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Item 2. Management’s Discussion and Analysis

2023-04-28 compared with 2022-10-28 · 96 added, 258 removed, 212 unchanged (63% 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, 2022 filed with the Securities and Exchange Commission (“SEC”) on February 17, 2023.

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.

We refer to the three months ended March 31, 2023 and March 31, 2022 as the “2023 Quarter” and the “2022 Quarter,” respectively.

Forward-Looking Statements

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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;

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 and our ability to realize any anticipated operational benefits from our internalization of community management functions;

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 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;

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

changes in the composition of our portfolio;

fluctuations in interest rates and other risks related to changes in interest rates;

risks related to changes in interest rates, including the future of the reference rate used in our existing floating rate debt instruments;

reductions in or actual or threatened changes to the timing of federal government spending;

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the availability and terms of financing and capital and the general volatility of securities markets;

the risks related to our organizational structure and limitations of stock ownership;

the risks related to our organizational structure and limitations of share ownership;

failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs;

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• Results of Operations.

Discussion of our financial results comparing the 2022 Quarter to the 2021 Quarter and the 2022 Period to the 2021 Period.

Discussion of our financial results comparing the 2023 Quarter to the 2022 Quarter.

• Liquidity and Capital Resources.

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• Funds From Operations .

Calculation of National Association of Real Estate Investment Trusts, Inc.

(“NAREIT”) Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental measure to net income.

Calculation of NAREIT Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental measure to net income.

• Critical Accounting Estimates.

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• Net operating income (“NOI”) , calculated as set forth below under the caption "Results of Operations - Net Operating Income." NOI is a non-GAAP supplemental measure to net income.

• NAREIT FFO , calculated as set forth below under the caption “Funds from Operations.” NAREIT FFO is a non-GAAP supplemental measure to net income.

• Funds From Operations (“NAREIT FFO”) , calculated as set forth below under the caption “Funds from Operations.” NAREIT FFO is a non-GAAP supplemental measure to net income.

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

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

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

As of March 31, 2023, 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.

During the third quarter of 2021, we sold twelve office properties (the “Office Portfolio”) and eight retail properties (the “Retail Portfolio”) (see note 3 to the condensed consolidated financial statements) for contract sale prices of $766.0 million and $168.3 million, respectively.

Both the Office Portfolio and Retail Portfolio meet the criteria for classification as discontinued operations in our condensed consolidated financial statements.

Our remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 10 to the condensed consolidated financial statements).

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 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.

The apartment communities have a combined total of 730 apartment homes.

During the 2022 Period, we completed acquisitions of three apartment communities in Georgia with a combined total of 1,079 apartment homes for a total contract purchase price of $283.2 million.

We believe the successful execution of this research-driven strategic shift will lead to greater, more sustainable growth.

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

In connection with our strategic transformation, the shift away from the commercial sector to the residential sector, we are redesigning our operating model for purposes of more efficiently and effectively supporting residential operations.

This operating model redesign includes insourcing the property-level management activities currently performed by third-party management companies.

Costs related to the strategic transformation, including the allocation of internal costs, consulting, advisory and termination benefits, are included in Transformation costs on our consolidated statements of operations.

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.”

We recognized $2.9 million and $2.2 million of transformation costs, net of amounts capitalized, on the condensed consolidated statements of operations during the 2023 Quarter and 2022 Quarter, respectively, and anticipate incurring approximately $5.0 - $6.0 million of additional transformation costs during 2023.

We expect to realize significant operational benefits from this operating model redesign.

Community onboarding began in October 2022, and we have transitioned 13 of our 27 residential communities to Elme management as of March 31, 2023, and expect to complete the implementation by the end of the third quarter.

