Elme Communities 10-Q

ITEM 1: FINANCIAL STATEMENTS The information furnished in the accompanying unaudited Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Equity and Consolidated Statements of Cash Flows reflects all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes for the three years ended December 31, 2022 included in our 2022 Annual Report on Form 10-K filed on February 17, 2023. 4 ELME COMMUNITIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA ) September 30, 2023 December 31, 2022 (Unaudited) Assets Land $ 384,097 $ 373,171 Income producing property 1,941,663 1,897,835 2,325,760 2,271,006 Accumulated depreciation and amortization ( 506,298 ) ( 481,588 ) Net income producing property 1,819,462 1,789,418 Properties under development or held for future development 31,095 31,260 Total real estate held for investment, net 1,850,557 1,820,678 Cash and cash equivalents 8,079 8,389 Restricted cash 2,104 1,463 Rents and other receivables 15,300 16,346 Prepaid expenses and other assets 34,233 25,730 Total assets $ 1,910,273 $ 1,872,606 Liabilities Notes payable, net $ 522,150 $ 497,359 Line of credit 149,000 55,000 Accounts payable and other liabilities 40,666 34,386 Dividend payable 15,868 14,934 Advance rents 3,365 1,578 Tenant security deposits 6,171 5,563 Total liabilities 737,220 608,820 Equity Shareholders’ equity Preferred shares; $ 0.01 par value; 10,000 shares authorized; no shares issued or outstanding — — Shares of beneficial interest, $ 0.01 par value; 150,000 shares authorized; 87,832 and 87,534 shares issued and outstanding, as of September 30, 2023 and December 31, 2022, respectively 878 875 Additional paid in capital 1,734,657 1,729,854 Distributions in excess of net income ( 550,442 ) ( 453,008 ) Accumulated other comprehensive loss ( 12,332 ) ( 14,233 ) Total shareholders’ equity 1,172,761 1,263,488 Noncontrolling interests in subsidiaries 292 298 Total equity 1,173,053 1,263,786 Total liabilities and equity $ 1,910,273 $ 1,872,606 See accompanying notes to the consolidated financial statements. 5 ELME COMMUNITIES AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue Real estate rental revenue $ 56,651 $ 54,603 $ 169,059 $ 153,787 Expenses Property operating and maintenance 12,747 13,092 38,510 35,404 Real estate taxes and insurance 7,050 6,469 21,066 19,893 Property management 1,935 1,916 5,882 5,462 General and administrative 6,370 6,403 19,891 20,998 Transformation costs 985 2,399 6,339 6,645 Depreciation and amortization 21,904 23,632 64,855 69,871 Real estate impairment 41,860 — 41,860 — 92,851 53,911 198,403 158,273 Real estate operating (loss) income ( 36,200 ) 692 ( 29,344 ) ( 4,486 ) Other income (expense) Interest expense ( 7,418 ) ( 6,582 ) ( 21,043 ) ( 18,388 ) Loss on extinguishment of debt — ( 4,917 ) ( 54 ) ( 4,917 ) Other income — 68 569 454 ( 7,418 ) ( 11,431 ) ( 20,528 ) ( 22,851 ) Net loss $ ( 43,618 ) $ ( 10,739 ) $ ( 49,872 ) $ ( 27,337 ) Basic net loss per common share $ ( 0.50 ) $ ( 0.12 ) $ ( 0.57 ) $ ( 0.32 ) Diluted net loss per common share $ ( 0.50 ) $ ( 0.12 ) $ ( 0.57 ) $ ( 0.32 ) Weighted average shares outstanding – basic 87,759 87,453 87,717 87,354 Weighted average shares outstanding – diluted 87,759 87,453 87,717 87,354 See accompanying notes to the consolidated financial statements. 6 ELME COMMUNITIES AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net loss $ ( 43,618 ) $ ( 10,739 ) $ ( 49,872 ) $ ( 27,337 ) Other comprehensive income: Unrealized (loss) gain on interest rate hedges ( 149 ) 442 372 3,284 Reclassification of unrealized loss on interest rate derivatives to earnings 510 509 1,529 1,529 Comprehensive loss $ ( 43,257 ) $ ( 9,788 ) $ ( 47,971 ) $ ( 22,524 ) See accompanying notes to the consolidated financial statements. 