Participants

Amy Hopkins; Vice President - Investor Relations; Elme Communities

Paul McDermott; Chairman of the Board of Trustee, President, Chief Executive Officer; Elme Communities

Tiffany Butcher; Chief Operating Officer, Executive Vice President; Elme Communities

Steven Freishtat; Chief Financial Officer, Executive Vice President; Elme Communities

Cooper Clark; Analyst; Wells Fargo

Ann Chan; Analyst; Green Street Advisors

Presentation

Operator

Good day, and welcome to the Elme Communities' first-quarter 2025 earnings conference call. As a reminder, today's call is being recorded. And at this time, I would like to turn the call over to Amy Hopkins, Vice President, Investor Relations. Amy, please go ahead.

Amy Hopkins

Good morning and thank you for joining our first quarter earnings call. Today's call will be available for replay on the Investors section of our website. Statements made during this call may constitute 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.
. Presenting on the call today will be Paul McDermott, our CEO; Tiffany Butcher, our COO; and Steve Freishtat, our CFO. And with that, I will turn the call over to Paul.

Paul McDermott

Thanks, Amy. Welcome, everyone, and thank you for joining us this morning. We kicked off the year with strong momentum as both same-store revenue and NOI came in ahead of our expectations, and the trends we are seeing as we enter peak leasing season are encouraging.
I'll start today's call by highlighting what we're seeing on the ground here in the DMV and how we're positioned as regional employment trends evolve. Tiffany will provide a more detailed update on our operating trends, and Steve will discuss our outlook for 2025.
While the new administration continues to work to streamline the federal workforce, the fundamentals that we are seeing across our Washington Metro portfolio remained solid and in line with seasonal norms. Looking forward, apartment tour volumes and renewal lease negotiations for June and July expirations remained strong, in line with our expectations.
While we acknowledge that the region could be impacted, by employment losses and a slowdown in economic growth, our mid-market rent levels and geographic focus on Northern Virginia put us in a better position than higher-end rentals and the broader regional housing market overall. Mid-market rent levels are widely recognized for offering relative resilience during periods of economic volatility.
Looking back at performance during sequestration in 2013 and 2014, Class B apartments outperformed Class A and effective rent growth by over 1.8% according to data collected by RealPage. And with regard to our geographic focus, Nearly 75% of Elme's Washington Metro homes are located in Northern Virginia, which is known for having the strongest private sector employment growth in the Washington Metro region.
Over the past four years, Northern Virginia's private sector job growth was 2.5 times the private sector job gains in the Washington Metro according to BLS data. Although Northern Virginia is known as a major hub for federal contractors, we believe Elme's exposure to government contractors is very low at approximately 5% of our Washington Metro resident base as of April. More details about our exposure to federal workforce reductions can be found on slide 11 of our latest investor presentation.
Additionally, most federal employees fall outside the typical age range of apartment runners. As of September 2024, over 70% of federal government employees were over 40 and for OPM data. In contrast, only 30% of Elme residents fall into that age group, suggesting a lower impact on apartments compared to the broader housing market overall.
Looking at supply, conditions are shaping up for a very positive trajectory in the Washington Metro. According to RealPage, annual supply peaked in Q1 2025 at 2.2% annual net inventory growth below the national average of 2.9%.
New construction starts in the Washington Metro are down over 70% from their peak and supply is projected to decline steeply from here to 1.8% annual net inventory growth by the fourth quarter of this year and still further to nearly half at 1.1% by the fourth quarter of 2026, which would be the lowest level reported since 2012.
Beyond 2026, supply could drop even further depending on the effects of tariffs and increased construction costs, paving the way for additional favorable competitive dynamics in the region. Turning to our strategic review.
As announced on February 13, 2025, our Board of Trustees is overseeing a formal evaluation of strategic alternatives to maximize shareholder value. This process was initiated from a position of strength and having transformed Elme into a multifamily REIT while improving performance and profitability and underscores our commitment to acting in the best interest of Elme and its shareholders.
Despite the current volatility and uncertain capital markets environment, this evaluation remains ongoing. The Board is working with independent financial and legal advisers to assess alternatives and determine the best path forward for Elme.
As we said when we announced this formal evaluation there can be no assurance that this process will result in Elme pursuing a transaction or any other strategic outcome, and we do not intend to provide further details on the process in connection with the discussion of our first quarter earnings results today.
Thank you for your understanding and keeping your questions focused on our results and outlook. And with that, I'll turn it over to Tiffany to discuss our operations.

