Item 1. Business
ITEM 1: BUSINESS
Elme Communities Overview
Elme Communities, a Maryland real estate investment trust (the "Company"), is a self-administered equity real estate investment trust ("REIT") and successor to a trust organized in 1960. Our business primarily consists of the ownership of apartment communities in the greater Washington, DC metro and Sunbelt regions. In October 2022, the Company changed its name from Washington Real Estate Investment Trust to Elme Communities to reflect the Company’s 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.”
Business and Investment Strategy
Our mission is to elevate the value living experience and create a place our residents are proud to call home by continuously focusing on service, efficiency, and innovation. We are focused on creating shareholder value by providing quality, affordably priced housing to a deep, solid, and growing base of mid-market demand. Our research indicates that affordability is a pressing rental issue at multiple price points across the mid-market rent spectrum. We believe that rents can be consistently grown if a portfolio’s price point does not compete directly with new product price points and wages for mid-market renters are growing. Furthermore, as the cost of homeownership continues to rise above affordable levels for median income earners, we expect to benefit from sustained demand for quality, affordably priced rental housing.
We acquire, develop, and renovate apartment communities that align with our research-led investment strategy, which is focused on the following:
• targeting markets that have economies with diverse, innovative industries that drive outsized job creation, wage growth and in-migration, which we believe will benefit from these trends in the years to come;
• targeting middle-income renters who make up the largest share of apartment demand in each of our current and target markets but for whom new apartment supply and the cost of owning a home is unaffordable;
• executing value-add renovations that are tailored to each submarket, target renter group and individual community to provide an improved yet affordable living experience while enhancing shareholder value; and
• targeting investment opportunities that have operating upside through community management strategies.
Our research-focused approach enables us to craft optimal strategies to provide the best combination of value, quality, and resident experience in our apartment communities. We categorize our apartment communities among broader asset classes, as determined by a variety of factors, including the age of our buildings, rent growth drivers and rent relative to the market:
Class A
– Class A communities are recently developed and command rental rates above market median rents.
– Class A- communities have been developed within the past twenty years and feature operational improvements and unit upgrades and command rents at or above median market rents.
Class B
– Class B Value-Add communities feature operational improvements and strong potential for unit renovations. These communities, which are generally over twenty years old, command average rental rates below median market rents for units that have not been renovated.
– Class B communities feature operational improvements and command average rental rates below median market rents. Near-term rent growth is driven by operational improvements and market rent growth without unit renovations. These communities are over twenty years old and can become Class B Value-Add depending on future market rents and renovation opportunities.
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Regional Real Estate Markets (1)
While we have historically focused our investments in the greater Washington, DC metro region, we began expanding into the Sunbelt region in 2021. Currently, approximately 20% of our residential homes are located in the Sunbelt region. We target markets that have economies with diverse, innovative industries that drive outsized job creation, wage growth and in-migration. Our current targeted expansion markets include Atlanta, Georgia, Dallas-Fort Worth, Texas, Raleigh/Durham, North Carolina, and Charlotte, North Carolina. As of December 31, 2022, we have acquired five apartment communities in the Atlanta metro region and expect to continue to invest in the Sunbelt region in the coming years.
Our multifamily transformation and subsequent geographic expansion were designed to provide greater opportunities for growth as opposed to the headwinds facing the commercial office and retail sectors. As expected, our portfolio experienced very strong rental rate growth during 2022. Our in-place rent growth accelerated during the second half of the year. Looking forward, we believe we are positioned with historically high embedded growth, which we expect will drive outsized revenue and net operating income growth in 2023.
Our portfolio's allocation in the Atlanta and Washington markets, and our focus on value-oriented price points, help enable our future growth, while also providing relative insulation during economic downturns. Over the past five and 10-year periods, Class B rent growth has outperformed Class A in both of our operating markets. Additionally, our mid-market price points have not directly competed with new supply, as our average monthly rent is generally several hundred dollars below the asking rent for new deliveries. Moreover, the national cost of owning a home compared to renting a single-family starter home is the highest it’s been in over 20 years. As housing remains undersupplied and the cost of homeownership remains unaffordable for many median-income households, we expect to benefit from sustained demand for quality, affordable rental options.
Washington, DC metro region (22 apartment communities)
The apartment market in the Washington, DC metro region performed well in 2022, with moderation in fundamentals during the second half of the year. In the fourth quarter of 2022, annual demand was flat, and the softening in demand the past three quarters caused overall market occupancy to decline by 190 basis points year-over-year to 95.1%.