7 ELME COMMUNITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (IN THOUSANDS) (UNAUDITED) Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, December 31, 2022 87,534 $ 875 $ 1,729,854 $ ( 453,008 ) $ ( 14,233 ) $ 1,263,488 $ 298 $ 1,263,786 Net loss — — — ( 49,872 ) — ( 49,872 ) — ( 49,872 ) Unrealized gain on interest rate hedges — — — — 372 372 — 372 Amortization of swap settlements — — — — 1,529 1,529 — 1,529 Distributions to noncontrolling interests — — — — — — ( 6 ) ( 6 ) Dividends ($ 0.54 per common share) — — — ( 47,562 ) — ( 47,562 ) — ( 47,562 ) Shares issued under Dividend Reinvestment Program 28 — 497 — — 497 — 497 Share grants, net of forfeitures and tax withholdings 270 3 4,306 — — 4,309 — 4,309 Balance, September 30, 2023 87,832 $ 878 $ 1,734,657 $ ( 550,442 ) $ ( 12,332 ) $ 1,172,761 $ 292 $ 1,173,053 Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, December 31, 2021 86,261 $ 863 $ 1,697,477 $ ( 362,494 ) $ ( 19,091 ) $ 1,316,755 $ 307 $ 1,317,062 Net loss — — — ( 27,337 ) — ( 27,337 ) — ( 27,337 ) Unrealized gain on interest rate hedges — — — — 3,284 3,284 — 3,284 Amortization of swap settlements — — — — 1,529 1,529 — 1,529 Distributions to noncontrolling interests — — — — — — ( 6 ) ( 6 ) Dividends ($ 0.51 per common share) — — — ( 44,708 ) — ( 44,708 ) — ( 44,708 ) Equity issuances, net of issuance costs 1,032 10 26,841 — — 26,851 — 26,851 Shares issued under Dividend Reinvestment Program 32 — 777 — — 777 — 777 Share grants, net of forfeitures and tax withholdings 179 2 3,745 — — 3,747 — 3,747 Balance, September 30, 2022 87,504 $ 875 $ 1,728,840 $ ( 434,539 ) $ ( 14,278 ) $ 1,280,898 $ 301 $ 1,281,199 See accompanying notes to the consolidated financial statements. 8 ELME COMMUNITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (IN THOUSANDS) (UNAUDITED) Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, June 30, 2023 87,809 $ 878 $ 1,733,388 $ ( 490,939 ) $ ( 12,693 ) $ 1,230,634 $ 294 $ 1,230,928 Net loss — — — ( 43,618 ) — ( 43,618 ) — ( 43,618 ) Unrealized loss on interest rate hedges — — — — ( 149 ) ( 149 ) — ( 149 ) Amortization of swap settlements — — — — 510 510 — 510 Distributions to noncontrolling interests — — — — — — ( 2 ) ( 2 ) Dividends ($ 0.18 per common share) — — — ( 15,885 ) — ( 15,885 ) — ( 15,885 ) Share grants, net of share grant amortization and forfeitures 23 — 1,269 — — 1,269 — 1,269 Balance, September 30, 2023 87,832 $ 878 $ 1,734,657 $ ( 550,442 ) $ ( 12,332 ) $ 1,172,761 $ 292 $ 1,173,053 Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, June 30, 2022 87,392 $ 874 $ 1,727,031 $ ( 408,882 ) $ ( 15,229 ) $ 1,303,794 $ 302 $ 1,304,096 Net loss — — — ( 10,739 ) — ( 10,739 ) — ( 10,739 ) Unrealized gain on interest rate hedges — — — — 442 442 — 442 Amortization of swap settlements — — — — 509 509 — 509 Distributions to noncontrolling interests — — — — — — ( 1 ) ( 1 ) Dividends ($ 0.17 per common share) — — — ( 14,918 ) — ( 14,918 ) — ( 14,918 ) Shares issued under Dividend Reinvestment Program 12 — 259 — — 259 — 259 Share grants, net of forfeitures and tax withholdings 100 1 1,550 — — 1,551 — 1,551 Balance, September 30, 2022 87,504 $ 875 $ 1,728,840 $ ( 434,539 ) $ ( 14,278 ) $ 1,280,898 $ 301 $ 1,281,199 See accompanying notes to the consolidated financial statements. 9 ELME COMMUNITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities Net loss $ ( 49,872 ) $ ( 27,337 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 64,855 69,871 Credit losses on lease related receivables 2,876 1,816 Real estate impairment 41,860 — Share-based compensation expense 4,031 6,157 Net amortization of debt premiums, discounts and related financing costs 3,160 3,084 Loss on extinguishment of debt 54 4,917 Changes in operating other assets ( 10,591 ) ( 952 ) Changes in operating other liabilities 5,443 ( 6,100 ) Net cash provided by operating activities 61,816 51,456 Cash flows from investing activities Real estate acquisitions, net ( 107,595 ) ( 204,433 ) Capital improvements to real estate ( 22,293 ) ( 19,046 ) Development in progress — ( 671 ) Insurance proceeds — 2,224 Non-real estate capital improvements ( 395 ) ( 1,322 ) Net cash used in investing activities ( 130,283 ) ( 223,248 ) Cash flows from financing activities Line of credit repayments, net 94,000 43,000 Dividends paid ( 48,495 ) ( 44,440 ) Repayments of mortgage notes payable — ( 76,598 ) Repayments of unsecured term loan debt ( 100,000 ) — Proceeds from term loan 125,000 — Payment of financing costs ( 844 ) ( 39 ) Distributions to noncontrolling interests ( 6 ) ( 6 ) Proceeds from dividend reinvestment program 497 777 Net proceeds from equity issuances — 26,851 Payment of tax withholdings for restricted share awards ( 1,354 ) ( 2,100 ) Net cash provided by (used in) financing activities 68,798 ( 52,555 ) Net decrease in cash, cash equivalents and restricted cash 331 ( 224,347 ) Cash, cash equivalents and restricted cash at beginning of period 9,852 234,220 Cash, cash equivalents and restricted cash at end of period $ 10,183 $ 9,873 10 ELME COMMUNITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Nine Months Ended September 30, 2023 2022 Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized $ 20,066 $ 18,386 Change in accrued capital improvements and development costs 7,343 2,510 Dividend payable 15,868 14,919 Mortgage notes payable assumed in connection with the acquisition of real estate — 76,554 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 8,079 $ 8,436 Restricted cash 2,104 1,437 Cash, cash equivalents and restricted cash $ 10,183 $ 9,873 See accompanying notes to the consolidated financial statements. 