Operating Results

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,

Net loss, NOI and NAREIT FFO for the three months ended March 31, 2023 and 2022 were as follows (in thousands):

Three Months Ended March 31,

2023 2022 $ Change % Change

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

Net loss $ (3,643) $ (7,724) $ 4,081 (52.8) %

$ 36,288 $ 30,652 $ 5,636 18.4 %

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(2) See page 31 of the MD&A for a reconciliation of NAREIT FFO to net income.

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 decrease in net loss is primarily due to higher NOI ($5.6 million) and lower depreciation and amortization expenses ($0.7 million).

These were partially offset by higher interest expense ($1.2 million), higher transformation expenses ($0.7 million), and lower other income ($0.4 million).

The higher NOI is primarily due to the acquisitions of Marietta Crossing ($1.3 million), Alder Park ($0.9 million) and Carlyle of Sandy Springs ($0.4 million) in 2022, higher NOI from same-store properties ($2.9 million), and higher NOI at Watergate 600 ($0.2 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).

Residential same-store average occupancy for our portfolio decreased to 95.5% as of March 31, 2023 from 95.6% as of March 31, 2022.

The higher NAREIT FFO is primarily due to higher NOI ($5.6 million), partially offset by higher interest expense ($1.2 million), higher transformation expenses ($0.7 million), and lower other income ($0.4 million).

Investment Activity

Significant investment transactions during the 2022 Period included the following:

• Acquisition of Carlyle of Sandy Springs, a 389-unit apartment community in Sandy Springs, Georgia for a contract purchase price of $105.6 million during the first quarter of 2022.

• Acquisition of Marietta Crossing, a 420-unit apartment community in Marietta, Georgia for a contract purchase price of $107.9 million during the 2022 Quarter.

We assumed a $42.8 million mortgage with this acquisition.

• Acquisition of Alder Park, a 270-unit apartment community in Smyrna, Georgia for a contract purchase price of $69.8 million during the 2022 Quarter.

We assumed a $33.7 million mortgage with this acquisition.

There were no significant investment transactions during the 2023 Quarter.

Financing Activity

Significant financing transactions during the 2022 Period included the following:

• 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.

• 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.

Significant financing transactions during the 2023 Quarter included the following:

• Entered into a $125.0 million unsecured term loan ("2023 Term Loan") with an interest rate of SOFR (subject to a credit spread adjustment of 10 basis points) plus a margin of 95 basis points.

We used the proceeds to prepay the $100.0 million 2018 Term Loan in full and a portion of our borrowings under our unsecured credit facility.

The 2023 Term Loan has a two-year term ending in January 2025, with two one-year extension options.

As of March 31, 2023, the interest rate on the Revolving Credit Facility is adjusted SOFR (inclusive of the 0.10% credit spread adjustment) plus 0.85%, the daily SOFR is 4.87% and the facility fee is 0.20%.

As of April 25, 2023, our Revolving Credit Facility has a borrowing capacity of $654.0 million.

Capital Requirements

We have no debt maturities scheduled until the third quarter of 2023.

We have no debt maturities scheduled until the first quarter of 2025.

We expect to have additional capital requirements as set forth on page 33 (Liquidity and Capital Resources – Capital Requirements).

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The discussion that follows is based on our consolidated results of operations for the 2023 Quarter and 2022 Quarter.

The ability to compare one period to another is significantly affected by acquisitions and dispositions made during 2022 and 2021 (see note 3 to the consolidated financial statements).

Net Operating Income

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NOI does not include management expenses, which consist of corporate property management costs and property management fees paid to third parties.

NOI is the primary performance measure we use to assess the results of our operations at the property level.

We believe that NOI is a useful performance measure because, when compared across periods, it reflects the impact on operations of trends in occupancy rates, rental rates and operating costs on an unleveraged basis, providing perspective not immediately apparent from net income.

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2023 Quarter Compared to 2022 Quarter

The following table reconciles NOI to net loss and provides the basis for our discussion of our consolidated results of operations and NOI in the 2022 Quarter compared to the 2021 Quarter.

