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Item 2. Management’s Discussion and Analysis

2022-10-28 compared with 2022-07-29 · 108 added, 96 removed, 362 unchanged (36% of the section changed)

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The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on February 18, 2022.

We refer to the three months ended June 30, 2022 and June 30, 2021 as the “2022 Quarter” and the “2021 Quarter,” respectively, and the six months ended June 30, 2022 and June 30, 2021 as the “2022 Period” and “2021 Period,” respectively.

We refer to the three months ended September 30, 2022 and September 30, 2021 as the “2022 Quarter” and the “2021 Quarter,” respectively, and the nine months ended September 30, 2022 and September 30, 2021 as the “2022 Period” and “2021 Period,” respectively.

Forward-Looking Statements

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In some cases, you can identify forward looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters.

Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

Additional factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to:

risks associated with our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of residential properties in the Southeastern markets, on the terms anticipated, or at all, and to realize any anticipated benefits, including the performance of any acquired residential properties at the levels anticipated;

Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Elme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

Additional factors which may cause the actual results, performance, or achievements of Elme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to:

risks associated with our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of apartment homes in the Sunbelt markets, on the terms anticipated, or at all, the operational benefits from our operating model redesign on the timing contemplated or at all, and to realize any anticipated returns and benefits, including the performance of any acquired residential properties at the levels anticipated;

the risks associated with ownership of real estate in general and our real estate assets in particular;

the economic health of the areas in which our properties are located, particularly with respect to greater Washington, DC metro region and the larger Southeastern region;

the economic health of the areas in which our properties are located, particularly with respect to greater Washington, DC metro region and the larger Sunbelt region;

the risk of failure to enter into and/or complete contemplated acquisitions and dispositions, at all, within the price ranges anticipated and on the terms and timing anticipated;

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whether our estimated transformation costs for 2022 will be correct;

whether we will realize significant operation benefits from our operating model redesign on the timing contemplated or at all;

and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2021 Form 10-K filed on February 18, 2022.

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• Average occupancy , calculated as average daily occupied apartment homes as a percentage of total apartment homes.

For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store”.

Same-store portfolio properties include properties that were owned for the entirety of the years being compared, and exclude properties under redevelopment or development and properties acquired, sold or classified as held for sale during the years being compared.

For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store.” Same-store portfolio properties include properties that were owned for the entirety of the years being compared, and exclude properties under redevelopment or development and properties acquired, sold or classified as held for sale during the years being compared.

We define development properties as those for which we have planned or ongoing major construction activities on existing or acquired land pursuant to an authorized development plan.

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Our revenues are derived primarily from the ownership and operation of income producing properties.

As of June 30, 2022, we owned approximately 8,900 residential apartment homes in the Washington, DC metro and Southeastern regions.

As of September 30, 2022, we owned approximately 8,900 residential apartment homes in the Washington, DC metro and Sunbelt regions.

We also own and operate approximately 300,000 square feet of commercial space in the Washington, DC metro region.

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The dispositions of the Office Portfolio and Retail Portfolio are part of a strategic shift away from the commercial sector to the residential sector, which simplified our portfolio to one reportable segment (residential) (the “strategic transformation”).

We used the net proceeds from the sales to fund the expansion of our residential platform through acquisitions in Southeastern markets and to reduce our leverage by repaying outstanding debt.

We used the net proceeds from the sales to fund the expansion of our residential platform through acquisitions in Sunbelt markets and to reduce our leverage by repaying outstanding debt.

During the third and fourth quarters of 2021, we completed the acquisitions of two apartment communities in Georgia for contract purchase prices of $48.0 million and $106.0 million, respectively.

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We recognized $2.4 million and $6.6 million of transformation costs, net of amounts capitalized, on the condensed consolidated statements of operations during the 2022 Quarter and 2022 Period, respectively, and anticipate incurring approximately $3.0 - $4.0 million of additional transformation costs during 2022.

Community onboarding is expected to be completed in phases starting in October 2022.

We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023.

In October 2022, the Company changed its name from Washington Real Estate Investment Trust to Elme Communities reflecting the Company’s continued transition into a focused multifamily company, and subsequent geographic expansion into Sunbelt markets.

On October 20, 2022, the Company’s ticker symbol on the New York Stock Exchange changed from “WRE” to “ELME.”

