Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Elme Communities (ELME, Financial) reported strong occupancy rates, particularly in the Washington Metro area, with same-store occupancy averaging 95.3% through July.
- The company achieved a 17% return on investment (ROI) on 150 home renovations during the second quarter.
- Elme Communities (ELME) successfully launched the Elme Resident Services department, aimed at streamlining community operations and enhancing process efficiencies.
- The company tightened its 2024 core FFO per share guidance range to $0.91 to $0.95, maintaining a midpoint of $0.93.
- Elme Communities (ELME) entered into a new four-year $500 million revolving credit facility, enhancing its liquidity position with over $320 million available as of August 1.
Negative Points
- The Atlanta market continues to face challenges with elevated supply and bad debt, with bad debt in the Atlanta portfolio at 6.6% in the second quarter.
- New lease rate growth was minimal, at 0.2% for the second quarter and 0.4% in July, indicating slow improvement.
- The company expects expense growth in the 5% to 6% range for 2024, driven by higher taxes and payroll costs.
- Occupancy in the Atlanta market remains lower, averaging 89.5% during the quarter and increasing to 90.6% in July.
- The company is facing challenges with the timing of evictions in Atlanta, which could continue to pressure occupancy rates.
Q & A Highlights
Q: Wondering if you could walk through bad debt in the quarter for the whole portfolio in Atlanta specifically. I'm wondering if you still think Atlanta bad debt could get to that 3% to 4% range by the end of the fourth quarter and that full-year '24 average of 5% to 6%.
A: In the second quarter, we saw improvement in our bad debt across both of our markets. In the Washington Metro portfolio, we are now below 1% of bad debt. In Atlanta, bad debt was about 6.6% in the second quarter. We expect further improvement due to House Bill 1203, which allows landlords to hire off-duty officers to execute evictions, and other internal efforts to streamline collections and improve credit screening.
Q: Switching over to the updated NOI guidance. It seems that it's mostly expense-driven. Wondering how same-store revenue is shaping up relative to expectations assumed in guidance.
A: We tightened our NOI guidance to a midpoint of 1.25%. Expense growth is expected to be in the 5% to 6% range, lower than initially forecasted due to lower taxes and payroll. Revenue is expected to be in the 2.5% to 3% range for 2024, driven by improving bad debt trends in Atlanta.
Q: In Atlanta, where do you think occupancy finishes off the year in terms of how you're seeing things now?
A: We expect occupancy in Atlanta to remain in the low 90% range through year-end, driven by gradual improvement in supply/demand dynamics and solid retention.
Q: Can you talk about how much you're spending on full renovations and the returns you're getting, and also discuss Class B cap rates in your markets?
A: We expect to complete over 475 full home renovations and over 100 partial renovations this year, with an average ROI of 17%. Class B cap rates are trading between 5.5% and 6%, with core cap rates in the 4.5% to 5% range and core plus cap rates in the 5% to 5.5% range.
Q: Are you seeing anything in some of your potential target markets that has caused you to change how you're thinking about potential expansion markets?
A: We are applying more scrutiny on going-in rental rates and pushing back the timing of some renovations. We are monitoring our portfolio and new acquisitions to determine the best timing for operational improvements and value creation.
Q: Could you share what kind of changes to supply and demand assumptions are baked into the new guidance, if any?
A: Stronger-than-expected performance in the Washington, D.C. market is driving our guidance. We have seen strength in new leasing and occupancy, with same-store occupancy at 96.1% in the second quarter and 96.7% in July. Supply is tight, and job growth is strong, particularly in industries that drive demand for our communities.
Q: Could you give a breakdown of the 1.3% blended rate expected for the rest of this year?
A: We expect new lease rates to be in the negative 1% to positive 1% range, renewal rates in the 3.5% to 4.5% range, and blended lease rates in the 1.5% to 2.5% range for the full year.
Q: Given your implied cap rate today and some of the pricing commentary, have you thought about picking up capital recycling, specifically out of your Maryland portfolio or maybe some of your district assets?
A: We are always looking at our portfolio and recycling options. While we have assets like the Watergate as recycling candidates, we do not have plans to do any recycling from now through December. We will continue to monitor market conditions and preserve optionality.
Q: Where are you seeing pricing today in the unsecured market, and thoughts around raising any incremental debt for the right acquisition opportunity?
A: Given recent movements in the 10-year, new unsecured debt would probably be in the high-5s%, with secured debt slightly inside of that. We have created a balance sheet with a lot of optionality and would consider capital recycling as a top choice for financing new opportunities.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