The following table reconciles net loss to NOI and provides the basis for our discussion of our consolidated results of operations and NOI in the 2023 Quarter compared to the 2022 Quarter.

All amounts are in thousands, except percentage amounts.

Three Months Ended September 30,

Three Months Ended March 31,

2023 2022 $ Change % Change

Residential revenue:

Same-store portfolio $ 38,771 $ 35,408 $ 3,363 9.5 %

Acquisitions (1)

8,150 488 7,662 1,570.1 %

Development (2)

2,711 1,846 865 46.9 %

Non-residential (3)

257 304 (47) (15.5) %

Total 49,889 38,046 11,843 31.1 %

Residential expenses:

Same-store portfolio 14,031 13,003 1,028 7.9 %

Acquisitions 3,157 212 2,945 1,389.2 %

Development 941 846 95 11.2 %

Non-residential 69 85 (16) (18.8) %

Total 18,198 14,146 4,052 28.6 %

Residential NOI:

Same-store portfolio 24,740 22,405 2,335 10.4 %

Acquisitions 4,993 276 4,717 1,709.1 %

Development 1,770 1,000 770 77.0 %

Non-residential 188 219 (31) (14.2) %

Total 31,691 23,900 7,791 32.6 %

Other NOI (4)

3,351 3,154 197 6.2 %

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

Reconciliation to net (loss) income:

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

General and administrative expenses (6,403) (7,909) 1,506 (19.0) %

Net loss $ (3,643) $ (7,724) 4,081 (52.8) %

Property management expense 1,769 1,750 19 1.1 %

General and administrative expense 6,841 6,939 (98) (1.4) %

Transformation costs 2,900 2,223 677 30.5 %

Depreciation and amortization (23,632) (18,252) (5,380) 29.5 %

Real estate depreciation and amortization 21,536 22,200 (664) (3.0) %

Interest expense 6,831 5,650 1,181 20.9 %

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

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

Loss on extinguishment of debt, net 54 — 54 — %

Other income — (386) 386 (100.0) %

Discontinued operations (5) :

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

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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(1) Acquisitions:

The Oxford and Assembly Eagles Landing

Carlyle of Sandy Springs, Alder Park, Marietta Crossing

(2) Development/redevelopment:

Trove, Riverside Development (multifamily development adjacent to Riverside Apartments)

(3) Non-residential:

Includes revenues and expenses from retail operations at residential properties.

(4) Other (classified as continuing operations):

Watergate 600

(5) Discontinued operations:

2021 Office - 1901 Pennsylvania Avenue, 515 King Street, 1220 19th Street, 1600 Wilson Boulevard, Silverline Center, Courthouse Square, 2000 M Street, 1140 Connecticut Avenue, Army Navy Club, 1775 Eye Street, Fairgate at Ballston and Arlington Tower

2021 Retail - Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S.

Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village

Real Estate Rental Revenue

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:

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 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 $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 higher NOI at Watergate 600 ($0.2 million).

Other Income and Expenses

Property management expenses:

Increase of $0.4 million primarily due to acquisitions.

General and administrative expenses:

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:

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 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 September 30, 2022 and 2021 was as follows (in thousands):

Three Months Ended September 30,

Debt Type 2022 2021 $ Change % Change

Notes payable $ 5,127 7,523 $ (2,396) (31.8) %

Mortgage notes payable 524 — 524 100.0 %

Line of credit 931 765 166 21.7 %

Capitalized interest — (182) 182 (100.0) %

Total $ 6,582 $ 8,106 $ (1,524) (18.8) %

• Notes payable :

Decrease primarily due to the prepayment of $300.0 million of unsecured notes during the third quarter of 2021 that had been scheduled to mature in October 2022 and the prepayment of a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021.

• 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 second quarter of 2022.

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

• Line of credit :

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.

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 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

The following tables reconcile NOI to net income (loss) and provide the basis for our discussion of our consolidated results of operations and NOI in the 2022 Period compared to the 2021 Period.