Operating Results

Net loss, NOI and NAREIT FFO for the three months ended June 30, 2022 and 2021 were as follows (in thousands):

Three Months Ended June 30,

Net loss, NOI and NAREIT FFO for the three months ended September 30, 2022 and 2021 were as follows (in thousands):

Three Months Ended September 30,

2022 2021 $ Change % Change

Net loss $ (8,874) $ (6,992) $ (1,882) 26.9 %

Net (loss) income $ (10,739) $ 31,319 $ (42,058) (134.3) %

$ 35,042 $ 27,054 $ 7,988 29.5 %

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(2) See page 41 of the MD&A for a reconciliation of NAREIT FFO to net income.

The increase in net loss is primarily due to lower income from discontinued operations ($9.7 million) due to the sales of the Office Portfolio and Retail Portfolio during 2021, higher depreciation and amortization expenses ($6.7 million), higher general and administrative expenses ($1.4 million), lower other income ($1.5 million) and higher property management expenses ($0.3 million).

These were partially offset by higher NOI ($6.2 million), the loss on interest rate derivatives in 2021 ($5.8 million), lower interest expense ($4.0 million) and lower transformation expenses ($1.8 million).

The increase in net loss is primarily due to gains on sale of real estate ($46.4 million) in 2021 and lower income from discontinued operations ($7.2 million) due to the sales of the Office Portfolio and Retail Portfolio during 2021, higher depreciation and amortization expenses ($5.4 million), higher transformation expenses ($1.4 million) and higher property management expenses ($0.4 million).

These were partially offset by higher NOI ($8.0 million), lower loss on extinguishment of debt ($7.8 million), lower general and administrative expenses ($1.5 million) and lower interest expense ($1.5 million).

The higher NOI is primarily due to the acquisitions of Assembly Eagles Landing ($1.2 million) and The Oxford ($0.2 million) in 2021 and Carlyle of Sandy Spring ($1.4 million), Marietta Crossing ($1.1 million) and Alder Park ($0.8 million) in 2022, higher NOI from same-store properties ($2.3 million) and higher NOI from Trove ($0.8 million), which achieved stabilization in the fourth quarter of 2021, and higher NOI at Watergate 600 ($0.2 million).

The higher same-store NOI was primarily due to higher rental rates and occupancy.

Residential same-store average occupancy for our portfolio increased to 95.8% as of June 30, 2022 from 95.1% as of June 30, 2021, due to higher occupancy across the portfolio as the portfolio recovers from the COVID-19 pandemic.

The lower NAREIT FFO is primarily due to lower income from discontinued operations, net of depreciation and amortization ($20.0 million), lower other income ($1.5 million), higher general and administrative expenses ($1.4 million) and higher property management expenses ($0.3 million).

The higher same-store NOI was primarily due to higher rental rates.

Residential same-store average occupancy for our portfolio decreased to 95.6% as of September 30, 2022 from 95.8% as of September 30, 2021.

The higher NAREIT FFO is primarily due to higher NOI ($8.0 million), lower loss on extinguishment of debt ($7.8 million), lower general and administrative expenses ($1.5 million) and lower interest expense ($1.5 million), partially offset by lower income from discontinued operations ($7.2 million), higher transformation expenses ($1.4 million) and higher property management expenses ($0.4 million).

Investment Activity

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• Issuance of 1.0 million common shares at a weighted average price per share of $26.27 for net proceeds of $26.9 million through our at-the-market program.

As of June 30, 2022, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 1.79% and the facility fee was 0.20%.

As of July 25, 2022, we had no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility and $31.4 million of cash on hand.

• In September 2022, we extinguished the aggregate $76.5 million of mortgages secured by Marietta Crossing and Alder Park through defeasance arrangements, recognizing an aggregate loss on extinguishment of debt of $4.9 million.

We partially funded the defeasances with a $65.0 million draw on our unsecured revolving credit facility.

As of September 30, 2022, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 0.85% and the facility fee was 0.20%.

As of October 24, 2022, our Revolving Credit Facility has a borrowing capacity of $634.0 million.

Capital Requirements

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All amounts are in thousands, except percentage amounts.

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 $ Change % Change

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Total NOI 35,042 27,054 7,988 29.5 %

Reconciliation to net loss:

Reconciliation to net (loss) income:

Property management expenses (1,916) (1,499) (417) 27.8 %

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Loss on interest rate derivatives — (106) 106 (100.0) %

Loss on extinguishment of debt (4,917) (12,727) 7,810 (61.4) %

Other income 68 231 (163) (70.6) %

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Income from operations of properties sold or held for sale — 7,208 (7,208) (100.0) %

Net loss $ (8,874) $ (6,992) $ (1,882) 26.9 %

Gain on sale of real estate, net — 46,441 (46,441) (100.0) %

Net (loss) income $ (10,739) $ 31,319 $ (42,058) (134.3) %

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Real Estate Rental Revenue

recovery of operating expenses from our residents, (c) credit losses on lease related receivables, (d) revenue from leases of retail space at our apartment communities and (e) parking and other tenant charges.

