you over the next several weeks. Thank you.

This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.