All amounts are in thousands, except percentage amounts.

Nine Months Ended September 30,

2022 2021 $ Change % Change

Total net operating income (NOI) $ 36,288 $ 30,652 $ 5,636 18.4 %

Residential revenue:

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4,957 1,075 3,882 361.1 %

Development (2)

7,642 4,152 3,490 84.1 %

Non-residential (2)

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Total NOI $ 36,288 $ 30,652 $ 5,636 18.4 %

Reconciliation to net loss:

Property management expenses (5,462) (4,448) (1,014) 22.8 %

General and administrative expenses (20,998) (19,838) (1,160) 5.8 %

Transformation costs (6,645) (4,796) (1,849) 38.6 %

Depreciation and amortization (69,871) (52,542) (17,329) 33.0 %

Interest expense (18,388) (28,387) 9,999 (35.2) %

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) %

Discontinued operations (5) :

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

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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(1) Acquisitions:

The Oxford and Assembly Eagles Landing

Carlyle of Sandy Springs, Alder Park, Marietta Crossing

(2) Development/redevelopment:

Trove, Riverside Development (multifamily development adjacent to Riverside Apartments)

(2) Non-residential:

Includes revenues and expenses from retail operations at residential properties.

(4) Other (classified as continuing operations)

Watergate 600

(5) Discontinued operations:

2021 Retail - Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S.

Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village

Real Estate Rental Revenue

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.

Real estate rental revenue from development properties increased $3.5 million due to the continued lease-up of the Trove development, which reached stabilization in the fourth quarter of 2021.

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

September 30, 2022 September 30, 2021 % Change

Real estate rental revenue from same-store residential properties increased $3.8 million, or 9.0%, to $45.8 million for the 2023 Quarter, compared to $42.0 million for the 2022 Quarter, primarily due to higher rental income ($3.4 million), lower rent abatements ($0.3 million), and higher recoveries ($0.1 million).

Real estate rental revenue from acquisitions increased $3.9 million due to the acquisitions of Marietta Crossing ($1.9 million) and Alder Park ($1.2 million) during the second quarter of 2022, and Carlyle of Sandy Springs ($0.8 million) during the 2022 Quarter.

Average occupancy for residential properties for the 2023 Quarter and 2022 Quarter was as follows:

March 31, 2023 March 31, 2022 % Change

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

95.5 % 93.7 % 95.3 % 95.6 % 94.4 % 95.6 % (0.1) % (0.7) % (0.3) %

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.

The decrease in same-store average occupancy was primarily due to lower average occupancy at Bennett Park, Assembly Leesburg, Elme Watkins Mill, Elme Alexandria, and Cascade at Landmark, partially offset by higher average occupancy at Park Adams, Trove and 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 $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).

Residential real estate expenses as a percentage of residential revenue for the 2023 Quarter and the 2022 Quarter were 35.6% and 36.7%, respectively.

Real estate expenses from same-store residential properties increased $0.9 million, or 6.0%, to $16.2 million for the 2023 Quarter, compared to $15.3 million for the 2022 Quarter, primarily due to higher utilities ($0.5 million) and administrative ($0.4 million) expenses.

Real estate expenses from acquisitions increased $1.3 million due to the acquisitions of Marietta Crossing ($0.6 million) and Alder Park ($0.4 million) during the second quarter of 2022, and Carlyle of Sandy Springs ($0.3 million) during the 2022 Quarter.

Other NOI increased due to higher NOI at Watergate 600 ($0.2 million).

Other Income and Expenses

Property management expenses:

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 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.

Decrease of $0.1 million primarily due to lower share-based compensation expense ($0.9 million), partially offset by higher severance ($0.2 million), professional services ($0.2 million), shareholder ($0.1 million) and computer software ($0.1 million) expenses.

Transformation costs:

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 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).