Real estate rental revenue from same-store residential properties increased $1.9 million, or 5.3%, to $37.2 million for the 2022 Quarter, compared to $35.3 million for the 2021 Quarter, primarily due to higher rental income ($1.9 million), lower rent abatements ($0.5 million) and higher move-in charges ($0.1 million), partially offset by higher credit losses ($0.6 million).

Real estate rental revenue from acquisitions increased $6.6 million due to the acquisitions of Carlyle of Sandy Springs ($1.7 million) during the first quarter of 2022, Marietta Crossing ($1.1 million) and Alder Park ($0.8 million) during the 2022 Quarter, Assembly Eagles Landing ($2.1 million) during the fourth quarter of 2021, and The Oxford ($0.9 million) during the third quarter of 2021.

Real estate rental revenue from our apartment communities is comprised of (a) rent from operating leases of multifamily residential apartments with terms of approximately one year or less, recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our residents, (c) credit losses on lease related receivables, (d) revenue from leases of retail space at our apartment communities and (e) parking and other tenant charges.

Real estate rental revenue from same-store residential properties increased $3.4 million, or 9.5%, to $38.8 million for the 2022 Quarter, compared to $35.4 million for the 2021 Quarter, primarily due to higher rental income ($2.4 million), lower rent abatements ($0.7 million), higher move-in charges ($0.1 million) and lower credit losses ($0.1 million).

Real estate rental revenue from acquisitions increased $7.7 million due to the acquisitions of Carlyle of Sandy Springs ($1.8 million) during the first quarter of 2022, Marietta Crossing ($1.8 million) and Alder Park ($1.3 million) during the second quarter of 2022, Assembly Eagles Landing ($2.2 million) during the fourth quarter of 2021, and The Oxford ($0.6 million) during the third quarter of 2021.

Real estate rental revenue from development properties increased $0.9 million due to the continued lease-up of Trove, which reached stabilization in the fourth quarter of 2021.

Average occupancy for residential properties for the 2022 Quarter and 2021 Quarter was as follows:

June 30, 2022 June 30, 2021 % Change

September 30, 2022 September 30, 2021 % Change

Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total

95.6 % 94.3 % 95.3 % 95.8 % 82.0 % 94.7 % (0.2) % 12.3 % 0.6 %

The increase in same-store average occupancy was primarily due to higher average occupancy at The Kenmore, Park Adams, 3801 Connecticut Avenue, Assembly Germantown and Assembly Herndon, partially offset by lower average occupancy at The Ashby at McLean and Maxwell.

The decrease in same-store average occupancy was primarily due to lower average occupancy at Roosevelt Towers, Assembly Leesburg, The Paramount and Assembly Alexandria, partially offset by higher average occupancy at The Kenmore, Clayborne Apartments and Maxwell.

Real Estate Expenses

Residential real estate expenses as a percentage of residential revenue for the 2022 Quarter and the 2021 Quarter were 36.5% and 37.2%, respectively.

Real estate expenses from same-store residential properties increased $0.7 million, or 5.6%, to $13.3 million for the 2022 Quarter, compared to $12.6 million for the 2021 Quarter, primarily due to higher real estate taxes ($0.3 million), higher utilities ($0.2 million) and higher insurance ($0.1 million) expenses.

Real estate expenses from same-store residential properties increased $1.0 million, or 7.9%, to $14.0 million for the 2022 Quarter, compared to $13.0 million for the 2021 Quarter, primarily due to higher repairs and maintenance ($0.3 million), administrative ($0.3 million), contract maintenance and supplies ($0.2 million) and real estate tax ($0.2 million) expenses.

Real estate expenses from acquisitions increased $2.9 million due to the acquisitions of Carlyle of Sandy Springs ($0.4 million) during the first quarter of 2022, Marietta Crossing ($0.7 million) and Alder Park ($0.4 million) during the 2022 Quarter, Assembly Eagles Landing ($1.0 million) during the fourth quarter of 2021, and The Oxford ($0.4 million) during the third quarter of 2021.

Other NOI classified as continuing operations increased due to lower NOI at Watergate 600 ($0.3 million).

Other NOI classified as continuing operations increased due to higher NOI at Watergate 600 ($0.2 million).

Other Income and Expenses

Property management expenses:

These expenses include costs directly related to the third-party management of property operations and corporate management and other costs.

Increase of $0.4 million primarily due to acquisitions.