Atlanta metro region (5 apartment communities)
The apartment market in the Atlanta metro region performed well in 2021 and 2022 due to the economic recovery, higher household formation and higher in-migration. In the second half of 2022, the Atlanta apartment market experienced a cooling in demand relative to 2021, mirroring most national markets. As a result, overall market occupancy in the fourth quarter of 2022 decreased by 320 basis points year-over-year to 93.8%.
Raleigh/Durham and Charlotte metro regions (targeted markets)
The apartment markets in the Raleigh/Durham and Charlotte metro regions were also strong in 2022, though apartment demand in both markets began to pull back in the second quarter of 2022, with continued tapering for the remainder of the year. Overall market occupancy remained strong in the Raleigh/Durham and Charlotte markets, decreasing by 280 basis points to 94.4% and by 290 basis points to 94.2%, respectively, at the end of the fourth quarter of 2022, compared to the prior year. In the fourth quarter of 2022, asking rent growth was 7.1% and 8.1% in the Raleigh/Durham and Charlotte markets, respectively.
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Dallas-Fort Worth metro region (targeted market)
While annual demand cooled in the fourth quarter of 2022, the apartment market in the Dallas-Fort Worth metro region continued to lead the nation for new supply in absolute numbers. As a percentage of existing inventory, the region’s inventory growth is in line with other Sunbelt markets and is lower than many mid-sized markets. Overall market occupancy was approximately 94.1%, down 300 basis points from a year ago. In the fourth quarter of 2022, asking rent growth remained strong at 8.6% year-over-year.
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(1) The source of all numerical data in this section is RealPage Market Analytics
Our Portfolio
As of December 31, 2022, we owned approximately 8,900 residential apartment homes in the Washington, DC metro and Sunbelt regions. We also owned approximately 300,000 square feet of commercial space in the Washington, DC metro region. The percentage of total real estate rental revenue from continuing operations by property type for the three years ended December 31, 2022, and the average occupancy for the year ended December 31, 2022, were as follows:
Average Occupancy, year ended December 31, 2022
% of Total Real Estate Rental Revenue
2022 2021 2020
95% Residential 91 % 89 % 82 %
92% Other 9 % 11 % 18 %
100 % 100 % 100 %
Total real estate rental revenue from continuing operations for each of the three years ended December 31, 2022, was $209.4 million, $169.2 million and $176.0 million, respectively. During the three years ended December 31, 2022, we acquired five residential properties and placed one residential development project into service. During that same period, we sold fifteen office properties and eight retail properties. See note 14 to the consolidated financial statements for further discussion of our operating results by segment.
No single tenant accounted for more than 5% of real estate rental revenue from continuing operations in any of the three years ended December 31, 2022.
We enter into arrangements from time to time by which various service providers conduct day-to-day community management and/or leasing activities at our properties. As of December 31, 2022, Bozzuto Management Company ("Bozzuto") and Greystar Real Estate Partners ("Greystar") provide community management and leasing services at the majority of our residential communities and Stream Realty Partners ("Stream") provides property management and leasing services at our sole office property, Watergate 600. Bozzuto and Greystar provide such services under individual community management agreements for each residential community, each of which is separately terminable by us or Bozzuto/Greystar, as applicable. Although they vary by community, on average, the fees charged by Bozzuto/Greystar under each agreement are approximately 3% of revenues at each residential community. We are currently implementing a plan to perform day-to-day community management and leasing activities at our residential communities internally rather than outsource those activities. This process began in October of 2022 and is scheduled to be completed in 2023. As of December 31, 2022, 3 of our 27 residential communities were managed internally.
We make capital improvements to our properties on an ongoing basis for the purpose of maintaining and increasing their value and income. Major improvements and/or renovations to the properties during the three years ended December 31, 2022 are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Capital Improvements and Development Costs.”
Further description of the properties is contained in Item 2, Properties, and note 14 to the consolidated financial statements, Segment Information, and in Schedule III. Reference is also made to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Environmental, Social and Governance
At Elme Communities, our Environmental, Social and Governance (“ESG”) strategy is to operate and grow in a sustainable, responsible manner that contributes to positive economic, social, and environmental outcomes for shareholders, employees, and the communities in which we serve. We intend to continue providing an annual ESG report that includes disclosures aligned with Global Reporting Initiative Standards 2016, the United Nations Sustainable Development Goals, the Sustainability
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Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures. This report can be found online at https://www.elmecommunities.com/esg/. The reference to our website address does not constitute incorporation by reference of the information contained in the website and such information should not be considered part of this document.