Increase of $0.7 million during the 2023 Quarter primarily due to signing bonuses for new employees ($0.4 million), higher employee time allocations ($0.3 million) related to the strategic transformation and transition fees paid to third party managers ($0.2 million).

The increase is partially offset by lower accelerated software depreciation ($0.2 million).

Real estate depreciation and amortization :

Decrease of $0.7 million primarily due to lower depreciation and amortization at same-store residential properties ($2.6 million) and at Carlyle of Sandy Springs ($0.2 million).

The decrease was partially offset by the acquisitions of Marietta Crossing ($0.9 million) and Alder Park ($0.9 million), and higher depreciation and amortization at Watergate 600 ($0.3 million).

Interest expense :

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,

Interest expense by debt type for the three months ended March 31, 2023 and 2022 was as follows (in thousands):

Three Months Ended March 31,

Debt Type 2023 2022 $ Change % Change

Notes payable $ 5,454 5,149 $ 305 5.9 %

Mortgage notes payable 1,014 — 1,014 100.0 %

Line of credit 1,377 694 683 98.4 %

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• Notes payable :

• Mortgage notes payable :

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.

Increase primarily due to new $125.0 million 2023 Term Loan executed in January 2023, partially offset by prepayment of a $100.0 million portion of the 2018 Term Loan in January 2023.

• Line of credit :

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.

Increase primarily due to weighted average borrowings of $44.8 million and a weighted average interest rate of 6.1% in the 2023 Quarter, as compared to no borrowings during the 2022 Quarter.

• Capitalized interest :

Decrease primarily due to ceased capitalization of interest on spending related to the multifamily development adjacent to Riverside Apartments due to a pause in development activities.

Loss on interest rate derivatives :

We terminated five interest rate swap arrangements with an aggregate notional value of $150.0 million and recognized a $5.9 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 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 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).

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

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 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.

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 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.

W e executed strategic transactions that will allow us to continue pursuing residential expansion in Sunbelt markets, meet our debt obligations for the next twelve months, and pay a dividend on a quarterly basis.

We also believe we have adequate liquidity beyond 2023, with o nly $160.0 million of scheduled debt maturities prior to 2028.

As of April 25, 2023, we had cash and cash equivalents totaling $12.3 million and a borrowing capacity of $654.0 million on our Revolving Credit Facility, resulting in a total liquidity position of $666.3 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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• Funding dividends and distributions to our shareholders;

• Approximately $25.0 - $30.0 million to invest in our existing portfolio of operating assets;

• Approximately $0.7 - $1.0 million to invest in our development and redevelopment projects;

• Approximately $47.0 - $52.0 million to invest in our existing portfolio of operating assets, inclusive of $30.0 - $35.0 million of major capital expenditures;

• Less than $1.0 million to invest in our development and redevelopment projects;

• Funding for potential property acquisitions throughout 2023, offset by proceeds from potential property dispositions.

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

As of March 31, 2023, our future debt principal payments are scheduled as follows (in thousands):

Future Maturities of Debt

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2027 — — — —%

2026 — — — —%

Thereafter 400,000 — 400,000 4.5%

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______________________________

(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.

(1) During the 2023 Quarter, we entered into the $125.0 million 2023 Term Loan with an interest rate of SOFR (subject to a credit spread adjustment of 10 basis points) plus a margin of 95 basis points (subject to adjustment depending on Elme Communities’ credit rating).

The 2023 Term Loan has a two-year term ending in January 2025, with two one-year extension options.

We used the proceeds to prepay the $100.0 million 2018 Term Loan in full and a portion of our borrowings under our unsecured credit facility.

Elme Communities had previously entered into an interest rate swap to effectively fix the interest rate for the remaining $100.0 million portion of the 2018 Term Loan.

Following the prepayment of the 2018 Term Loan, the interest rate swap effectively fixes a $100.0 million portion of the 2023 Term Loan at 2.16% through the interest rate swap's expiration date of July 21, 2023.