General and administrative expenses:

Increase primarily due to corporate overhead no longer being allocated to office management due to the sales of the Office and Retail Portfolios in 2021 ($0.9 million), higher legal fees ($0.8 million) and higher office rent ($0.3 million) from the commencement of the corporate office lease during the third quarter of 2021.

The increase was partially offset by lower short term incentive compensation expense ($0.7 million) during the 2022 Quarter.

Decrease of $1.5 million primarily due to lower short term incentive compensation expense ($0.9 million) and lower share based compensation expense ($0.4 million) during the 2022 Quarter.

Transformation costs:

Decrease of $1.8 million during 2022 Quarter primarily due to lower consulting and professional fees ($2.1 million) and lower severance expense ($0.8 million), partially offset by higher software depreciation ($0.5 million), higher employee time allocations ($0.3 million) and higher software costs ($0.2 million).

Increase of $1.4 million during the 2022 Quarter primarily due to higher consulting and professional fees ($0.7 million) and higher employee time allocations ($0.6 million).

Depreciation and amortization :

Increase primarily due to the acquisitions of Marietta Crossing ($1.3 million), Alder Park ($0.6 million), Carlyle of Sandy Springs ($2.4 million), Assembly Eagles Landing ($1.9 million) and The Oxford ($0.5 million) and higher depreciation and amortization at Watergate 600 ($0.2 million).

The increase was partially offset by lower depreciation and amortization at same-store residential properties ($0.1 million) and Trove ($0.1 million).

Increase of $5.4 million primarily due to the acquisitions of Marietta Crossing ($2.7 million), Alder Park ($1.3 million), Carlyle of Sandy Springs ($1.1 million), Assembly Eagles Landing ($1.0 million) and higher

depreciation and amortization at Watergate 600 ($0.3 million).

The increase was partially offset by lower depreciation and amortization at same-store residential properties ($0.9 million) and The Oxford ($0.1 million).

Interest Expense :

Interest expense by debt type for the three months ended June 30, 2022 and 2021 was as follows (in thousands):

Three Months Ended June 30,

Interest expense by debt type for the three months ended September 30, 2022 and 2021 was as follows (in thousands):

Three Months Ended September 30,

Debt Type 2022 2021 $ Change % Change

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• Mortgage notes payable :

Increase due to assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Marietta Crossing and Alder Park, respectively, during the 2022 Quarter.

Increase due to assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Marietta Crossing and Alder Park, respectively, during the second quarter of 2022.

In September 2022, we extinguished the liabilities associated with these mortgages though defeasance arrangements.

• Line of credit :

Decrease primarily due to no borrowings in the 2022 Quarter, as compared to weighted average borrowings of $60.9 million and weighted average interest rate of 1.1% during the 2021 Quarter.

Increase primarily due to higher weighted average borrowings of $22.4 million and a weighted average interest rate of 3.34% in the 2022 Quarter, as compared to weighted average borrowings of $20.9 million and a weighted average interest rate of 1.1% during the 2021 Quarter.

• Capitalized interest :

Decrease primarily due to ceasing capitalization of interest on spending related to the multifamily development adjacent to Riverside Apartments due to a pause in development activities resulting from macroeconomic uncertainty.

Other income :

During the 2021 Quarter we recognized $1.5 million in other income related to a tax refund for an office property sold in 2018.

Loss on interest rate derivatives :

We terminated five interest rate swap arrangements with an aggregate notional value of $150.0 million and recognized a $5.8 million loss on interest rate derivatives during the 2021 Quarter (see note 6 to the consolidated financial statements).

Loss on extinguishment of debt :

During the 2022 Quarter, we extinguished the liabilities associated with mortgage notes payable for Marietta Crossing and Alder Park through defeasance arrangements, recognizing aggregate losses on extinguishment of debt of $4.9 million.

During the 2021 Quarter, we recognized a $12.3 million loss on extinguishment of debt related to the prepayment of the $300.0 million of unsecured notes that were originally scheduled to mature in October 2022, a $0.2 million loss on extinguishment of debt related to the prepayment of a $150.0 million portion of the $250.0 million 2018 Term Loan and a $0.2 million loss on extinguishment of debt related to the renewal of our Revolving Credit Facility.

Discontinued operations

Income from operations of properties sold or held for sale:

Decrease due to the sale of the Office Portfolio and the Retail Portfolio during the third quarter of 2021.

Decrease due to the sale of the Office Portfolio and the Retail Portfolio during the 2021 Quarter.

Gain on sale of real estate, net:

The net gain during 2021 is due to the gain on sale of the Retail Portfolio ($57.7 million), partially offset by the loss on sale of the Office Portfolio ($11.2 million).

2022 Period Compared to 2021 Period

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All amounts are in thousands, except percentage amounts.