Environmental
In 2021, we announced our commitment to net zero carbon operation in alignment with the Urban Land Institute’s Greenprint Net Zero by 2050 Goal. Meeting this goal will require that we fully integrate a focus on carbon reductions into our strategic approach and at all levels of our organization throughout our portfolio transformation. As a first step toward this goal, we are reevaluating the appropriate interim energy and greenhouse gas emissions targets in support of this long-term objective.
We implement sustainable policies and practices at all of our properties, for purposes of ensuring occupants and residents work and live in efficient, healthy spaces. We track annual asset-level performance of energy use, greenhouse gas emissions, and water consumption, utilizing ENERGY STAR Portfolio Manager as well as Measurabl ESG software. Over the past several years we have demonstrated continual progress in achieving reductions. We apply industry standard rating systems such as the Leadership in Energy and Environmental Design (“LEED”) and Building Research Establishment Environmental Assessment Method (“BREEAM”) to establish sustainable practices for building design, construction, operations, and maintenance. During unit renovations, we replace end-of-life appliances with ENERGY STAR rated equipment; heating, ventilation, and air conditioning systems with more efficient models; as well as update water fixtures to low-flow options. Additionally, we continue to expand our electric vehicle charging stations across our portfolio to support the transition of our residents to electric transportation.
Social
Among our social initiatives is a commitment to financial inclusion, which aims to increase the availability and equality of financial service opportunities, remove barriers to the financial sector, and enable individuals to improve their financial wellbeing. Beyond credit history, life-altering events can interrupt a resident’s ability to pay rent, including job loss, medical emergencies, domestic violence, and other hardships. This can lead to delinquencies, increased interest rate debt, potential eviction, and situational unhousing.
In 2022, we announced a partnership with a financial technology company to dismantle barriers to housing for working families. Through this partnership, on-time rent payments will be reported monthly to all three credit bureaus, providing an opportunity for residents to build their credit. This no-cost amenity is available to 100% of our community residents. This initiative follows a “do no harm” mindset. Therefore, only on-time payments—not delinquencies—will be reported.
In addition to credit reporting, our technology partner's platform offers housing stability loans for residents experiencing financial hardship. These interest-free loans provide up to three months of rent relief, enabling residents to remain housed during difficult times. Residents can then work with our technology partner to set up a 12-month repayment plan for the loan.
These programs support the short- and long-term financial well-being of our residents.
We are committed to robust corporate governance and high ethical standards. Our Board of Trustees (the “Board”) is responsible for corporate policy and management oversight to enhance long-term shareholder value. In 2020, our Board formalized the oversight, implementation, and improvement of ESG initiatives, recognizing that environmental and social matters—together with strong corporate governance—play a critical role in the execution of our ESG strategy.
We are made up of growth-oriented, hardworking individuals dedicated to transforming creative ideas into decisive action. Our flat organizational structure facilitates frequent, meaningful interactions with Company executives, and our commitment to teamwork and entrepreneurial spirit enables employees at every level to conceptualize ideas and make them happen. We create an environment designed to encourage people to do what they do best, all while learning, growing, and contributing in meaningful ways to build a better company. We trust, encourage, and support one another, driving our pursuit of excellence.
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Human Capital
Employees, Training and Development
On February 14, 2023, we had 102 employees, including 43 persons engaged in community management functions who were hired in connection with the internalization of our community management functions, and 59 persons engaged in corporate, financial, asset management and other functions. We expect the number of employees engaged in community management functions to increase throughout 2023 as we continue the internalization of community management services at our apartment communities. All of our officers and substantially all of our corporate-level employees live and work in or near the greater Washington, DC metro region, and our community management employees live and work in or near their respective communities.
Our human capital resources objectives include identifying, recruiting, retaining, incentivizing and integrating our new and existing employees. At Elme Communities, we place great value on employee growth through goals, feedback and professional and leadership development offerings. Our human resources team provides ongoing training and development opportunities to all employees. We financially support employees pursuing industry-specific training and certification programs and we encourage employees to join professional organizations that offer technical, soft skill and leadership development workshops.
