Washington Real Estate Investment Trust (NYSE:WRE) Q2 2022 Results Conference Call July 29, 2022 10:00 AM ET
Company Participants
Amy Hopkins – VP, IR
Paul McDermott – President and CEO
Steve Riffee – EVP and CFO
Grant Montgomery – VP and Head, Research
Conference Call Participants
Blaine Heck – Wells Fargo
Mike Lewis – Truist Securities
Michael Gorman – BTIG
Bill Crow – Raymond James
Alan Peterson – Green Street
Operator
Welcome to the WashREIT Second Quarter 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 of Investor Relations.
Amy, please go ahead.
Amy Hopkins
Good morning, everyone, and thank you for joining us on our second 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; Grant Montgomery, Vice President and Head of Research; Drew Hammond, Vice President, Chief Accounting Officer and Treasurer; and Steven Freishtat, Vice President, Finance.
Before we begin, 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 Investor Relations page of our website.
And with that, I’d like to turn the call over to our President and Chief Executive Officer, Paul McDermott.
Paul McDermott
Thank you, Amy. Good morning, everyone, and thank you for joining our second quarter 2022 earnings call. These are obviously quite interesting times. The capital markets have been disrupted as a result of the Fed’s response to rising inflation, as well as other macro events, yet apartment market fundamentals remain historically strong.
Interest rate movement has caused debt markets to pull back. And as a result, transactional markets have slowed down substantially. However, as an all-cash buyer, we continue to receive calls about acquisition opportunities as certainty of execution is now paramount.
We have completed the deployment of the commercial asset sale proceeds and are working on additional opportunities to continue our growth and geographic diversification. Steve will cover where our portfolio is 1 year after launching major transformation steps and the anniversary of turning the corner from the worst of pandemic leasing conditions, as well as our second quarter results and growth outlook.
But first, I would like to talk about the environment we now face in the near-term as we continue our geographic expansion. As interest rates have risen, deal competition has subsided as leverage buyers face negative terms and have moved to the sideline. Our underwriting has been conservative, and we plan for the potential of a lower gross economy.
We underwrote the expectation for 2023 rent increases to trend down to high single-digits versus the unprecedented double-digit trade-outs we are continuing to experience thus far and to approximate to historical levels after 2023. Depending upon the market, submarket and vintage of assets, we believe cap rates have expanded 30 to 50 basis points, and we’ll continue to monitor price movement as the markets are still volatile.
That said, we have capital to deploy and are being judicious with our underwriting and continue to insist on full due diligence on each acquisition we pursue. Recently, we passed on a transaction as our disciplined due diligence discovered additional capital requirements. While market conditions have changed, we were not able to be compensated adequately by the seller.
Although this decision delays our assumed acquisition timing and lowers near-term guidance, we still have a good pipeline of opportunities and are confident we will complete acquisitions, meeting our requirements this year. In May, we closed on the acquisitions of Alder Park and Marietta Crossing for $178 million, bringing the total size of our Atlanta portfolio to approximately 1,800 units or just over 20% of our total homes.
Our acquired portfolio returns continue to exceed the expectations that we underwrote as we assume that the current very strong rent growth levels would moderate in the coming years. Maintaining this discipline along with focusing on growth, starting with firm initial yield targets has proven to be prudent as the environment shifts.
Thus far, we’ve executed on our geographic expansion by targeting specific assets, but we are also evaluating private portfolios and other opportunities, which would allow us to scale our portfolio more rapidly in line with our strategic direction. While there is currently less product in the market as sellers are assessing conditions, we are working on opportunities to continue to grow, including exploring ways to structure transactions based on net asset values.
These kinds of opportunities take time but may provide excellent mutual value creation opportunities ahead. With that market backdrop, I’d like to comment on the operating environment in our markets. We continue to benefit from good fundamentals, driven by strong demand for value-oriented homes in the DC Metro and Atlanta.
Nearly, 80% of our same-store portfolio is located in Northern Virginia, where effective rents accelerated into the summer months, rising nearly 3.5% on average during the second quarter and 13% year-over-year according to RealPage. New lease trade-outs for the Washington region, which continue to have positive momentum, increased 15.4% for the second quarter, up 430 basis points from last quarter.
In Atlanta, year-over-year effective rents grew by 16.8% in the second quarter as reported by RealPage and remain at near record levels. Our communities are benefiting from strong demand and high retention in addition to significant growth in market rents. Even as the outsized market rent growth that we are seeing today moderates, we foresee sustained demand for our value-oriented price points.
As interest rates have increased, home ownership has become even less affordable for middle-income runners, which comprise the largest share of rental household in our current and target markets. Housing shortages continue to worsen overall, and the lack of affordable housing options is even higher.
According to a recent study, the Washington metro has a shortage of 151,000 housing units and Atlanta has a shortage of 81,000 housing units. Within our Washington metro markets, the premium to own a starter home compared to our current average asking rent is over $1,700 per month. In Atlanta, it’s approximately $1,000 and widening as Atlanta home values have risen nearly 60% compared to 3 years ago.
In fact, the differential cost between renting versus owning nationally is the highest it’s been this century. We’re seeing the impact of rising cost of homeownership and our move-out statistics. As the number of move-outs related to home purchases declined 20% year-over-year during the second quarter and over 25% on a year-to-date basis for our same-store portfolio.
Move-outs driven by home purchases were even lower in our Atlanta communities, representing less than 9% of our second quarter move-outs. Furthermore, the majority of new supply coming into our markets is concentrated outside of the areas where our communities are located. Only 11% of the new supply in Atlanta and less than 1/3 of the new supply in the Washington metro is delivering into WashREIT submarkets in 2022 and 2023.
Moreover, our price points do not compete with new deliveries. Our average effective monthly rent is $800 lower than newly delivered Class A communities in the Washington metro and $480 lower for our Atlanta communities. Given the recent rise in construction and debt costs, we expect supply levels to decline past 2023.
