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Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Drew Hammond, Vice President, Chief Accounting Officer and Treasurer; and Grant Montgomery, Vice President and Head of Research.
I'd like to start off with an update on the progress of our Southeastern market expansion, following our commercial asset sales.
I will also discuss the efforts that are underway to transform our operating model and current market conditions in the DC Metro and Atlanta, where we are actively growing our footprint.
Steve will then update you on our portfolio performance and trends and we'll discuss our third quarter results and outlook as we execute our transformation.
Starting with our geographic expansion.
We are pleased to report that in just over four months since our transformation announcement, we have already deployed or tied up over 55% of our $450 million target.
We have deployed or under binding contract to deploy approximately $154 million and we have been awarded another $97 million that is moving toward a binding contract.
We also have other opportunities that we are pursuing, all of which in line with our strategies and offer very strong NOI growth prospects.
We have a very active pipeline and remain confident that we will meet our target over the balance of this year and perhaps into early next year.
During the quarter, we closed the sales of our office and retail portfolios as planned.
We closed our first Southeastern multifamily acquisition, The Oxford, on August 10th for $48 million.
We have three additional acquisitions in process, including two communities that are under binding contracts of $106 million and the $97 million property that is moving toward the binding contract.
We expect all three to close during the fourth quarter.
We have and will remain disciplined and we are only underwriting assets that fit our strategy and provide stronger NOI growth.
Three of our initial properties aligned with our B Class portfolio strategy, with price points that target the deepest demand segments in their respective sub-markets and the other property aligns with our Class B value-add strategy and offers a near-term value-add renovation pipeline.
Our first acquisition, The Oxford, is a 240 unit garden-style community in the city of Conyers, Georgia.
The area is primarily comprised of family households who want the benefits of living in the suburbs, combined with connectivity with downtown, midtown and the South Atlanta business districts, along with the proximity to local employment nodes, including the Interstate 20 corridor, which is experiencing significant investment as employers expand into the area.
The Oxford was built in 1999 and over the past five years same-store rent growth for the submarkets 1999 product has outperformed the average for all 90s vintage apartments in the Atlanta market and significantly outperformed the overall Atlanta market rent growth for all apartments.
Over the past three years, the submarket has widened its outperformance versus the region's 90s vintage rent growth by over 3%.
The Oxford has performed very well during the first two-and-a- half months we've operated it, with very strong new lease rate growth of 25% during September and increasing to 26% in October.
Occupancy is tracking above our expectations, driven by very high retention rates and new leasing activity.
We acquired The Oxford at a cap rate of 4.7% and we expect an NOI growth rate that will be very high for the next three years.
Two of the properties that we currently expect to close in the fourth quarter are located in Henry County in the southern suburbs of Atlanta, where rent growth has outperformed the overall Atlanta market on a trailing five and three-year basis and is projected to continue to outperform over the next several years.
These properties are a strategic fit, aligning with our Class B portfolio strategy.
We will provide more details after we close.
In terms of our plans for our remaining capital and growth beyond, we are underwriting opportunities to acquire Southeastern communities, with low double-digit NOI growth prospects, which is stronger than our initial expectations when we decided to enter these markets.
While the Southeastern markets are competitive, we have several advantages that appeal to sellers and are helping us to succeed.
We have a 55-year track record of owning and operating multifamily properties and a strong track record of execution, which allows for a smooth and efficient due diligence process.
We have well-established relationships in the multifamily industry that transcend into our new Southeastern growth markets that we are profiting from.
Additionally, we are an all cash buyer with no financing contingencies, which sets us apart and adds a greater level of certainty of execution to the seller.
While cap rates have tightened further since June, we are keying in on opportunities that will yield outsized rent and NOI growth and align with our strategic goals.
Investment discipline is critical for us and we spend a lot of time and effort, researching and selecting our target markets and strategies for each market.
Our research tells us that the industrial mix of an economy can determine what rent growth will look like over the long-term.
Our current target markets of Atlanta, Raleigh-Durham and Charlotte have outsized exposure to industry that drive productivity growth, which creates a virtual feedback loop of job and income growth in migration and increasing education levels.
Year-over-year effect of rents for Atlanta, Raleigh/Durham and Charlotte grew by 19.8%, 19% and 17.6% respectively in September as reported by RealPage.
New lease trade outs were even stronger, averaging 22.7% across the three markets and a 580 basis point inflection between June and September.
Annual demand also serves across these markets as in migration and household formation drove record-setting absorption.