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 $ Change % Change

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Loss on interest rate derivatives — (5,866) 5,866 (100.0) %

Loss on extinguishment of debt (4,917) (12,727) 7,810 (61.4) %

Other income 454 3,037 (2,583) (85.1) %

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Income from operations of properties sold or held for sale — 23,083 (23,083) (100.0) %

Net loss $ (16,598) $ (8,139) $ (8,459) (103.9) %

Gain on sale of real estate, net — 46,441 (46,441) (100.0) %

Net (loss) income $ (27,337) $ 23,180 $ (50,517) (217.9) %

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Real estate rental revenue from same-store residential properties increased $3.7 million, or 5.3%, to $73.9 million for the 2022 Period, compared to $70.2 million for the 2021 Period, primarily due to higher rental income ($3.2 million), lower rent abatements ($0.6 million) and higher recoveries ($0.2 million), partially offset by higher credit losses ($0.3 million).

Real estate rental revenue from same-store residential properties increased $7.1 million, or 6.7%, to $112.7 million for the 2022 Period, compared to $105.6 million for the 2021 Period, primarily due to higher rental income ($5.6 million), lower rent abatements ($1.3 million) and higher one time fees ($0.4 million), partially offset by higher credit losses ($0.2 million).

Real estate rental revenue from acquisitions increased $18.2 million due to the acquisitions of Carlyle of Sandy Springs ($4.6 million) during the first quarter of 2022, Marietta Crossing ($2.9 million) and Alder Park ($2.1 million) during the 2022 Quarter, Assembly Eagles Landing ($6.1 million) during the fourth quarter of 2021 and The Oxford ($2.5 million) during the third quarter of 2021.

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Average occupancy for residential properties for the 2022 Period and 2021 Period was as follows:

June 30, 2022 June 30, 2021 % Change

September 30, 2022 September 30, 2021 % Change

Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total

95.7 % 94.4 % 95.4 % 95.1 % 57.6 % 92.7 % 0.6 % 36.8 % 2.7 %

The increase in same-store average occupancy was primarily due to higher average occupancy at The Kenmore, 3801 Connecticut Avenue, Park Adams, Assembly Germantown and Assembly Herndon.

The increase in same-store average occupancy was primarily due to higher average occupancy at The Kenmore, 3801 Connecticut Avenue, Assembly Germantown, Assembly Herndon and Park Adams, partially offset by lower average occupancy at The Ashby at McLean.

Real Estate Expenses

Residential real estate expenses as a percentage of residential revenue for the 2022 Period and 2021 Period were 36.8% and 37.3%, respectively.

Real estate expenses from same-store residential properties increased $0.8 million, or 3.2%, to $26.4 million for the 2022 Period, compared to $25.6 million for the six months ended June 30, 2021, primarily due to higher real estate tax ($0.3 million), utilities ($0.2 million), insurance ($0.2 million) and contract maintenance and supplies ($0.1 million) expenses.

Real estate expenses from acquisitions increased $4.9 million due to the acquisitions of Carlyle of Sandy Springs ($1.4 million) during the first quarter of 2022, Marietta Crossing ($0.4 million) and Alder Park ($0.3 million) during the 2022 Quarter, Assembly Eagles Landing ($1.8 million) during the fourth quarter of 2021, and The Oxford ($1.0 million) during the third quarter of 2021.

Real estate expenses from same-store residential properties increased $1.8 million, or 4.8%, to $40.4 million for the 2022 Period, compared to $38.6 million for the nine months ended September 30, 2021, primarily due to higher administrative ($0.5 million), real estate tax ($0.5 million), utilities ($0.3 million), insurance ($0.3 million) and contract maintenance and supplies ($0.2 million) expenses.

Real estate expenses from acquisitions increased $7.8 million due to the acquisitions of Carlyle of Sandy Springs ($1.9 million) during the first quarter of 2022, Marietta Crossing ($1.1 million) and Alder Park ($0.7 million) during the 2022 Quarter, Assembly Eagles Landing ($2.7 million) during the fourth quarter of 2021, and The Oxford ($1.4 million) during the 2021 Quarter.

Other NOI classified as continuing operations increased due to higher NOI at Watergate 600 ($0.4 million).

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Property management expenses:

These expenses include costs directly related to the third-party management of property operations and corporate management and other costs, respectively.

Increase primarily due to the acquisitions of The Oxford and Assembly Eagles Landing during the third and fourth quarters of 2021, the acquisitions of Carlyle of Sandy Springs, Marietta Crossing and Alder Park during the 2022 Period and Trove reaching stabilization during the fourth quarter of 2021.