So far this year, we’ve achieved higher rental rates than we had expected and market rent growth has remained very strong into the summer. Over 30% of our lease has expire between July and September, and we expect same-store NOI growth to be higher in the second half of the year as the combination of rate increases earned into our rent roll and final pandemic leases rolling off drives higher overall growth in rental income.
Additionally, income growth remains robust and can support continued rent growth. Median incomes for our Washington metro communities have risen 12% over the past year and 14% for our Atlanta communities from the second half of 2021 to the first half of 2022, underscoring the strengthening credit profile of our resident base as market rents grow.
Given the strong demand levels that we are seeing today, combined with rent increases we have experienced since last July, we are well positioned for strong same-store NOI growth for the rest of 2022 and 2023. The acquisitions we have made throughout 2022 will provide even greater NOI growth. We expect strong NOI, Core FFO and Core AFFO growth going forward, beginning this third quarter of 2022 and further strengthening in 2023.
In fact, with this growth building, I want to be clear that the reason we are lowering the balance of 2022 guidance is because we delayed the timing of the assumed acquisition and are capitalizing less interest because now is not the time to activate development at the Riverside.
As Steve will cover, our growth is now getting stronger. As we continue our transformation, we are rolling out new and improved operational infrastructure that will position us to deliver better service to our residents and operating leverage for our shareholders as we grow. We are making great progress on this part of our transformation, and we continue to uncover new opportunities to improve property level operations.
We’re executing a major overall of our operating model, technology platform, human resource infrastructure and brand strategy ahead of internalizing property level residential operations later this year. This transformation includes 3 phases in total, and we are now moving into Phase III.
Since our last update, we have designed our near-term and future state human capital models and have filled several key positions and are continuing to recruit for corporate positions that will support our internalized model. We are redefining our culture to further support and meet resident needs while incorporating diversity, equity and inclusion and belonging into all people-related aspects of this project.
As we look forward to welcoming the on-site property teams to the company, we are building out our training program and developing compensation and incentive packages to align all team members with our resident-centric mission and long-term vision and ultimately support our business strategy and growth.
We are implementing our core technology platforms and our testing and planning for cutover of third-party data into our new core operating system. We are also creating a resident-focused brand strategy with plans to launch our new name, brand and website later this year. A significant component of our marketing will be focusing on customer experience and technology enablement.
Along with our infrastructure overhaul, we aim to elevate the value living experience for mid-market renters by rolling out a pilot program that brings ease of living and operating cost avoidance provided by smart home and smart building automation. It’s a well-known fact that Class B properties have lagged Class A when it comes to technology investments. But we believe that by tailoring our technology investments to the needs and priorities of our residents, we can improve our resident day-to-day experience at investment levels that make sense for mid-market price points with technologies that will reduce our operating expenses and advance our environmental goals.
Our initial pilot program includes smart door locks, thermostats, water leak sensors and community-wide Wi-Fi designed to ease the resident move-in and living experience. We plan to roll out this pilot initiative as part of our broader plan to improve and streamline the technology used at communities as we start to bring property level operations in-house starting later this year.
We expect the process of onboarding property level operations in each of our communities on to our internal systems to be completed by mid-2023. And for most of the costs related to the broader infrastructure transformation, to be absorbed this year in line with our updated guidance range. By year-end, we expect to have G&A expense base in place going forward, which will not be substantially different from the ongoing level that it is today to support a doubling of our unit count when conditions are appropriate to do so.
The future should provide additional opportunities and benefits to scale the business and optimize our expense base. Meanwhile, we now have significant growth earned into our portfolio as we creatively wait for the best opportunities to further scale. Steve will expand on that further. However, before we cover that, I’d like to provide an update on a couple of our recent ESG initiatives.
We’ve nearly completed the installation of solar panels on 2 of our apartment communities in D.C. When activated, these systems will generate enough clean energy to reduce greenhouse gas emissions equivalent to the impact of 7,800 trees each year. Additionally, this past month, we kicked off the installation of electric vehicle charging stations across all our Maryland communities.
We are coordinating with the state of Maryland, as well as the local electric utility to take advantage of rebates that will potentially cover 100% of the installation cost. We are actively coordinating across our Virginia and D.C. properties to identify and take advantage of other similar rate opportunities to lower the entry cost of installing EV charging for our residents given the increased demand in the past year.
Now, I’d like to turn the call over to Steve to discuss our growth outlook in more detail, capital allocation and planning and our second quarter results and outlook.
Steve Riffee
Thank you, Paul, and good morning, everyone. I’d like to cover where we are at this point, having launched our most significant steps in our transformation 1 year ago and talk about our operating results, trends and outlook before covering our second quarter results and guidance.
We are now in the third quarter of 2022, which represents the first quarter of performance that includes the full allocation of the net proceeds from exiting our commercial businesses. It will also be the first quarter where substantially all of our multifamily leases, that have had at least one post pandemic inflection lease rate increase.
Our transformation was designed to provide tailwinds of growth as opposed to the headwinds facing the commercial office and retail sectors. We had historically strong rent trade-outs since we reached the pandemic rental inflection point beginning on average last July. By the end of this quarter, nearly all of our leases will have captured strong year-over-year rent trade-outs and substantially all pandemic lease consumptions will now burn off.
The growth that we are capturing as we sign new leases remained in the double-digits for leases signed to date with July and August commencement dates, reaching yet a new same-store peak for effective new lease rate trade-outs of 13.9% for July. Our total loss to lease stood at 11% at quarter end and combined, this gives us true visibility into the growth that is ahead.