In March 2023, we entered into two interest rate swap arrangements with an aggregate notional amount of $125.0 million that will effectively fix the 2023 Term Loan’s interest rate at 4.73% beginning on July 22, 2023 through the 2023 Term Loan’s maturity date of January 10, 2025.

(2) The credit facility's term ends in August 2025, with two six-month extension options.

The weighted average maturity for our debt is 5.9 years.

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Prevailing interest rates or other factors at the time of a refinancing, such as possible reluctance of lenders to make commercial real estate loans, may result in higher interest rates and increased interest expense or inhibit our ability to finance our obligations.

From time to time, we may seek to repurchase and cancel our outstanding secured and unsecured notes and term loans through open market purchases, privately negotiated transactions or otherwise.

From time to time, we may seek to repurchase and cancel our outstanding unsecured notes and term loans through open market purchases, privately negotiated transactions or otherwise.

Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

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Debt Covenants

Pursuant to the terms of our Revolving Credit Facility, 2018 Term Loan and secured and unsecured notes, we are subject to customary operating covenants and maintenance of various financial ratios.

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.

Pursuant to the terms of our Revolving Credit Facility, 2023 Term Loan and unsecured notes, we are subject to customary operating covenants and maintenance of various financial ratios.

Failure to comply with any of the covenants under our Revolving Credit Facility, 2023 Term Loan, 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.

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

As of March 31, 2023, we were in compliance with the covenants related to our Revolving Credit Facility, 2023 Term Loan, and unsecured notes.

Common Equity

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

We have authorized for issuance 150.0 million common shares, of which 87.7 million shares were outstanding at March 31, 2023.

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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We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt.

We did not issue common shares under the Equity Distribution Agreements during the 2022 Quarter or 2021 Quarter.

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):

Nine Months Ended September 30,

We did not issue common shares under the Equity Distribution Agreements during the 2023 Quarter.

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

Three Months Ended March 31,

Issuance of common shares 1,032

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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 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

Our issuances and net proceeds on the dividend reinvestment program for the three months ended March 31, 2023 and 2022 were as follows ($ in thousands, except per share data):

Three Months Ended March 31,

Issuance of common shares 14 10

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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.

As of March 31, 2023, no preferred shares were issued and outstanding.

Historical Cash Flows

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

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

Net cash provided by operating activities $ 16,289 $ 8,651 $ 7,638 88.3 %

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).

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.

Net cash used in investing activities (5,791) (114,533) 108,742 (94.9) %

Net cash (used in) provided by financing activities (11,819) 12,009 (23,828) (198.4) %

Net cash provided by operating activities increased primarily due to the acquisitions of Carlyle of Sandy Springs, Marietta Crossing and Alder Park during 2022.

Net cash used in investing activities decreased primarily due to the acquisition of Carlyle of Sandy Springs during the 2022 Quarter.

Net cash (used in) provided by financing activities decreased primarily due to the repayment of the $100.0 million 2018 Term Loan and net repayments on the Revolving Credit Facility during the 2023 Quarter and proceeds from equity issuances during the 2022 Quarter.

These were partially offset by executing the $125.0 million 2023 Term Loan during the 2023 Quarter.

Off-Balance Sheet Arrangements

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.

We have no off-balance sheet arrangements as of March 31, 2023 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 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) income $ (10,739) $ 31,319 $ (27,337) $ 23,180

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

Discontinued operations:

The following table provides the calculation of our NAREIT FFO and a reconciliation of net loss to NAREIT FFO for the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended March 31,

Net loss $ (3,643) $ (7,724)

Depreciation and amortization 21,536 22,200

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

NAREIT FFO $ 17,893 $ 14,476

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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 nine months ended September 30, 2022.

There were no changes made by management to the critical accounting policies in the three months ended March 31, 2023.

We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 17, 2023.

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