Reported first quarter annual demand had already exceeded the five-year average in each target market, yet it climbed over 23% higher from the first and the third quarters.
Raleigh/Durham posted a second quarter annual demand at 142% of its five-year average, while Charlotte and Atlanta second quarter annual demand topped 162% and 161% of their five-year averages respectively.
In order to maintain a disciplined approach and invest in these economies without competing with new supply, we're evaluating acquisition opportunities at the submarket level and targeting vintages with price points located at the deepest section of the demand curve.
We are targeting renters that are benefiting from economic and wage growth, but remain underserved by new supply, which provides us the opportunity to create a quality living experience, while also growing rents without competing with new supply.
We remain in active negotiations, pursuing additional opportunities and would like to tie up another $200 million in multifamily assets that we expect can now be completed by early 2022.
Again, we remain disciplined and are committed to allocating capital according to our strategy.
We have passed on opportunities that did not meet our criteria or would not generate accretive growth.
While we believe diversifying and expanding our footprint makes sense, we will also continue to explore acquisition opportunities in Northern Virginia, should they create greater value.
The Washington apartment market is exhibiting some of the same positive trends that we are seeing in our Southeastern target markets.
Year-over-year effective rents climbed 640 basis points from June to September.
Suburban Virginia's performance followed a similar pattern, but with even stronger growth with year-over-year effective rent growth accelerating to 9.7% in September.
Our DC portfolio is positioned well with 80% of our portfolio in Northern Virginia where the rapidly expanding consumer technology sector continues to drive job and income growth.
Furthermore, our value-oriented price points offer favorable supply and demand fundamentals over the long-term as the regional housing shortage worsens and cost of ownership and new apartment supply remains unaffordable for mid-market renters.
As many of you know we have been planning this transformation for several years and our transformation plan includes bringing property level management in-house while building a new operating platform for the future.
Over the past year, we have worked with a consultant to map out a plan to optimize our operational design as we scale our multifamily portfolio.
We are now in phase one of this project, which includes three phases in total.
We're making steady progress against the road map that we laid out and we anticipate that by the time of our year-end call, we will have selected all technology, establish the elements required to support our operations including a comprehensive human capital program and established a new brand that best defines our approach for investors, residents and employees.
At that time, we expect to be able to give guidance on G&A and transformation costs as we will be actively building out the platform.
We hope to execute phase two, which includes core platform implementation in 2022 and phase three, which incorporates the onboarding of our property management functions to our internal systems starting in late 2022 into mid-2023.
While we control our revenue strategy and do all capital planning internally, day-to-day marketing, maintenance and property management staffing have been outsourced.
Following the complete internalization of property management and enhancements to our operational platform, we expect to realize significant operational benefits from streamlining our business processes through the use of technology to establishing a closer connection with our residents to operational design efficiencies as we scale the business and optimize G&A expenses.
At the property level, we believe that there are operating efficiencies ahead of us from internalizing property management because we are designing an operating platform aligned with our strategies for resident experience and employee satisfaction and growth.
By utilizing corporate functions in a centralized model, we can be highly scalable, which will allow us to grow NOI at a much higher rate than G&A expenses.
By designing and implementing our operating platform from scratch, we are not limited by existing infrastructure and will offer value and opportunity to all our stakeholders.
The lease rate momentum that we experienced during the summer months has continued into the fall and we are positioned well heading into the winter months with low double-digit lease rate growth on our most recent new lease executions.
New lease rate growth was 9% for leases signed in September and 11% for leases signed thus far in October on an effective basis.
On the renewal side there has been very strong demand and the renewal lease rate growth was over 6% for September renewals and over 7% for October renewals on an effective basis.
Concessions declined dramatically from June through September and are nearing pre-COVID levels.
Total concessions for September move-ins declined over 95% compared to June move-ins driven by both a decline in the number of new leases with concessions and a decline in the average concession amount per lease.
The percentage of new leases with concessions declined from an average level of 60% during the first half of the year to only 9% of new leases for September move-ins.
The average concession value for new leases where concessions were granted, declined by 60% from $1300 for June move-ins to approximately $560 per home for September move-ins.
Occupancy remains strong, with a forward trend that will allow us to continue to increase rents.
Same-store average occupancy grew 40 basis points in October, compared to the third quarter.
Our suburban lease rates continue to outperform our urban lease rates, although the gap has narrowed due to the strong rebound we're experiencing in our urban portfolio.
Blended lease rate growth was 7% for leases signed in September and over 8% for leases signed in October on an effective basis which represents a significant increase in the third quarter average.