Starting with the third quarter of 2022, we expect average double-digit same-store multifamily NOI growth for the next 5 quarters. All things considered, we have excellent visibility into very strong NOI and Core FFO growth for the second half of 2022 and all of 2023. On top of our historically strong same-store growth, we have strategically and geographically expanded and invested in Southeast communities, where the year-over-year growth for the months owned in both 2022 and 2023 will be much higher than our same-store growth.
While we are forecasting inflationary impacts on our cost base, most notably payroll and utility costs, we have a rent roll with fully embedded year-over-year rental growth that is further enhanced by the burn off of the pandemic-induced lease concessions. As we capture our loss-to-lease, it will build on top of the growth that is already embedded in our rent roll, driving higher NOI growth, which will carry into 2023.
Given that most of this growth is either earned in or embedded in our loss-to-lease, it is now visible as we begin the third quarter, and again, we expect it to drive strong Core FFO and AFFO growth through 2023 as well.
Another main objective as we launched this final step of our transformation into a multifamily company was to geographically diversify our portfolio. As Paul just gave an update on our recent acquisitions, we’ve made great progress thus far as annualized NOI for our Atlanta communities is expected to be approximately 20% of our multifamily NOI by the fourth quarter of 2022.
We continue to evaluate Southeast acquisitions on an ongoing basis and are exploring additional opportunities to further diversify our geographic concentration. We will monitor capital markets and pursue opportunities to scale and diversify by recycling some lower growth assets in our D.C. metro portfolio into higher-growth Southeastern communities that align with our investment strategies.
We will be disciplined about accessing capital markets, and we certainly see the disruptions to them. We are creatively exploring our opportunities to scale, grow profitably and further expand geographically, including through private portfolios via possible NAV to NAV structured acquisitions that could make sense for both parties. These pursuits take time to evaluate and execute and they provide excellent opportunities to further accomplish our 3 objectives of profitable growth, geographic expansion and profitably scaling the company when it makes sense to do so.
Nevertheless, our primary objective of delivering value and profitable growth is now visible, and we are experiencing it as we begin the third quarter.
Now turning to our operating highlights. Same-store occupancy averaged 95.8% during the quarter, and retention was 63% during the quarter, representing a 6% year-over-year increase. For same-store move-ins that took place during the second quarter, effective new Lease Rate Growth was 11.7% and effective renewal Lease Rate Growth was 10.9%, which went to 11.2%.
We are continuing to achieve mid-teen effective new Lease Rate Growth for our same-store communities, averaging approximately 13.9% for July movement. For Atlanta move-ins that took place during the second quarter, effective new Lease Rate Growth was 17.7% and an effective renewal Lease Rate Growth was 16.3%, which blends to 16.9%.
For July move-in, new lease rates increased 18.2% and renewal lease rates increased 16.3%, resulting in blended Lease Rate Growth of 17% in our Atlanta communities. We expect blended Lease Rate Growth to moderate after the seasonal summer months, but remain above historical levels through 2023. Beyond what’s already reflected in our loss-to-lease, average effective market rent growth is expected to be approximately 11% for the Atlanta region and 6% for the Washington metro area for 2023, according to RealPage data.
Our loss-to-lease stands at 15% of our non-same-store portfolio and just over 10% for our same-store portfolio, which lends to a total loss-to-lease of 11%. We expect to capture our loss-to-lease over the next 12 to 16 months, allowing in-place rents to grow as the portfolio turns.
During the second quarter, we renovated 75 units for a return on investment of a little over 12%, excluding the rent growth that we achieved on comparable unrenovated units. And if you included total rental increases in your ROI, it will look more like 25%. As we continue to acquire communities with renovation potential, we expect renovation-led value creation to have an increasing impact on our growth trajectory, alongside our geographic expansion.
In particular, we expect renovations to extend the tail of our rental rate and NOI growth going forward. We expect to return to our historical annual renovation run rate of approximately 600 units per year as we look forward and then grow as we continue to scale. Our forecast contemplates inflation pressure on wages, utilities, insurance and repairs and maintenance costs into 2023. Even considering those factors, at this point, we expect strong NOI growth in 2023.
Now turning to our financial performance. Net loss for the second quarter of 2022 was approximately $8.9 million or $0.10 per diluted share compared to a net loss of $7 million or $0.08 per diluted share in the prior year. Core FFO was $0.21 per diluted share, reflecting a year-over-year decline of $0.14 due to the impact of our commercial asset sales as well as the timing of reinvestment.
Multifamily same-store NOI grew 5.1% over the prior year driven by higher base rent and occupancy compared to the prior year period, offset in part by higher bad debt. The increase in bad debt was largely due to some increase in delinquencies as a result of an extended eviction time line, while the Virginia’s government assistance program was winding down prior to ending on July 1.
We expect repossessions to increase during the third quarter and for bad debt to show a visible decline in the fourth quarter. Average effective monthly rent per home for the quarter increased 7% compared to the prior year on a same-store basis, which also represents a substantial improvement compared to the 3% year-over-year growth achieved last quarter.
As we mentioned last quarter, we expect the growth in average monthly rent to remain strong over the course of the year as more and more rental growth has been captured in our rent rolls to date. We still have 1/3 of our leases expiring during the third quarter, replacing leases signed what rents were just beginning to recover starting July of last year.
Other NOI, which represents Watergate 600, grew 9.6% in the second quarter compared to the prior year, driven by higher rental income for new leasing and rent increases as well as increased parking usage. Watergate 600 is an architectural landmark and an amenity-rich neighborhood with high-quality institutional tenant base.
Now turning to our outlook for the balance of the year. We are slightly lowering and tightening our guidance range by $0.02 at the midpoint due to a delay in timing of further acquisitions and increased interest costs, including lower capitalized interest and higher interest rates. Neither of these adjustments have changed our outlook for 2023.