Tiffany Butcher

Thanks, Paul. Looking at our operational highlights, we are off to a solid start to the year. Demand trends across our Washington Metro and Atlanta portfolios reflect typical seasonality against the backdrop of stable supply levels in the DMV and improving supply dynamics in Atlanta.
Elme's same-store multifamily occupancy averaged 94.8% during the first quarter, in line with our targeted range and up 50 basis points year over year. We achieved 1.9% same-store blended lease rate growth during the quarter, and our initial estimated blended rate growth for April is 2.6%, reflecting a typical upswing heading into the spring leasing season.
Within our D&B portfolio, forward occupancy trends remain in line with our expectations and renewal rates remain strong. We are continuing to closely monitor our forward-looking demand indicators and plan to adjust our pricing strategies accordingly. In Atlanta, we are experiencing stable rent and occupancy trends and better-than-expected bad debt performance. New delinquencies have declined since the second quarter of last year, supported by higher credit standards, process changes and technology enhancements implemented last year.
Eviction delays in Atlanta are steadily decreasing with the continued use of Georgia House Bill 1203 and improved processing efficiency is also helping to reduce bad debt. As Steve will discuss in a moment, we expect improvement in bad debt to be a larger contributor to revenue growth in 2025 than we had initially anticipated.
Now turning to renovations. We completed 88 renovations during the quarter at an ROI of approximately 18% and remain on track to complete over 500 full renovations in 2025. We expect the pace of renovations to increase as expirations pick up during the summer leasing season, and we maintain flexibility to adjust the pace of renovations as market demand shifts.
Moving on to operating initiatives. Our managed WiFi program is ramping up more quickly than anticipated, and we now expect to capture $600,000 to $800,000 of additional NOI in 2025 and the seven communities that are part of Phase 1 and the four communities that are part of Phase 2. Once Phase 1 and Phase 2 are fully integrated by mid-2026, we expect to capture $1.5 million to $2 million of additional NOI per year with further upside from future phases.
And with that I'll turn it over to Steve to cover our performance and outlook.

Steven Freishtat

Thanks, Tiffany. Our first quarter results were very strong, with same-store revenue growth of 3.9% and NOI growth of 5.5% year over year. Our better-than-expected performance was driven primarily by stronger rent growth across our Washington Metro portfolio; and two, favorable real estate tax appeals in Atlanta. As Tiffany mentioned, our Managed WiFi rollout is going very well, and the associated income is ramping up more quickly than we had anticipated.
Additionally, Atlanta bad debt continues to decline, and we expect improvement in bad debt to be a larger contributor to revenue growth in 2025 than we had initially anticipated. Based on our year-to-date performance and updated projections for fee income and bad debt, we believe we only need an additional 50 to 60 basis points of revenue growth from rent and occupancy changes across the rest of the year to reach the midpoint of our revenue forecast, a target we consider highly attainable.
Additionally, our balance sheet remains in very good shape. Annualized net debt to adjusted EBITDA was 5.6 times during the first quarter, and we have over 60% of our total capacity available on our line of credit and no secured debt. In closing, our revenue and NOI are ahead of expectations at this point in the year, and we are engaged by the positive momentum heading into the peak leasing season.
Although the macro environment is in flux, the strong fundamentals of our portfolio and business, along with the ongoing success of our value-add renovation pipeline and platform initiatives gives us confidence in our ability to deliver resilient performance.
And now operator, I'd like to open it up for questions.

Question and Answer Session

Operator

At this time, we will be conducting our question-and-answer session. (Operator Instructions) Cooper Clark, Wells Fargo.

Cooper Clark

Paul, I was wondering if you could talk about the multifamily transaction market in D.C. Curious if you've seen any buyers taking contrarian bets on the metro and where you're seeing deals, if any, get done today from a cap rate perspective?