11 ELME COMMUNITIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (UNAUDITED) NOTE 1: NATURE OF BUSINESS Elme Communities, a Maryland real estate investment trust, 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. Within these notes to the financial statements, we refer to the three months ended September 30, 2023 and September 30, 2022 as the “2023 Quarter” and the “2022 Quarter,” respectively, and the nine months ended September 30, 2023 and September 30, 2022 as the “2023 Period” and the “2022 Period,” respectively. Federal Income Taxes 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 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 (“TRS”). Our TRS is subject to corporate federal and state income tax on its taxable income at regular statutory rates. As of both September 30, 2023 and December 31, 2022, our TRS had a deferred tax asset of $ 1.4 million that was fully reserved. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONS Significant Accounting Policies We have prepared our consolidated financial statements using the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022. Recent Accounting Pronouncements In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform ("Topic 848"), which was amended in December 2022 by ASU 2022-06, Reference Rate Reform (Topic 848). Topic 848 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in Topic 848 is optional and may be elected through December 31, 2024 as reference rate reform activities occur. During the first quarter of 2023, we executed an amendment to the $ 700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) to convert the benchmark interest rate from LIBOR to an adjusted SOFR ("Secured Overnight Financing Rate"). We elected to apply the optional expedients in Topic 848 to (i) assert that the hedged interest payments remain probable regardless of any expected modification in terms related to reference rate reform, and (ii) continue the method of assessing effectiveness as documented in the original hedge documentation so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The impact of this guidance did not have a material impact on our consolidated financial statements. Principles of Consolidation and Basis of Presentation The accompanying unaudited consolidated financial statements include the consolidated accounts of Elme Communities and our subsidiaries and entities in which Elme Communities has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation. We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements 12 prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. In addition, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. These unaudited financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2022. Lessee Accounting For leases where we are the lessee, primarily our corporate office operating lease, we recognize a right-of-use asset and a lease liability in accordance with Accounting Standards Codification (“ASC”) Topic 842. The right-of-use asset and associated liability is equal to the present value of the minimum lease payments, applying our incremental borrowing rate. Our borrowing rate is computed based on observable borrowing rates taking into consideration our credit quality and adjusting to a secured borrowing rate for similar assets and term. Lease expense for the operating lease is recognized on a straight-line basis over the expected lease term and is included in “General and administrative expense.” Restricted Cash Restricted cash includes funds held in escrow for tenant security deposits. Transformation Costs Transformation costs include costs related to the strategic shift away from the commercial sector to the residential sector, including the allocation of internal costs, consulting, advisory and termination benefits. Use of