We are raising and tightening our same-store multifamily NOI growth guidance and now expect it to range between 8.5% and 9.5%. At the midpoint, this represents 11.5% NOI growth for the last 2 quarters of 2022 and a 25 basis point increase over our prior guidance. NOI growth for same-store and Trove combined also increased and is now expected to be between 12.25% and 13.25%.
Trove was fully invested in both years and represents true year-over-year growth on the same capital investment. Non-same-store multifamily NOI, which consists of Trove, The Oxford, Assembly Eagles Landing, Carlyle of Sandy Springs, Alder Park, Marietta Crossing, and Riverside Development site is expected to be between $22 million and $23 million, of which Trove represents approximately $7 million.
This was slightly lower than previous guidance as operating expenses and bad debt are expected to be higher and capitalized costs related to development are lower. We have raised the midpoint of our guidance for other same-store NOI, which consists solely of Watergate 600 to a range of 13.25% to $13.75 million.
Our FFO guidance range incorporates approximately $125 million of additional acquisitions, now expected in the fourth quarter of this year later than previously guided. This delay in timing, net of carry costs lowered our 2022 guidance by approximately $0.01 per share. The other factor that impacted our prior guidance is that we suspended development activities at Riverside for now and are no longer capitalizing interest for taxes.
As I said, our guidance includes $125 million of additional acquisitions later this year. And when completed, we expect our net debt to adjusted EBITDA to be in the mid-5x range on an annualized basis. G&A net of core adjustments for severance and structuring costs is expected to range between $25.5 million and $26.5 million, excluding the impact of transformation investments for our future platform and our full integration.
Interest expense is now expected to range between $25.5 million and $26.25 million, which reflects the net impact of higher interest rates, later acquisitions and lower capitalized interest during the second half of the year. We expect our Core AFFO payout ratio for the year to be in the mid-70s and establishing an AFFO growth profile that should provide us with additional flexibility to grow the dividend.
And finally, we continue to expect transformation costs, which represent costs related to our strategic transformation, including core systems implementation, branding and human capital initiatives, operating platform design and retention and termination benefits to range from $10.5 million to $11.5 million.
By the end of 2022, we expect to have the infrastructure in place to manage all of our communities in-house, and we expect we will incur our residual transformation costs in 2023. Operating fundamentals are historically strong. And while we expect the current pace of market rent growth to moderate, we see a lot of momentum as the year progresses, which will carry over into 2023.
Much of this near-term growth is embedded in our portfolio today and is being extended further as our in-place leases catch up to increasing market rates. Looking forward, we continue to expect outsized market rent growth in our markets over the near-term, which will drive the top end of our loss-to-lease hire as our in-place lease pool turns.
Trove will provide meaningful growth, experiencing a full-year of stabilized occupancy coupled with initial lease-up concessions burning off. And finally, our value-add renovation and affordability gap strategy and our strong renovation pipeline provide opportunities that we’ve already captured to further extend profitable growth beyond market rent growth levels for the next 3 to 4 years.
And with that, I’ll now turn the call back to Paul.
Paul McDermott
Thank you, Steve. Before I conclude, I want to take a moment to welcome our new Board member, Jenny Banner, who will serve on our Audit and Governance Committees. Jenny is a highly accomplished senior leader with 14 years of CEO experience and 20 years of public company board experience. Among her many accomplishments, she has been a public speaker and consultant globally on the Board’s role in digital transformation, which is an area of focus for us as we continue to improve and streamline our corporate and property level technology infrastructure.
Her technology expertise and leadership will be a great asset for WashREIT. I’d also like to thank the entire Board for their ongoing support and commitment.
To conclude, as we enter the third quarter, we have a line of sight on the best growth outlook we’ve had in recent history. It’s been a year since we embarked on the final phase of our multifamily transformation. With same-store NOI growth expected through the third quarter of 2023 expected to average in the double-digits and even higher growth from our non-same-store communities, our outlook is certainly much better than it was a year ago.
Our internal transformation continues, and we are actively preparing to begin bringing our community operations in-house. Looking forward, we have several exciting announcements on the horizon, including our new resident-focused brand rollout later this year.
While our plans to scale our company might take time as the capital markets disruption subsides, we are confident in our ability to execute on opportunities and grow profitably and to further expand geographically and look forward to delivering very strong growth from our existing communities through 2023 and beyond.
And with that, I will now open the call up to answer-questions.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question today is coming from Blaine Heck from Wells Fargo.
Blaine Heck
So clearly, acquisition expectations are delayed a little bit contributing to your guidance reduction. It sounds like that delay is related to the specific situation you have with that seller. But more generally, Paul, can you give us a sense of whether you expect opportunistic or somewhat distressed situations to emerge, given the disruption in the capital market? What is the overall decline that we’re seeing in transaction volume just more attributable to just price discovery on all deals given the meaningful movement we’ve seen in the cost of capital, but maybe fundamentals are holding up well enough that there isn’t going to be much distressed?
Paul McDermott
Well, great. Let’s — Blaine start with the capital markets where you did. I mean — and let’s start with looking at debt first. If we look at the agencies right now, their coverage ratio constraints and their underwriting on trailing 12 has really started taking them out on deals, I’d say, over 55% LTV. The debt funds who we talked about a couple of calls ago, who were normally very aggressive, well, their costs have increased.
There’s — and thus so is their stabilized debt yield requirements. So they were really — I think they owned a lot of a higher LTV deals and where they were extremely competitive. And the now that — those types of requirements on the debt yield have really hindered them from reaching out and doing those higher LTV deals.
I still think you’re going to see deals and we are seeing deals because we’re known to be an all-cash buyer. And the deals that are going to get done in this market are going to be all-cash or lower leverage, 50% LTV, 55% or lower. I think the biggest thing that has changed probably in the last quarter is the premium that is being given to certainty of execution.