Paul McDermott

Sure, Cooper. So just stepping back for a second. My overall observation would be that the living sector is continuing to do well. We're seeing continual capital flows into it. We have the agencies here.
So we see continued liquidity in the debt markets, all of the lenders are active. The agencies are fairly aggressive, and the debt funds are feeding kind of the higher LTV requirements and getting paid for it. And the life companies are still playing well in that 50% to 55% loan to value. I think from the equity perspective, the change that we've seen probably this year are really the Odysseys, is their Qs coming down reentering with strategic capital allocations and really looking for AUM.
The investors that we talk to in the DMV, Cooper, their -- I think their perspective is they're looking at national construction stats down, as we said in our remarks, down 77%. In '26, we'll be over 80% down, as I mentioned in my remarks, you're balancing that with watching single-family mortgage originations at their lowest point in 30 years.
And I look at Washington, D.C. for the fifth quarter in a row, we're one of the top three in rental growth. And I think investors are concluding when they look at this region that when they look at 2026 through 2028, there's a nice runway for rental growth.
So the cap rates that we are seeing and that that's translated into our -- the core buyer profile is, I think, gotten a little bit more competitive, and we've seen cap rates as low as [4.5%] up to 5%, looking at levered IRRs between 9% and 11%. The core plus buyers still solid in that 4.75% to 5.25% cap rate range, looking at 11% to 13% levered IRRs. And then value add, I think that's kind of low to mid-5s depending on vintage and performance, but that levered IRR is really in the 13% to 15% range.
I'd say the 1 thing that we've observed over the last 12 to 18 months is that discount to replacement cost is shrinking, and some of our stronger submarkets here. And so we feel pretty optimistic just about the continued investment sales activity that we're seeing in the region, Cooper.

Cooper Clark

Awesome. And then could you also just touch on the addition of Ron to your Board from a high level and walk us through that process, specifically from a timing perspective as it relates to the announcement of your strategic review?

Paul McDermott

Well, the announcement -- let's start there. The announcement for the strategic review. We made that decision last year coming out of our strategic retreat and just the Board felt it was necessary to look at options to maximize shareholder value. The process for Ron getting on our Board was Ron is a well-known entity.
And our Board, as we've done over the last several years, our Board continues to look at a refreshment process. And I think Ron was just the appropriate candidate. We enjoy his skill set and his operating history and really looking forward to working with them and gaining valuable insights from them.

Operator

Ann Chan, Green Street.

Ann Chan

So could you elaborate on what's driving the acceleration of the Wi-Fi initiative income? And then does this imply a corresponding acceleration in the rollout related expenses as well?

Tiffany Butcher

Sure. Ann, I can start with that. And obviously, Steve can feel free to chime in. But we started rolling out our managed WiFi initiative last year with the first seven communities. We're in the process of installing Phase 2, which is our next four communities.
The installation process has gone a little faster than anticipated, particularly on Stage 2, so we're able to get those projects live a a little bit quicker. And the timing is critical on that given that we are entering our spring and summer leasing season when a lot of leases roll, and we have the ability to roll residents onto that.
The ability to get those systems live earlier and get more residents signed up quickly is allowing us to accelerate our expectations for achieving managed WiFi income this year, which is what led us to increase the amount of revenue we're expecting to get for Managed WiFi.

Steven Freishtat

And Ann, this is Steve. You're correct. There will be an associated charge, so the expenses will see that, but to a lesser extent.

Ann Chan

Okay. And given that guidance hasn't changed, but you're seeing some more contribution from the WiFi income this year and also from bad debt recovery in Atlanta. Should we assume that there's been a shift in revenue composition like in that context, are there any line items you see carrying potential downside in order to serve the midpoint guidance?

Paul McDermott

Yes, Ann. So obviously, as we talked about in the prepared remarks, we had a strong first quarter. First quarter that was above our initial expectations coming into the year. We talked about how we're tracking post quarter end in line with seasonal norms. But when looking at the whole year and looking at the leasing that we need to get done, we're just getting into the busy spring and summer leasing season.
So we still have a lot of leases that will turn over the next few months. And we feel good about the trends, but there is still in the next few months a lot to take care of. And so looking at our guidance and the potential outcomes over the next -- the remainder of the year, we feel that keeping our guidance range unchanged at this point in time is appropriate. But we should know a lot more on our Q2 call and we'll look to update the guidance at that point.

Operator

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

Paul McDermott

Thank you very much, everybody. We appreciate your time today, and we're looking forward to talking to many of you in the coming weeks. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's call. You may disconnect your lines at this time, and we thank you for your participation.