For move-ins that took place during the third quarter, blended lease rate growth was 3.5% on average on an effective basis, representing a 620 basis point increase from the second quarter.
Lease rate growth for September and October move-ins and lease executions with November and December move-in dates, indicates steady and consistent improvement through year-end.
We expect strong lease rate growth through the winter months and into the spring and summer leasing seasons in 2022.
Rents have shown a swift recovery.
The inflection as indicated by the rapid weekly improvement in lease rate growth, began toward the end of June and rental rates improved rapidly through the summer.
In August, we started signing new leases that were above pre-COVID levels for the majority of our portfolio.
Specifically, the average effective rent for new leases in the third quarter was above the same month in 2019 for 17 of our 21 same-store properties.
In fact, new leases for our suburban portfolio were 10% above the 2019 level on average in the third quarter, highlighting how well our suburban properties performed during the pandemic.
We expect to see steady growth in average portfoliowide rent levels, as the market recovery works its way in our rent roll, over the next year.
Our ability to capture this embedded growth will be slower during the winter months, as less than 25% of our leases expire between November and December.
During this time, we will be focused on balancing rent growth with retention as maintaining a balance and fundamentals heading into 2022 will set us up, for anticipated exceptionally strong spring and summer leasing season.
As we enter the spring and summer, we will be positioned to capture both the impact of the recovery and market rent growth beyond the COVID-related recovery.
Trove lease-up momentum continues and it is now over 85% occupied.
We expect Trove to be a key growth driver adding approximately $7 million of NOI in 2022 and $7.6 million of NOI in 2023.
We also continued to monitor demand levels at Riverside, where we have a shovel-ready opportunity to add 767 units which we put on hold when COVID hit.
While lease executions of Riverside are on a positive trend, we're currently monitoring projected lease rate growth, to support this development.
Our renovation programs are actively ramping up, after they were temporarily paused during the pandemic.
We have a pipeline of approximately 2,700 units in our same-store portfolio.
As expected, the pace of renovations picked up through the summer months, while unit turnover is seasonally high.
In many cases we preserve the renovation opportunity for the next turn, as we're achieving strong effective rent growth without currently having to make a capital investment.
Year-to-date we have fully renovated over 130 units and have invested capital in upgrading 110 additional units.
We are securing low to mid double-digit cash on cash returns year-to-date.
We expect to spend $3 million in our renovation program this year ramping up to approximately $7.50 million to $8 million next year for the current same-store portfolio.
In the spirit of our transformation into a multifamily REIT, we have made changes to our earnings materials and non-GAAP financial metrics to be more in line with and comparable to other multifamily REITs.
First, we provided a more detailed expense breakdown of both controllable and non-controllable expenses including property operating, taxes and insurance and property management.
Second, we've included detail of our same-store operating results by geographic region as we continue executing our strategic plan to diversify in the multiple geographic regions.
Third, we modified our calculation of NOI to exclude property management expense which is more consistent, with the multifamily industry standard and better presents the impact of our trends in occupancy rates, rental rates and operating costs and our operating performance.
We retrospectively adjusted our previously reported multifamily NOI for comparability.
And overall this adjustment has increased our NOI margin by 300 to 400 basis points.
Fourth, we updated our definition of NOI for residential communities to exclude NOI from ground level retail tenants.
Fifth we changed the name of the non-GAAP measure funds available for distribution or FAD to AFFO because we believe that AFFO is the more common term in the multifamily sector.
We do not make any change to the calculation and there is no difference in the definition of AFFO and FAD as previously labeled.
Sixth, we expanded our disclosure of same-store metrics adding operating margin and effective lease rate growth.
All of these adjustments are described in detail on page 14 of the third quarter earnings package.
Now turning to financial performance.
Net income for the third quarter of 2021 was approximately $31 million or $0.37 per diluted share compared to a net loss of $1 million or $0.01 per diluted share in the prior year.
Core FFO was $0.20 per diluted share reflecting a year-over-year decline of $0.16 due to the impact of our commercial asset sales.
Multifamily same-store NOI declined 40 basis points compared to the prior year driven by the impact of leases signed during the pandemic.
As expected, the rapid rebound in core multifamily operating trends that began toward the end of the second quarter is and will continue to have a more gradual impact on our financial performance.
While new lease executions began to improve rapidly starting in June and into July those movements started to impact our results in late August and we expect the inflection in lease rates to have a greater impact on our fourth quarter results.