Estimates in the Financial Statements The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 13 NOTE 3: REAL ESTATE Acquisitions We acquired the following community during the 2023 Quarter (the “2023 Acquisition”): Acquisition Date Community Type Number of Homes Ending Occupancy as of September 30, 2023 Contract Purchase Price (In thousands) September 29, 2023 Elme Druid Hills Residential 500 93.4 % $ 108,000 The results of operations from the acquired operating property for our period of ownership is included in the condensed consolidated statements of operations as of its acquisition date and was as follows (in thousands): Three and Nine Months Ended September 30, 2023 Real estate rental revenue $ 53 Net loss ( 403 ) We accounted for the 2023 Acquisition as an asset acquisition. We measured the value of the acquired physical assets (land and building) and in-place leases (absorption costs) by allocating the total cost of the acquisition on a relative fair value basis. The total cost of the 2023 Acquisition was as follows (in thousands): Contract purchase price $ 108,000 Capitalized acquisition costs 190 Total $ 108,190 We have recorded the 2023 Acquisition as follows (in thousands): Land $ 25,249 Building 79,281 Absorption costs 3,660 Total carrying amount recorded $ 108,190 The weighted remaining average life for the absorption costs is seven months . The difference in the total acquisition cost of $ 108.2 million for the 2023 Acquisition and the cash paid for the acquisition per the consolidated statements of cash flows of $ 107.6 million is due to net credits received at settlement totaling $ 0.6 million. Development/Redevelopment We have properties under development/redevelopment and held for current or future development. As of September 30, 2023, we have invested $ 30.4 million, including the cost of acquired land, in a residential development adjacent to Riverside Apartments. During the second quarter of 2022, we paused development activities at the aforementioned property and ceased associated capitalization of interest on spending and real estate taxes. However, we continue to capitalize qualifying costs on several other projects with minor development activity necessary to ready each project for its intended use. Properties Sold and Held for Sale We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties and to make occasional sales of properties that no longer meet our long-term strategy or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs or distributed to our shareholders. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale. 14 We did not sell or classify any properties as held for sale during the 2023 Period or in 2022. Real Estate Impairment During the 2023 Quarter, we recognized an impairment charge of $ 41.9 million on Watergate 600 in order to reduce its carrying value to its estimated fair value, which declined due to changes in market conditions in the Washington DC metro region office market. The estimated fair value is inherently subjective because there are few observable market transactions for similar office properties. This fair valuation fell into Level 3 in the fair value hierarchy due to its reliance on significant unobservable inputs (see note 7). In accordance with ASC 820, we estimated the fair value using a discounted cash flow model which required certain significant assumptions, including a discounted cash flow term of 5 years, an average economic occupancy of 80.5 %, and a terminal capitalization rate of 7.5 %. No other properties, including assets held for development, had any recognized impairment charges during the 2023 Quarter. Should external or internal circumstances change requiring the need to shorten holding periods or adjust future estimated cash flows from our properties, we could be required to record impairment charges in the future. NOTE 4: UNSECURED LINE OF CREDIT PAYABLE During the third quarter of 2021, we entered into an amended and restated credit agreement (“Credit Agreement”) which provides for the Revolving Credit Facility and the continuation of an existing $ 250.0 million unsecured term loan (“2018 Term Loan”). The Revolving Credit Facility has a four-year term ending in August 2025, with two six-month extension options. The Credit Agreement has an accordion feature that allows us to increase the aggregate facility to $ 1.5 billion, subject to the lenders’ agreement