Increase of $1.0 million primarily due to the acquisitions of The Oxford and Assembly Eagles Landing during the third and fourth quarters of 2021, the acquisitions of Carlyle of Sandy Springs, Marietta Crossing and Alder Park during the 2022 Period and Trove reaching stabilization during the fourth quarter of 2021.

General and administrative expenses :

Increase primarily due to corporate overhead no longer being allocated to office management due to the sales of the Office and Retail Portfolios in 2021 ($1.7 million), higher legal fees ($0.8 million), higher office rent ($0.6 million) from the commencement of the corporate office lease during the third quarter of 2021, higher accounting fees ($0.4 million) and higher recruitment fees ($0.1 million).

The increase was partially offset by lower short term incentive compensation expense ($0.9 million) during the 2022 Quarter.

Increase of $1.2 million primarily due to corporate overhead no longer being allocated to office management due to the sales of the Office and Retail Portfolios in 2021 ($2.0 million), higher legal fees ($0.9 million), higher

office rent ($0.6 million) from the commencement of the corporate office lease during the third quarter of 2021 and higher recruitment fees ($0.2 million).

The increase was partially offset by lower short term incentive compensation expense ($1.8 million) and lower leasing expenses ($0.7 million) during the 2022 Period.

Transformation costs:

Increase of $0.5 million primarily due to higher software depreciation ($1.0 million), higher employee time allocations ($0.6 million) related to the strategic transformation, higher software costs ($0.3 million) and higher rebranding expenses ($0.1 million), partially offset by lower consulting ($1.0 million) and severance ($0.6 million) expenses.

Increase of $1.8 million primarily due to higher employee time allocations ($1.2 million) related to the strategic transformation, higher software depreciation ($1.2 million) and higher software costs ($0.6 million), partially offset by lower severance expenses ($1.3 million).

Depreciation and amortization :

Increase primarily due to the acquisitions of Marietta Crossing ($1.3 million), Alder Park ($0.6 million), Carlyle of Sandy Springs ($3.6 million), Assembly Eagles Landing ($4.7 million) and The Oxford ($1.1 million) and higher depreciation and amortization at same-store residential properties ($0.3 million) and at Watergate 600 ($0.3 million).

Increase of $17.3 million primarily due to the acquisitions of Assembly Eagles Landing ($5.7 million), Carlyle of Sandy Springs ($4.8 million), Marietta Crossing ($4.0 million), Alder Park ($1.9 million) and The Oxford ($1.0 million) and higher depreciation and amortization at Watergate 600 ($0.6 million).

These increases were partially offset by lower depreciation and amortization at same-store residential properties ($0.6 million) and Trove ($0.1 million).

Interest Expense :

Interest expense by debt type for the six months ended June 30, 2022 and 2021 was as follows (in thousands):

Six Months Ended June 30,

Interest expense by debt type for the nine months ended September 30, 2022 and 2021 was as follows (in thousands):

Nine Months Ended September 30,

Debt Type 2022 2021 $ Change % Change

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Increase due to the assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Marietta Crossing and Alder Park, respectively, during the 2022 Period.

In September 2022, we extinguished the liabilities associated with these mortgages though defeasance arrangements.

• Line of credit :

Decrease primarily due to no borrowings in the 2022 Period, as compared to weighted average borrowings of $59.5 million and weighted average interest rate of 1.1% during the 2021 Period.

Decrease primarily due to lower weighted average borrowings of $7.5 million and a weighted average interest rate of 3.34% in the 2022 Period, as compared to weighted average borrowings of $46.5 million and weighted average interest rate of 1.1% during the 2021 Period.

• Capitalized interest :

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We terminated five interest rate swap arrangements with an aggregate notional value of $150.0 million and recognized a $5.9 million loss on interest rate derivatives during the 2021 Period (see note 6 to the consolidated financial statements).

Loss on extinguishment of debt:

During the 2022 Period, we extinguished the liabilities associated with mortgage notes payable for Marietta Crossing and Alder Park through defeasance arrangements, recognizing aggregate losses on extinguishment of debt of $4.9 million.

During the 2021 Period we recognized a $12.3 million loss on extinguishment of debt related to the prepayment of the $300.0 million of unsecured notes that were originally scheduled to mature in October 2022, a $0.2 million loss on extinguishment of debt related to the prepayment of a $150.0 million portion of the $250.0 million 2018 Term Loan and a $0.2 million loss on extinguishment of debt related to the renewal of our Revolving Credit Facility.

Other income :

Income during 2022 Period relates to real estate tax refunds ($0.4 million) received in Q1 2022 on previously sold properties.