And I think, look, we’ve tied up 5 deals, and we’ve closed 5 deals. I think we are known in the target markets that we’re in that we do offer certainty of execution. We’re not shying away from our underwriting. And as I said in my remarks, I believe our observations of the cap rates have expanded 30 to 50 basis points.
I would say, Blaine, if I was talking about office product, that number is probably going to be higher, same with retail. But I do think there is — because capital costs have increased, you’re definitely seeing some repricing of assets. And I think the larger deals are the portfolio deals.
If I had talked to you 6 months ago, I would have said there probably would have been a premium for portfolios and now we’re seeing discounts. The other big thing Blaine, we’re seeing now is that loan packages or loan sales are really just as important on an investment sales platform as one-offs. There’s definitely been a bifurcation kind of when I look at the markets and especially Blaine, if you’re looking at D.C. in the office market, trophy versus commodity, one of those is getting financed and really one of those has been hit pretty hard. But it really depends on the asset class, the submarket and the vintage in terms of the type of discounts that we would apply.
But we’ve gotten more calls probably in the last 60 to 75 days on deals than we have probably in the 18 months we’ve been in the capital markets. And brokers, most of the brokers that we talk to and even some of the owners, I think people are taking a little bit of a pause for the next 30 days, but we expect to see a surge in product coming to the market after Labor Day.
Blaine Heck
That’s very helpful color. And as you mentioned, you guys are halting development at Riverside at this point, and this is related to the first question, but on the other side of the deal, is there anything to read into that decision with respect to a potential monetization of that asset or even part of that asset? Or would you say it was driven more by kind of the other factors that you mentioned in prepared remarks?
Paul McDermott
I think it’s driven just because we are being prudent in our underwriting. And when we look at our requirements, our initial going in yields on that, we want to see more data points from that market. That market is certainly moving in a positive direction. But when we combine that with the increase in construction costs from when we first started the predevelopment work on that, I think construction costs, Blaine, have gone up probably 20% over the last 2-plus years. That’s the only reason.
We’re still very committed to that asset. We like what we’re seeing in our current same-store pool from the Riverside asset itself. And we think that, that project will be a long-term winner for us. But just right now, we’re really focused on current income as we make this transition.
Blaine Heck
Last one for me, Steve. I wanted to ask about same-store results in the quarter and particularly on the change in rental and other revenue at 5.3%. In the context of average rent per home up 7% year-over-year, along with a 0.7% increase in occupancy. I guess I would have expected the total revenue number to be up more.
Was there anything in other property or elsewhere that offset that rent and occupancy growth?
Paul McDermott
Well, first of all, I think what you’re seeing is that we’ve really been building it. I think you’ll see that kind of growth in the third and the fourth quarter continues. So for us, I think we hit our inflection point a year ago in terms of post pandemic, maybe a little slower than some other markets that started in July.
We have some concessions and all that started to continue to burn off through June that we’re amortizing. We did have a little bit of timing noise in the quarter on both an expense item, a couple of expense items and also that would have affected revenue.
We had probably what we think will be our peak bad debt quarter, which affected revenue a little bit in the second quarter. It’s just literally — we’ve got projections going out for the year, but I think the second quarter was our peak as we looked at just the aging of receivables, the whole clock on getting repossession of units back flips at the beginning of the third quarter, and we were — it was just a little bit extended there. So that may have affected the second quarter a little bit.
And then on the expense side, which is not what you were asking about, but we had just a comparative year-over-year. We had a real estate tax reassessment credit in the second quarter of last year. And so it looks like expenses went up more other than that. And a couple of the assets that we bought in Atlanta is just we were — we have a little bit of timing differences.
We were forecasting exactly when we would incur a few costs, and we hit a couple a month or 2 earlier than we thought we would, just as we were onboarding those assets. But I think when you really look at what we tried to put out there in our prepared remarks, Blaine, we are seeing incredible for our historical levels, trade-outs, new renewal effective lease blended.
Our loss-to-lease was 11% end of the quarter. And we just see this momentum now coming into the third quarter with pretty good visibility. I also would say one other thing because we had our inflection last July, internally, as I look at every week with our team, I was expecting our peak new trade-outs to be in either May or June, and we actually hit another peak in July, which is telling me that we’ve got real strength that’s continuing and our August rents are really strong, too, a little bit longer than I would have thought.
So I feel the revenue is really building. And again, I guess one other thing just to emphasize from their prepared remarks, this is the first quarter. We launched a year ago this transformation. We are now finally fully invested as of July 1 for a whole quarter from the reinvestment of the transformation. And we’re also finally reaching the pandemic lease inflection. So we were setting up for growth. It starts really July 1 for us. And that’s — we’ve been positioning ourselves throughout the last year to get there.
Operator
And the next question is coming from Mike Lewis from Truist Securities.
Mike Lewis
I wanted to follow-up and ask a little more specifically about cap rates. And on the cap rate on your second quarter acquisitions versus what you expect for the fourth quarter ones, you mentioned cap rates moving 30 to 50 basis points. So it’s unfortunate that you got delayed on an acquisition case. But are you benefiting here? In other words, it becomes a drag this year, but you think you’ll — maybe cap rates are a little higher than you thought on the acquisition side, maybe that becomes a little bit more of a tailwind next year? Or am I kind of overstating that movement in acquisition cap rates?
Paul McDermott
Well, let me make a couple of points on your question, Michael. It’s never unfortunate to walk away a deal — walk away from a deal that doesn’t meet your underwriting criteria because somehow some way we think that, that’s going to come back and rear its head. And this particular deal that we had tied up would have met and exceeded our acquisition goals this year, but I’m proud of my team for having the discipline when we didn’t get the capital improvements adjustments that we needed.
Clearly, the market was moving while we tied it up. And we also think that there could be some credit challenges potentially moving forward. So I think this is the time you need to maintain your discipline. But to your point, I think we will probably see, as I said on Blaine’s question, number one, I think we’re going to see a lot more deals in the second half. And just the bid-ask, I would expect that a lot of brokers that are taking on listings right now and even some of the owners, I think they’re becoming more realistic on the bid-ask.
I think some of the sellers, particularly in the Southeastern markets, were a little bit in denial that the market had moved and we were watching deals get retraded all around us, Michael. These are deals that were probably in the mid to upper 3 deals that we’re now going at 4.25% to 4.35% and seeing even in some of the submarkets, those deals getting priced to upper 4s. I think our investors in our portfolio will be a beneficiary longer term and coming in at a better basis.
Mike Lewis
And then second, I wanted to ask you the portfolio now Atlanta is only about 8% of total NOI in 2Q. How aggressively do you go about getting some belts up as a percentage of the portfolio from here? I know you have, like you said, more acquisitions in the back half of the year. Do you think there’s a — does this involve the next stage of either D.C. area dispositions in Sunbelt acquisitions or is it more of a gradual shift in the portfolio over time? And kind of where do you want to end up on that mix?
Steve Riffee
Michael, it’s Steve. I’ll start, and Paul, I’ll just hand it over to you to kind of round it out. Some of those acquisitions and all came in late in the quarter, our models show us at 20% in the fourth quarter in terms of Atlanta NOI as part of it. The other thing I would say is, obviously, they’re growing really well.
And we would have talked and then I’ll get to kind of what we’ll do transactionally. We talked what we were targeting for when we rolled out the transformation to try to get approximately a 4 cap rate a little better. We’re — as of today, for the assets that we’ve acquired, our 12-month yield forecast looking-forward from June 30 to now is a 4.6%. So obviously, we’re getting growth and good returns on what we’ve acquired so far, so that’s growing there.
We have 3 objectives, I think and I may have mentioned this in the prepared remarks. One, we wanted to get out of the headwinds and get the tailwinds behind us and to generate profitable growth. Well, we’re at that 1-year point, where we’ve repositioned the company, and we’ve got really significant growth ahead of us, as I laid out in the remarks. And I think if you model it, it falls all the way down to the bottom line. And hopefully, we’ll be able to give guidance for next year fairly soon in terms of all the way down.
Now secondly, the goal was to geographically expand. And I think we want to continue to do that. 20% is not where we’re stopping, and we want to make it more and more a part of the asset base of the company. And it really diversifies our business risk that also, we believe, with our research allows us to participate in even higher growth.
The third thing is to continue to scale and to scale profitably, that will require external capital, and we’ll do that at the time that it makes sense but we’re not pausing here. We’re actually looking at some creative solutions with private portfolios that can accomplish geographic expansion and scaling if we could agree on NAV to NAV versus just current capital market pricing. Those take a while, but there are people we’re talking to along those lines. So we’re going to continue to be creative. But we also can and will and we’re getting ready to do some of those, we will recycle out of some low-growth assets here and use those proceeds to allocate capital more to the Southeast and hire — and generate higher growth.
So we’re going to — the playbook, some of it we’re not using right now, but we have a big playbook. We wanted to create optionality. And we get a portfolio deal done, I think we can move faster. It’s just we’re going to execute what makes sense at each point along the way. I don’t know if you want to add to that.
Paul McDermott
No, I think that covered it, Steve.
Mike Lewis
And then just one last quick one for me. You have almost no debt maturing in the next several years. So of course, I’m going to ask about the one piece you do have, which is the 2.3% term loan next year. Should we just assume you’ll roll that into another term loan? And how much do you think rate has moved on that?
Steve Riffee
Well, look, I think that’s part of the optionality we have because that is debt that we can repay without penalty. And so we have the option of rolling that back into the bank market into another term loan. But I also want to keep open the possibility that we could pay it off if we got a hold of a portfolio and had to assume another kind of debt instead.
And so we’re going to have both of those options. I think we could definitely extend it if we needed to. But I think it also might be the way that we can structure a potential portfolio transaction where we need to pay off some of our debt.
Operator
And the next question is coming from Michael Gorman from BTIG.
Michael Gorman
Paul, sorry if I missed it, but did you mention the deal that you walked away from because of the discipline on your underwriting. Did that ultimately trade with another buyer? Did they pull it off the market? Is that something that you think will come back as you talk about the next 30 days as sellers reset expectations? What’s the status there?
Paul McDermott
To our knowledge, and as of this call, that deal was pulled, and we would expect — it’s not a fund that is monetizing, but we probably would expect to see that deal potentially in the fall. And I think we’ve done our homework, and I think we’ve underwritten the asset appropriately and calculated the risk, and we stand behind our number that we would acquire that asset at.
Michael Gorman
And then maybe as you talk about your underwriting and then what you’re seeing in the market. And obviously, WashREIT is being disciplined here. Have you gotten more conservative with your underwriting in terms of rent growth over the past 30 to 60 days as you’ve looked at the macro environment? Do you have a sense?
Obviously, the capital markets have been having an impact on cap rates. But have you had a sense that buyers are shifting their underwriting expectations for rent growth in the apartment market as well?
Paul McDermott
Michael, let me answer that in 2 pieces. We — I would say that our team from the get-go has always been disciplined in the underwriting, and we’ve really never thought that these growth rates we are seeing now were sustainable. And last year, when we were losing deals, we took the market rent growth the first year, we pared that down to high single-digits in year 2. And then we returned to normal historical rates, which were mid to low single-digits in the beginning of the third year.
I think we are still comfortable with those, although we’re hedging a little bit. And we’re also digging deeper now into historicals on accounts receivable, bad debt. In addition, I mean, I think we have a great physical team, but we’re counting on that a more moderate increase. Other buyers that we’ve seen come in, especially, Michael, because they — right now, the people that are active in the market or are getting deals done, like I said earlier, either all-cash buyers or they are in the mid-level LTVs.
I think they’ve tightened their underwriting approach, and there’s a particular focus on — particular focus on the credit envelope around that NOI.
Mike Lewis
That’s really good color. And then maybe one more on the underwriting. As you’re doing this transition to the in-house property management, you’re doing the technology rollout, all of those things. How does that factor into how you consider the expense side of your underwriting when you’re looking at these assets, your ability to maybe drive better NOI through the efficiency side as your underwriting assets?
Is that something that you’re not kind of putting through the models yet just because you’re still early in the transition? Or how does that factor into how you’re looking at assets?
Steve Riffee
We certainly factor, Michael, this is Steve. We factored it into our modeling of onboarding all of this. I don’t know that we’ll get the full benefit of it until we actually have everything in-house and is running. But as we look at our property management expenses, about 70% of that is what we pay third parties. And then the balance of it is split between our own internal management overseeing it, doing our overnight pricing and asset management and all of the properties today and then our own technology charges on top of that.
We believe that when you cut out the third-party services and all in that, we have a very scalable base of technology and corporate structure ourselves that there’s a net savings and all of that. Plus, in terms of efficiency and staffing, when you own it yourself, you can operate it consistently across all your properties according to your own model.
So there are things like centralization of certain functions, et cetera, that are factored into our long-term cost structure. We’re factoring it into it. I think it’s going to take until about midyear of next year before all of the properties we currently own are internally on the same system. But thereafter, we believe, we’ll start to realize some of those savings too.
Mike Lewis
And maybe one last one for you. You talked about some of the potentially interesting or innovative transactions in the NAV-to-NAV side for private portfolios. Just of the $125 million of acquisition guidance targeted for kind of fourth quarter of this year. Are any of those private portfolios kind of targeted in that number? Or are those more traditional one-off deals that you’re seeing in your pipeline that you’re underwriting right now?
Steve Riffee
Those are traditional deals that we have site on in our pipeline. And as Paul said, our pipeline is probably going to expand after Labor Day on top of that, plus maybe some other deals that we passed one might be visible again at that point in time. But we’re actually working on assets that could possibly do more than that. That’s what we’re guiding to right now. That is not the portfolio, NAV-to-NAV type structure, which we — those are hard to work out, but there may be ways to do that, that creates value and scale and get our geographic expansion kind of accelerated. So we’re doing those things kind of in addition to our normal in the market, working with brokers and owners to acquire assets.
Operator
The next question is coming from Bill Crow from Raymond James.
Bill Crow
A couple of quickies and then a more theoretical or strategic question. First of all, on the bad debt, I think you all are probably talking about it more than anybody else in the multifamily side. I’m just curious whether it is an issue that’s kind of a Walmart versus Target sort of issue, a submarket issue or why you’re having — seem to be having a little bit more challenge on the bad debt front than your peers?
Steve Riffee
Well, first of all, I think it’s timing because I think we had a pretty light bad debt in the first quarter and they had a heavier when you look at it. I think it’s just literally where we are in terms of the program. In terms of just a couple of the macro things that I think that you’re implying, which is a fair good question, Bill, it’s not a question about income or people’s ability to pay. And I’ll let Grant add a little color in a second to that, too. But right now, we’re back to pre-pandemic rent levels and incomes are much higher.
And it’s really more about the ability to get possession of space versus the ability of renters to pay. In fact, in the units where we’ve had some age delinquency until we hit this — the opportunity to start repossessing, we’re getting 14%, 15%, 17% trade-outs in some cases in the same properties. So there’s a deep market with the ability to pay behind it. But Grant, maybe you could comment, if you don’t mind, just on sort of the macros and incomes and all, if you will.
Grant Montgomery
Sure, happy to. Yes. So in our portfolio, our average rents have increased approximately $350 since March 2020, with the onset of the pandemic. Meanwhile, in the Washington metro, monthly incomes across the region have grown about $570. And we mentioned in the call within our portfolio, our actual residents incomes are up 12% year-over-year in the Washington region in really just over the last 6 months comparing to end of 2021 with the beginning of 2022, incomes are over 14% for our residents in our Atlanta properties. So as Steve said, it’s really not a wherewithal issue at all in terms of incomes versus rents.
Bill Crow
Second question, I think you said retention was 68%. I think it was somewhere in that range of 60s. I’m curious how many of those people are leaving to buy houses and whether you think you’ve seen any benefit over the last month or 2 from the shoot-up in mortgage rates?
Grant Montgomery
Yes, we certainly have both in our Washington market and in our Atlanta market. And our Washington market, the reason for move out to home purchase has declined about 20% compared to the prior year. Where in Atlanta, it’s been even more dramatic, and it’s about a 50% change. It’s actually under 9% move-out and that had been more in the high-teens as recently as the beginning of the beginning of the year.
Bill Crow
And then I guess bigger picture, Paul, one of the things that I’ve admired of you since we first met was your aggressiveness and you really — you’re focused on driving shareholder value. And I’m just curious, as you continue to trade, what, 100 basis points wide of the multifamily REIT group on a cap rate basis. But also as you continue to build out your company and add a lot of employees, does it change the way you might think about selling the comp, if you were to get a bid, how you might react to that?
Paul McDermott
Bill, I think in our first discussion way back when I said, first and foremost, we’re going to do the right thing for the shareholders. I think right now, we’re trading down along 52-week lows in that region. 90 days ago, we were at a much different number and had broader options. But I think what we’re doing right now is creating value for our shareholders.
I think everything we’re doing with project reimagine, bringing the operations back in-house, diversifying our portfolio, recycling out of lower-growth assets into higher-growth assets. Our thesis and our execution has always lent itself to creating value for our shareholders. I know the cap rates that we’re trading at right now. Do I think that we can do better? I think when you start seeing our next quarter’s performance, maybe the next 5 quarters performance, I think our stock will improve. And we’re not a group that picks up our jacks and goes home when we hit a speed bump.