Furthermore, the impact of the concession amortization peaked during the third quarter driven by the timing of the peak in concessions which occurred toward the very end of 2020 and into the first quarter of 2021.
The impact of concessions and amortization or in monthly NOI peaked in August and began to decline on a monthly basis in September.
Excluding the impact of amortization related to concessions granted in prior periods same-store multifamily NOI increased 2% on a year-over-year basis during the third quarter.
Our resident credit continues to be excellent.
For the small amount, of delinquent rents that we have local rent assistance programs have helped us on the margin today.
We collected 99% of multifamily rents during the third quarter and received $400,000 of local government rent assistance from residents.
Year-to-date residents have received over $1.4 million of rental assistance.
Other NOI which represents Watergate 600 declined 4.9% in the third quarter compared to the prior year primarily due to higher taxes and payroll expenses and a favorable bad debt recovery in the prior year period.
Leasing activity at Watergate 600 has been steady, despite the challenging environment of the DC office market.
We signed an 8200 square foot new lease with a credit tenant during the quarter and two renewals and one expansion post quarter end.
Our percentage leased has increased to 92% and we have activity to allow us to create further value in the asset.
This one remaining office asset is an iconic building with Riverfront and monument views, high-quality institutional tenants and a weighted average lease term of eight years and we continue to see opportunity to create value by owning and leasing Watergate 600.
Now touching on our outlook for the balance of the year.
We are reinstating full year 2021 guidance with a core FFO range of $1.05 per share to $1.08 per share.
We estimate that our same-store multifamily portfolio will contribute between 90 and $90.5 million of NOI for the year.
At the midpoint this implies an approximate 4.5% multifamily growth rate for the fourth quarter compared to the prior year period.
We expect healthy same-store NOI growth in the fourth quarter and further growth in 2022.
Trove and The Oxford are expected to contribute between $3.75 million and $4.25 million of 2021 NOI.
Watergate 600 is expected to contribute approximately $12.75 million of NOI.
We completed the sale of the office portfolio on July 26th for gross proceeds of $766 million and completed the sale of retail portfolio on September 22nd for gross proceeds of $168.3 million.
We acquired The Oxford on August 10th, which as Paul highlighted has performed very well thus far and is tracking ahead of underwriting based on rents.
As we've discussed, we entered into binding agreements to acquire two communities in the Atlanta market for $106 million and are moving toward an additional binding agreement for another property $97 million.
All three of these transactions are expected to close during the fourth quarter.
We redeemed all $300 million of senior unsecured notes that previously were scheduled to mature in 2022 on August 26 and repaid $150 million of amounts outstanding under the term loan maturing in 2023 on September 27.
We ended the quarter with a very low net debt to EBITDA ratio of 1.4 times.
While we may be in the mid to high five times net debt to adjusted EBITDA range in the first year after executing these transactions, as we progress through the second and third years of multifamily NOI growth, we would aspire to operate in the lower half of the five times to six times range.
We have very little debt maturing in the near term none earlier than 2023.
And our equity versus debt ratio is expected to get close to 80% to 20% which will be very strong.
We have no secured debt in our capital structure, which provides us with flexibility to take on some agency debt or other secured debt as we acquire apartments.
Moreover, we believe we will continue to have most of our line available.
So strong liquidity will be maintained.
We currently have approximately $1 billion of liquidity including the full availability of our $700 million line of credit, which we further extended another four years this quarter.
With this report, we are proud to be among the first multifamily REITs to commit to achieving net-zero carbon operations.
We detail a number of exciting ESG projects underway including pursuit of green building certifications for multifamily Class B assets growing our pipeline on on-site solar projects and the integration of climate risk into the company's overall enterprise risk management framework including evaluating climate risk and asset resilience as part of our underwriting process.
Overall, we are off to a very good start progressing on our geographic expansion and have executed most of our transformation to a multifamily company.
We have completed the sale of our commercial segments and we have closed on one asset have two others under contract and as we said have been awarded one more asset in Atlanta.
We have an active pipeline of opportunities that align with our strategies and we remain confident, we can allocate this capital appropriately over the balance of this year and into early next year.
For the balance of 2021, we remain focused on investing our remaining capital and firming up our plan to transform and expand our operating model.
We expect to achieve operating efficiencies as we scale the business and execute our plan to bring property-level operations back in-house.
We look forward to keeping you updated on our progress as we expand our geographic footprint and transform our operating platform.

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q3 core ffo per share $0.20.
core ffo for 2021 is expected to be $1.05 to $1.08 per share.

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