During the 2021 Period, we recognized $1.3 million in other income related to a legal settlement and $1.5 million related to a real estate tax refund for an office property sold in 2018 during 2021 Period.

Income during the 2022 Period relates to real estate tax refunds ($0.4 million) received in the first quarter of 2022 on previously sold properties.

During the 2021 Period, we recognized $1.3 million in other income related to a legal settlement, $1.3 million related to a real estate tax refund for an office property sold in 2018 and $0.4 million related to a construction easement at a retail property during the 2021 Period.

Discontinued operations

Income from properties sold or held for sale:

Decrease due to the sale of the Office Portfolio and the Retail Portfolio during the third quarter of 2021.

Decrease due to the sale of the Office Portfolio and the Retail Portfolio during the 2021 Quarter.

Gain on sale of real estate, net:

The net gain during 2021 is due to the gain on sale of the Retail Portfolio ($57.7 million), partially offset by the loss on sale of the Office Portfolio ($11.2 million).

Liquidity and Capital Resources

We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements, including meeting our debt obligations, capital commitments and contractual obligations, as well as the payment of dividends, on-going transformational costs and funding possible growth opportunities.

Through our Office Portfolio and Retail Portfolio sales in 2021, which had a combined contract sales price of approximately $934.3 million, we executed strategic transactions that will allow us to pursue residential expansion in Southeastern markets, meet our debt obligations for the next twelve months, and pay a dividend on a quarterly basis.

Through our Office Portfolio and Retail Portfolio sales in 2021, which had a combined contract sales price of approximately $934.3 million, we executed strategic transactions that will allow us to pursue residential expansion in Sunbelt markets, meet our debt obligations for the next twelve months, and pay a dividend on a quarterly basis.

In connection with our strategic transformation, we are designing our operating model for purposes of more efficiently and effectively supporting residential operations.

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We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023.

We also believe we have adequate liquidity beyond 2022, with only $100.0 million of scheduled debt maturities within the next five years.

As of July 25, 2022, we had cash and cash equivalents totaling $31.4 million and no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility, resulting in a total liquidity position of $731.4 million.

We also believe we have adequate liquidity beyond October 2022, with only $143.0 million of scheduled debt maturities prior to 2027.

As of October 24, 2022, we had cash and cash equivalents totaling $19.7 million and a borrowing capacity of $634.0 million on our Revolving Credit Facility, resulting in a total liquidity position of $653.7 million.

While we currently intend to continue to pay dividends at or about current levels , we will continue to assess the payment of our dividends on a quarterly basis.

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We currently believe that we will generate sufficient cash flow from operations and potential property sales and have access to the capital resources necessary to fund our requirements for the remainder of 2022 .

However, as a result of the uncertainty of the general market conditions in the greater Washington, DC metro and Southeastern regions, economic conditions affecting the ability to attract and retain tenants, declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all.

However, as a result of the uncertainty of the general market conditions in the greater Washington, DC metro and Sunbelt regions, economic conditions affecting the ability to attract and retain tenants, declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all.

If we are unable to obtain capital from other sources, we may need to alter capital spending to be materially different than what is stated above.

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We may either hedge our variable rate debt to give it an effective fixed interest rate or hedge fixed rate debt to give it an effective variable interest rate.

As of June 30, 2022, our future debt principal payments are scheduled as follows (in thousands):

As of September 30, 2022, our future debt principal payments are scheduled as follows (in thousands):

Future Maturities of Debt

Year Secured Debt Unsecured Debt Revolving Credit Facility Total Debt Average Interest Rate

Year Unsecured Debt Revolving Credit Facility Total Debt Average Interest Rate

2022 $ — $ — $ — —%

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Thereafter 400,000 — 400,000 4.5%

400,000 — 476,554 4.5%

Scheduled principal payments $ 500,000 $ 43,000 $ 543,000 4.1%

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______________________________

(1) WashREIT assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Marietta Crossing and Alder Park, respectively, during the 2022 Quarter.

The mortgages mature on May 1, 2030.

(2) WashREIT entered into an interest rate swap to effectively fix a LIBOR plus 110 basis points floating interest rate to a 2.31% all-in fixed rate for the remaining $100.0 million portion of the 2018 Term Loan.

(1) Elme Communities entered into an interest rate swap to effectively fix a LIBOR plus 110 basis points floating interest rate to a 2.31% all-in fixed rate for the remaining $100.0 million portion of the 2018 Term Loan.

The interest rates are fixed through the term loan maturity of July 2023.

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Failure to comply with any of the covenants under our Revolving Credit Facility, 2018 Term Loan, secured and unsecured notes or other debt instruments could result in a default under one or more of our debt instruments.