I still think there’s a lot of value to create here. But of course, we’re always going to do what’s in the best interest of our shareholders, and we’re going to be consistent about that, Bill.
Operator
The next question is coming from Alan Peterson from Green Street.
Alan Peterson
I was just hoping to get some more color around the lower growth D.C. assets. And in terms of the initial marketing or when you guys are having those marketing discussions, can you share what pricing is looking like for those types of assets? And amongst the 3 submarket locations, Maryland, D.C. and Virginia, where we could potentially see some of those dispositions come out of?
Paul McDermott
I think right now, I mean, we are — I’ll start with D.C. I think the trade-outs we’re seeing are strong in D.C. The challenge that you’re seeing in D.C. right now, there’s a couple of them. First is that we had caps on our ability to increase rents and over the last 24 months, basically.
And now that those have come off, a lot of the buyers that we talk to and a lot of the brokers, investors want to see a little bit more seasoning and particularly flush out the ARR numbers. But we’re definitely — we definitely know the market is there. I think people are — D.C. does perform well when other markets don’t. And so I still feel like there’s a lot there. The biggest challenge in D.C. right now is we still have TOPA.
So for buyers that want to use leverage, they’re in a little bit of a jam on a, let’s say, a forward rate lock deal where TOPA might take 6 months, you can’t get a spread lock. So I think that’s hindered the deal pace. But overall, I think D.C., like we said before in our prepared comments, D.C. is back to and is better than prepandemic. So I just think it’s a matter of time since I think more prudent investors are being sensitive to credit standards applied by operators.
If I turn to Virginia, I’d say Virginia is — Northern Virginia is the most active in our region. The macro economy is outperforming and deals are getting more attention. I think there’s probably 2x or 3x as many deals, apartment deals in Northern Virginia right now as there are on the market in D.C. There aren’t really any accounts receivable or bad debt issues. And Northern Virginia is seeing excellent trade-outs as we’ve also said.
Maryland is still seeing activity, not to the level of Northern Virginia. I think, again, another market, particularly in Montgomery County, when you look up the I-270 corridor, rent caps are coming off and job and wage growth are keeping investors’ interest, particularly in the Life Sciences Corridor up on 270. So we feel good about what we have here right now, we think the market is coming back to us.
And in terms of are we — what we would sell, we look at opportunities where we can allocate from, let’s call it, a moderate growth to a higher growth. Those will be the assets that we choose, and we’re not really expecting a lot of dilution in this recycling.
Alan Peterson
Steve, you mentioned the capital markets discipline. And back in 4Q ‘21 and 1Q ‘22, you guys brought some market some ATM issuances. Is ATM issuances still part of the go-forward funding plan for acquisitions today? And can we anticipate any ATM issuances over, call it, the next 2 quarters at these pricing levels?
Steve Riffee
Well, first of all, I wouldn’t indicate advance of issuing equity and create an overhang on the stock. But — and ATM is a part of the playbook, but it’s not a part we’re using today at these stock prices. So I don’t think it makes sense to us to issue equity at these prices.
Now I think potentially exchanging units on an NAV-to-NAV basis in a structured transaction, you’re getting a different relative value for those. So those are the kind — but we were at $26 just 3 days after this call a quarter ago, and we’re not there today. So not at these levels, but we’ll be prepared to use that if it makes sense and if the equity markets come back.
Alan Peterson
Maybe just one last one for me on the transition. I appreciate the comments on the human capital side. Are you guys running into any difficulty either at the corporate level or at the on-site level in terms of hiring? And what positions are you running into the most difficulty with?
Paul McDermott
Steve and I will ham and egg this one. First off, yes, it’s a very competitive labor market, not just attracting but retention. And so we’re all eyes on that in terms of our human capital model and our Head of HR has been very proactive, especially on the retention side. But in addition, I would say that we’re trying to build up our corporate infrastructure to prepare for the onboarding later this year, and as Steve said, into mid next year.
I think it’s really been at the property level. I think we have a good start on that, obviously, with our third-party managers, and we expect a lot of seamless transition there as we onboard those employees that come along with the properties. I think at the corporate level, it would probably be very job specific. Steve, I don’t know if you want to add.
Steve Riffee
I think you hit it. I mean, we have a really weekly status by position of what positions we want to onboard when and we’re building the infrastructure and the leadership and the regional leadership and all out. We’ve been — I think you would say, Paul, we’ve been recruiting our own third-party management staff now for a couple of quarters and are communicating with them.
And we’re part of our program of really assimilating multiple cultures into our mission and vision for the renters that we target. And so we’re bringing together 3 cultures into 1. And so there’s been a lot of work done on that to try to make sure that this is a place that our employees are going to want to work and be proud of. So we’re looking at everything from what the incentive programs are to, how we will reward people, how we will make them feel they have access or included in what we’re trying to do.
And so a lot of that is we have a lot of the people that are in the communities already target specifically to come aboard. We’re going to have to add to it because it’s a — it will be a challenging job market. But I think we’ve got pretty good visibility and have been working on it for a couple of quarters, Paul.
Paul McDermott
Yes, the only other thing I’d add, Alan, is just obviously, workplace flexibility is high on a number of people’s agendas and we’re trying to incorporate that into our human capital structure moving forward.
Operator
There are no more questions in queue. I would now like to hand the call back to Paul McDermott for closing remarks.
Paul McDermott
Thank you. Again, I’d like to thank everyone for your time and interest today. We will continue to update you as we progress our multifamily transformation, and we look forward to speaking with many of you over the next several weeks. Thank you, everyone.
Operator
Thank you, ladies and gentlemen. This does conclude today’s conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.
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