Additionally, our equity and cash incentive plans are designed to attract, retain and reward our workforce through the granting of share-based and cash-based compensation awards, with the goal of motivating employees to perform to the best of their abilities and achieve our objectives, including increasing shareholder value.
Health, Safety and Well-being
We support our employees with a robust and competitive employee benefits program, including a flexible vacation policy, parental leave, 401(k) matching, tuition reimbursement, an Employee Assistance Program, and other programs.
Additionally, we have a wellness program that provides fun, engaging challenges to encourage employees to continuously improve their physical, mental, and financial well-being. Some of the programs we offer throughout the year include biometric screenings, personal finance check-ups, and healthy lunch challenges. In our corporate office, we offer two wellness rooms for employees to take a break to decompress.
Our technological capabilities allow our corporate-level employees the flexibility to work from anywhere at any time. This allows us to easily meet our residents’ needs as well as those of our employees.
Diversity, Equity, Inclusion and Accessibility
Our Diversity, Equity, Inclusion, and Accessibility Initiative ("DEIA") is a long-term commitment to promoting an environment where each individual feels comfortable being their most authentic selves. We believe diversity of backgrounds, experiences, cultures, ethnicities, and interests leads to new ways of thinking and drives engagement and organizational success. Our diverse DEIA Council is overseen by our senior leadership team and board of trustees. The DEIA Council tracks and monitors our diversity metrics and facilitates learning and training opportunities, including a diversity speaker series, targeted recruitment and relationship development with diverse industry groups for internships and employment opportunities and partnering with community-based non-profits for volunteer activities.
Community Engagement
As a real estate investment trust, investing is at the core of what we do, but the most valuable investments we make are not in our buildings but in our people and our community. We are passionate about making a difference in the regions we call home.
We are committed to improving the lives of those in need, and our employees participate in a wide variety of philanthropic activities throughout the year. Whether volunteering at a food bank, running a toy drive, walking for a cause, or participating in our company-wide community service day, we are proud to foster a culture of giving back.
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Regulation
REIT Tax Status
We believe that we qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"), and intend to continue to qualify as such. To maintain our status as a REIT, we are, among other things required to distribute 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding net capital gains), to our shareholders on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold, in a way that allows us to defer recognition of some or all of the taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders.
Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed taxable income and taxes on the income generated by our taxable REIT subsidiary. Our taxable REIT subsidiary is subject to corporate U.S. federal, state and local income tax on its taxable income at regular statutory rates (see note 1 to the consolidated financial statements for further disclosure).
Americans with Disabilities Act ("ADA")
The properties in our portfolio must comply with Title III of the ADA, to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily accessible accommodations is an ongoing one, and we will continue to assess our properties and make alterations as appropriate in this respect.
Fair Housing Act ("FHA")
The FHA, its state law counterparts and the regulations promulgated by the U.S. Department of Housing and Urban Development and various state agencies, prohibit discrimination in housing on the basis of race or color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women and people securing custody of children under 18) or handicap (disability) and, in some states, financial capability or other bases. A failure to comply with these laws in our operations could result in litigation, fines, penalties or other adverse claims, or could result in limitations or restrictions on our ability to operate, any of which could materially and adversely affect us. We believe that we operate our properties in substantial compliance with the FHA.
Environmental Matters
We are subject to numerous federal, state and local environmental, health, safety and zoning laws and regulations that govern our operations, including with respect to air emissions, wastewater, and the use, storage and disposal of hazardous and toxic substances and petroleum products. If we fail to comply with such laws, including if we fail to obtain any required permits or licenses, we could face substantial fines or possible revocation of our authority to conduct some of our operations.
In addition, under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under, or migrating from such property, including costs to investigate and clean up such contamination and liability for natural resources damage. In addition, we also may be liable for the costs of remediating contamination at off-site waste disposal facilities to which we have arranged for the disposal or treatment of hazardous substances, without regard to whether we complied with environmental laws in doing so. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could be substantial and the cost of any required remediation, removal, fines, or other costs could exceed the value of the property and/or our aggregate assets. In addition, the presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or bodily injury or property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures.
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Availability of Reports
Copies of this Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are available, free of charge, on our website www.elmecommunities.com. All required reports are made available on the website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. The reference to our website address does not constitute incorporation by reference of the information contained in the website and such information should not be considered part of this document.
The Securities and Exchange Commission maintains a website ( http://www.sec.gov ) that contains reports, proxy statements, information statements, and other information regarding issuers that file electronically with Securities and Exchange Commission.
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