to provide additional revolving loan commitments or term loans. During the first quarter of 2023, we executed an amendment to the Revolving Credit Facility to convert the benchmark interest rate from LIBOR to an adjusted SOFR, with no change in the applicable interest rate margins. The Revolving Credit Facility bears interest at a rate of daily SOFR plus 0.10 % plus a margin ranging from 0.70 % to 1.40 %. In addition, the Revolving Credit Facility requires the payment of a facility fee ranging from 0.10 % to 0.30 % (depending on Elme Communities’ credit rating) on the $ 700.0 million committed revolving loan capacity, without regard to usage. As of September 30, 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 5.31% and the facility fee is 0.20 %. All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in August 2025, unless extended pursuant to one or both of the two six-month extension options. Interest only payments are due and payable generally on a monthly basis. The amount of the Revolving Credit Facility’s unsecured line of credit unused and available at September 30, 2023 was as follows (in thousands): Committed capacity $ 700,000 Borrowings outstanding ( 149,000 ) Unused and available $ 551,000 We executed borrowings and repayments on the Revolving Credit Facility during the 2023 Period as follows (in thousands): Balance, December 31, 2022 $ 55,000 Borrowings 294,000 Repayments ( 200,000 ) Balance, September 30, 2023 $ 149,000 NOTE 5: NOTES PAYABLE During the first quarter of 2023, we 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 (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 Revolving Credit Facility. 15 NOTE 6: DERIVATIVE INSTRUMENTS We had an interest rate swap arrangement with a notional amount of $ 100.0 million that had effectively fixed the remaining $ 100.0 million portion of the 2018 Term Loan prior to the prepayment. During the first quarter of 2023, we prepaid the 2018 Term Loan using proceeds from the $ 125.0 million 2023 Term Loan (see note 5). Subsequent to this transaction, the interest swap arrangement effectively fixed the interest rate on a $ 100.0 million portion of the 2023 Term Loan through the interest rate swap arrangement’s expiration date of July 21, 2023. During the first quarter of 2023, we entered into two interest rate swap arrangements with an aggregate notional amount of $ 125.0 million that effectively fixed the interest at 4.73 % for the 2023 Term Loan beginning on July 21, 2023 through the 2023 Term Loan’s maturity date of January 10, 2025. The interest rate swap arrangements are recorded at fair value in accordance with GAAP, based on discounted cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedges in Other comprehensive income (loss). We assess the effectiveness of a cash flow hedge both at inception and on an ongoing basis. If a cash flow hedge is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness of our cash flow hedges is recorded in earnings. The fair values of the interest rate swaps as of September 30, 2023 and December 31, 2022, were as follows (in thousands): Fair Value Derivative Assets Derivative Instrument Aggregate Notional Amount Effective Date Maturity Date September 30, 2023 December 31, 2022 Interest rate swap $ 100,000 March 31, 2017 July 21, 2023 $ — $ 1,998 Interest rate swap 75,000 July 21, 2023 January 10, 2025 1,422 — Interest rate swap 50,000 July 21, 2023 January 10, 2025 948 — $ 2,370 $ 1,998 We record interest rate swaps on our consolidated balance sheets within Prepaid expenses and other assets when in a net asset position and within Accounts payable and other liabilities when in a net liability position. The net unrealized gains and losses on the effective swaps were recognized in Other comprehensive income (loss), as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Unrealized (loss) gain on interest rate hedges $ ( 149 ) $ 442 $ 372 $ 3,284 Amounts reported in Accumulated other comprehensive loss related to effective cash flow hedges will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional $ 2.0 million related to our two outstanding interest rate swap arrangements will be reclassified as a decrease to interest expense. The losses reclassified from Accumulated other comprehensive loss into interest expense for the three and nine months ended September 30, 2023 and 2022, were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Loss reclassified from accumulated other comprehensive loss into interest expense $ 510 $ 509 $ 1,529 $ 1,529 During the next twelve months, we estimate that an additional $ 2.0 million related to the previously settled interest rate swap arrangements will be reclassified as an increase to interest expense. We have agreements with each of our derivative counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of September 30, 2023, the fair value of derivative assets, including accrued interest, was $ 2.4 million and we did no t have any derivatives in a liability position. As of September 30, 2023, we have not posted any collateral related to these agreements. 16 Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreements. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. We monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration. NOTE 7: FAIR VALUE DISCLOSURES Assets and Liabilities Measured at Fair Value on a Recurring Basis For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements are required to be disclosed separately for each major category of assets and liabilities, as follows: Level 1: Quoted prices in active markets for identical assets Level 2: Significant other observable inputs Level 3: Significant unobservable inputs The only assets or liabilities we had at September 30, 2023 and December 31, 2022 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Plan (“SERP”), which primarily consist of investments in mutual funds, and the interest rate derivatives (see note 6). We base the valuations related to the SERP on assumptions derived from significant other observable inputs and accordingly these valuations fall into Level 2 in the fair value hierarchy. The valuation of the interest rate derivatives is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate derivative. This analysis reflects the contractual terms of the interest rate derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate derivatives are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Fair Value Measurement , we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate derivatives fall into Level 2 in the fair value hierarchy. The fair values of these assets at September 30, 2023 and December 31, 2022 were as follows (in thousands): September 30, 2023 December 31, 2022 Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3 Assets: SERP $ 1,714 $ — $ 1,714 $ — $ 2,142 $ — $ 2,142 $ — Interest rate derivatives 2,370 — 2,370 — 1,998 — 1,998 — Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Certain assets not measured at fair value on an ongoing basis but subject to fair value adjustments only in certain circumstances, such as when there is evidence of impairment, are measured at fair value on a nonrecurring basis. In the 2023 Quarter, we measured the fair value of Watergate 600 as there was evidence of impairment (see note 3). Financial Assets and Liabilities Not Measured at Fair Value 17 The following disclosures of estimated fair value were determined by management using available market information and established valuation methodologies, including discounted cash flow models. Many of these estimates involve significant judgment. The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to September 30, 2023 may differ significantly from the amounts presented. The valuations of cash and cash equivalents and restricted cash fall into Level 1 in the fair value hierarchy and the valuations of debt instruments fall into Level 3 in the fair value hierarchy. As of September 30, 2023 and December 31, 2022, the carrying values and estimated fair values of our financial instruments were as follows (in thousands): September 30, 2023 December 31, 2022 Carrying Value Fair Value Carrying Value Fair Value Cash and cash equivalents $ 8,079 $ 8,079 $ 8,389 $ 8,389 Restricted cash 2,104 2,104 1,463 1,463 Line of credit 149,000 149,000 55,000 55,000 Notes payable, net 522,150 459,471 497,359 454,564 18 NOTE 8: SHARE-BASED COMPENSATION Elme Communities maintains short-term (“STIP”) and long-term (“LTIP”) incentive plans that allow for stock-based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2016 Omnibus Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options and other awards up to an aggregate of 2,400,000 shares over the ten-year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares. Total Compensation Expense Total compensation expense recognized in the consolidated financial statements for all outstanding share-based awards was $ 1.4 million and $ 1.9 million for the 2023 Quarter and 2022 Quarter, respectively, and $ 4.0 million and $ 6.2 million for the 2023 and 2022 Period, respectively. Restricted Share Awards The total fair values of restricted share awards vested was $ 4.0 million and $ 4.8 million for the 2023 Period and 2022 Period, respectively. The total unvested restricted share awards at September 30, 2023 was 391,777 shares, which had a weighted average grant date fair value of $ 19.78 per share. As of September 30, 2023, the total compensation cost related to unvested restricted share awards was $ 5.3 million, which we expect to recognize over a weighted average period of 26 months. NOTE 9: EARNINGS PER COMMON SHARE We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards and units have non-forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by dividing net income less the allocation of undistributed earnings to unvested restricted share awards and units by the weighted-average number of common shares outstanding for the period. We also determine “Diluted earnings per share” as the more dilutive of the two-class method or the treasury stock method with respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our dilutive earnings per share calculation includes the dilutive impact of operating partnership units under the if-converted method and our share based awards with performance conditions prior to the grant date and all market condition awards under the contingently issuable method. The computations of basic and diluted earnings per share for the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands, except per share data): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Numerator: Net loss $ ( 43,618 ) $ ( 10,739 ) $ ( 49,872 ) $ ( 27,337 ) Allocation of earnings to unvested restricted share awards ( 71 ) ( 68 ) ( 209 ) ( 191 ) Adjusted net loss $ ( 43,689 ) $ ( 10,807 ) $ ( 50,081 ) $ ( 27,528 ) Denominator: Weighted average shares outstanding – basic and diluted 87,759 87,453 87,717 87,354 Basic net loss per common share $ ( 0.50 ) $ ( 0.12 ) $ ( 0.57 ) $ ( 0.32 ) Diluted net loss per common share $ ( 0.50 ) $ ( 0.12 ) $ ( 0.57 ) $ ( 0.32 ) Dividends declared per common share $ 0.18 $ 0.17 $ 0.54 $ 0.51 19 NOTE 10: SEGMENT INFORMATION We operate in a single reportable segment which includes the ownership, development, redevelopment and acquisition of apartment communities. None of our operating properties meet the criteria to be considered separate operating segments on a stand-alone basis. Within the residential segment, we do not distinguish or group our consolidated operations based on size (only one community, Riverside Apartments, comprises more than 10 % of consolidated revenues), type (all assets in the segment are residential) or geography (all but six communities are within the Washington, DC metro region). Further, our apartment communities have similar long-term economic characteristics and provide similar products and services to our residents. As a result, our operating properties are aggregated into a single reportable segment: residential. We have one remaining office property, Watergate 600, which does not meet the criteria for a reportable segment, and has been classified within “Other” on our segment disclosure tables. We evaluate performance based upon net operating income (“NOI”) of the combined properties in the segment. Our reportable operating segment consolidates similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segment’s performance. NOI is a key measurement of our segment profit and loss and is defined as real estate rental revenue less real estate expenses. The following tables present revenues, NOI, capital expenditures and total assets for the three and nine months ended September 30, 2023 and 2022 from our Residential segment as well as Other, and reconcile NOI to net loss as reported (in thousands): Three Months Ended September 30, 2023 Residential Other (1) Consolidated Real estate rental revenue $ 52,065 $ 4,586 $ 56,651 Real estate expenses 18,431 1,366 19,797 Net operating income $ 33,634 $ 3,220 $ 36,854 Other income (expense): Property management expenses ( 1,935 ) General and administrative expenses ( 6,370 ) Transformation costs ( 985 ) Depreciation and amortization ( 21,904 ) Interest expense ( 7,418 ) Real estate impairment ( 41,860 ) Net loss $ ( 43,618 ) Less: Net income attributable to noncontrolling interests in subsidiaries — Net loss attributable to the controlling interests $ ( 43,618 ) Capital expenditures $ 11,900 $ 605 $ 12,505 Total assets $ 1,770,921 $ 139,352 $ 1,910,273 20 Three Months Ended September 30, 2022 Residential Other (1) Consolidated Real estate rental revenue $ 49,889 $ 4,714 $ 54,603 Real estate expenses 18,198 1,363 19,561 Net operating income $ 31,691 $ 3,351 $ 35,042 Other income (expense): Property management expenses ( 1,916 ) General and administrative expenses ( 6,403 ) Transformation costs ( 2,399 ) Depreciation and amortization ( 23,632 ) Interest expense ( 6,582 ) Loss on extinguishment of debt ( 4,917 ) Other income 68 Net loss $ ( 10,739 ) Capital expenditures $ 7,764 $ 567 $ 8,331 Total assets $ 1,694,750 $ 184,784 $ 1,879,534 Nine Months Ended September 30, 2023 Residential Other (1) Consolidated Real estate rental revenue $ 155,156 13,903 $ 169,059 Real estate expenses 55,629 3,947 59,576 Net operating income $ 99,527 $ 9,956 $ 109,483 Other income (expense): Property management expenses ( 5,882 ) General and administrative expenses ( 19,891 ) Transformation costs ( 6,339 ) Depreciation and amortization ( 64,855 ) Interest expense ( 21,043 ) Loss on extinguishment of debt ( 54 ) Other income 569 Real estate impairment ( 41,860 ) Net loss $ ( 49,872 ) Capital expenditures $ 21,447 $ 1,241 $ 22,688 21 Nine Months Ended September 30, 2022 Residential Other (1) Consolidated Real estate rental revenue 139,869 13,918 $ 153,787 Real estate expenses 51,411 3,886 55,297 Net operating income $ 88,458 $ 10,032 $ 98,490 Other income (expense): Property management expenses ( 5,462 ) General and administrative expenses ( 20,998 ) Transformation costs ( 6,645 ) Depreciation and amortization ( 69,871 ) Interest expense ( 18,388 ) Loss on extinguishment of debt ( 4,917 ) Other income 454 Net loss $ ( 27,337 ) Capital expenditures $ 17,623 $ 2,745 $ 20,368 ______________________________ (1) Other represents Watergate 600, an office property that does not meet the qualitative or quantitative criteria for a reportable segment. NOTE 11: SHAREHOLDERS' EQUITY 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. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.), each dated May 4, 2018 (collectively, as amended, the “Equity Distribution Agreements”) for our at-the-market program. Also on February 17, 2021, we entered into a separate equity distribution agreement with BTIG, LLC on the same terms as the Amended Equity Distribution Agreements (the “BTIG Equity Distribution Agreement”). On September 22, 2021, BTIG, LLC notified us that it was terminating the BTIG Equity Distribution Agreement, effective as of September 27, 2021. Pursuant to the Equity Distribution Agreements, we may sell, from time to time, up to an aggregate price of $ 550.0 million of our common shares of beneficial interest, $ 0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. 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 property or the repayment of debt. We did not issue common shares under the Equity Distribution Agreements during the 2023 Period and 2022 Quarter. Our issuances and net proceeds on the Equity Distribution Agreements for the 2022 Period were as follows ($ in thousands, except per share data): Nine Months Ended September 30, 2022 Issuance of common shares 1,032 Weighted average price per share $ 26.27 Net proceeds $ 26,851 We have a dividend reinvestment program whereby shareholders may use their dividends and optional cash payments to purchase common shares. The shares sold under this program may either be common shares issued by us or common shares purchased in the open market. Net proceeds under this program are used for general corporate purposes. 22 We did no t issue common shares under the dividend reinvestment program during the 2023 Quarter. Our issuances and net proceeds on the dividend reinvestment program for the three months ended September 30, 2022 and nine months ended September 30, 2023 and 2022 were as follows ($ in thousands, except per share data): Three Months Ended September 30, Nine Months Ended September 30, 2022 2023 2022 Issuance of common shares 12 28 32 Weighted average price per share $ 21.15 $ 17.64 $ 24.01 Net proceeds $ 259 $ 497 $ 777 23