This could cause our lenders

to accelerate the timing of payments and could therefore have a material adverse effect on our business, operations, financial condition and liquidity.

This could cause our lenders to accelerate the timing of payments and could therefore have a material adverse effect on our business, operations, financial

condition and liquidity.

In addition, our ability to draw on our Revolving Credit Facility or incur other unsecured debt in the future could be restricted by the debt covenants.

As of June 30, 2022, we were in compliance with the covenants related to our Revolving Credit Facility, 2018 Term Loan, and unsecured notes.

As of September 30, 2022, we were in compliance with the covenants related to our Revolving Credit Facility, 2018 Term Loan, and unsecured notes.

Common Equity

We have authorized for issuance 150.0 million common shares, of which 87.4 million shares were outstanding at June 30, 2022.

We have authorized for issuance 150.0 million common shares, of which 87.5 million shares were outstanding at September 30, 2022.

On February 17, 2021, we entered into separate amendments to each of our existing equity distribution agreements (“Original Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co.

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Our issuances and net proceeds on the Equity Distribution Agreements for the 2022 Period and 2021 Period were as follows ($ in thousands, except per share data):

Six Months Ended June 30,

Nine Months Ended September 30,

Issuance of common shares 1,032 24

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The common shares sold under this program may either be common shares issued by us or common shares purchased in the open market.

Our issuances and net proceeds on the dividend reinvestment program for the three and six months ended June 30, 2022 and 2021 were as follows ($ in thousands, except per share data):

Three Months Ended June 30, Six Months Ended June 30,

Our issuances and net proceeds on the dividend reinvestment program for the three and nine months ended September 30, 2022 and 2021 were as follows ($ in thousands, except per share data):

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Preferred Equity

WashREIT’s board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares.

The ability to issue preferred equity provides WashREIT an additional financing tool that may be used to raise capital for future acquisitions or other business purposes.

As of June 30, 2022, no preferred shares were issued and outstanding.

Elme Communities’ board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares.

The ability to issue preferred equity provides Elme Communities an additional financing tool that may be used to raise capital for future acquisitions or other business purposes.

As of September 30, 2022, no preferred shares were issued and outstanding.

Historical Cash Flows

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Consolidated cash flow information is summarized as follows (in thousands):

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 $ %

Net cash provided by operating activities $ 51,456 $ 66,383 $ (14,927) (22.5) %

Net cash used in investing activities (217,129) (18,195) (198,934) 1,093.3 %

Net cash (used in) provided by investing activities (223,248) 823,241 (1,046,489) (127.1) %

Net cash used in financing activities (52,555) (589,512) 536,957 (91.1) %

Net cash provided by operating activities decreased primarily due to the sales of the Office Portfolio and Retail Portfolio in 2021 (see note 3 to the consolidated financial statements) and timing differences on the payment of certain liabilities.

Net cash used in investing activities increased primarily due to the acquisition of Marietta Crossing, Alder Park and Carlyle of Sandy Springs during the 2022 Period.

Net cash used in financing activities decreased primarily due to higher net proceeds from equity issuances and lower dividends paid in the 2022 Period.

Net cash provided by operating activities decreased primarily due to the sales of the Office Portfolio and Retail Portfolio in 2021 (see note 3 to the consolidated financial statements).

Net cash (used in) provided by investing activities increased primarily due to the sales of the Office and Retail portfolios during the 2021 Period and the acquisitions of Marietta Crossing, Alder Park and Carlyle of Sandy Springs during the 2022 Period.

Net cash used in financing activities decreased primarily due to a higher volume of debt repayments during the 2021 Period and higher net proceeds from equity issuances and lower dividends paid in the 2022 Period.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of June 30, 2022 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We have no off-balance sheet arrangements as of September 30, 2022 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Funds From Operations

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NAREIT FFO is a non-GAAP measure.

The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net loss for the three and six months ended June 30, 2022 and 2021 (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net loss for the three and nine months ended September 30, 2022 and 2021 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Net loss $ (8,874) $ (6,992) $ (16,598) $ (8,139)

Net (loss) income $ (10,739) $ 31,319 $ (27,337) $ 23,180

Depreciation and amortization 23,632 18,252 69,871 52,542

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Depreciation and amortization — — — 22,904

Gain on sale of depreciable real estate — (46,441) — (46,441)

NAREIT FFO $ 12,893 $ 3,130 $ 42,534 $ 52,185

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The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

There were no changes made by management to the critical accounting policies in the three and six months ended June 30, 2022.

There were no changes made by management to the critical accounting policies in the three and nine months ended September 30, 2022.

We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis