Elme Communities 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 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 “2022 Period,” respectively. Forward-Looking Statements This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Elme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional factors which may cause the actual results, performance, or achievements of Elme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to: risks associated with our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of apartment homes in the Sunbelt markets 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, within the price ranges anticipated and on the terms and timing anticipated, or at all; changes in the composition of our portfolio; risks related to changes in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers; the economic health of our residents; the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts); compliance with applicable laws and corporate social responsibility goals, including those concerning the environment and access by persons with disabilities; the risks related to not having adequate insurance to cover potential losses; changes in the market value of securities; terrorist attacks or actions and/or cyber-attacks; whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced; 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 share ownership; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; whether our estimated transformation costs for 2023 will be correct; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2022 Form 10-K filed on February 17, 2023. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise. General Introductory Matters We provide our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations and financial condition. We organize the MD&A as follows: • Overview. Discussion of our business outlook, operating results, investment and financing activity and capital requirements to provide context for the remainder of MD&A. • Results of Operations. Discussion of our financial results comparing the 2023 Quarter to the 2022 Quarter and the 2023 Period to the 2022 Period. • Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and cash flows. • Funds From Operations . Calculation of NAREIT Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental measure to net income. 24 • Critical Accounting Estimates. Descriptions of accounting policies that reflect significant judgments and estimates used in the preparation of our consolidated financial statements. When evaluating our financial condition and operating performance, we focus on the following financial and non-financial indicators: • 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. • 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. For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store.” Same-store portfolio properties include properties that were owned for the entirety of the years being compared, and exclude properties under redevelopment or development and properties acquired, sold or classified as held for sale during the years being compared. We define development properties as those for which we have planned or ongoing major construction activities on existing or acquired land pursuant to an authorized development plan. Development properties are categorized as same-store when they have reached stabilized occupancy (90%) before the start of the prior year. We define redevelopment properties as those for which we have planned or ongoing significant development and construction activities on existing or acquired buildings pursuant to an authorized plan, which has an impact on current operating results, occupancy and the ability to lease space with the intended result of a higher economic return on the property. We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared. Overview Our revenues are derived primarily from the ownership and operation of income producing property. As of September 30, 2023, we owned approximately 9,400 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. In connection with our strategic transformation, the shift away from the commercial sector to the residential sector, we have redesigned our operating model for purposes of more efficiently and effectively supporting residential operations. This operating model redesign included insourcing the property-level management activities at our multifamily properties previously 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 transformation costs, net of amounts capitalized, on the condensed consolidated statements of operations of $1.0 million and $2.4 million during the 2023 Quarter and 2022 Quarter, respectively, and $6.3 million and $6.6 million during the 2023 Period and 2022 Period, respectively. We do not anticipate incurring additional transformation costs in the future. We expect to realize significant operational benefits from this operating model redesign. Community onboarding began in October 2022, and we have transitioned all of our residential communities to Elme management as of September 30, 2023. Operating Results Net loss, NOI and NAREIT FFO for the three months ended September 30, 2023 and 2022 were as follows (in thousands): Three Months Ended September 30, 2023 2022 $ Change % Change Net loss $ (43,618) $ (10,739) $ (32,879) 306.2 % NOI (1) $ 36,854 $ 35,042 $ 1,812 5.2 % NAREIT FFO (2) $ 20,146 $ 12,893 $ 7,253 56.3 % ______________________________ (1) See page 28 of the MD&A for a reconciliation of NOI to net income. (2) See page 38 of the MD&A for a reconciliation of NAREIT FFO to net income. The increase in net loss is primarily due to a real estate impairment ($41.9 million) and higher interest expense ($0.8 million) in the 2023 Quarter. These were partially offset by loss on extinguishment of debt ($4.9 million) in the 2022 Quarter, higher NOI ($1.8 million), lower depreciation and amortization expenses ($1.7 million) and lower transformation costs ($1.4 million). 25 The higher NOI is primarily due to higher NOI from same-store properties ($2.1 million) and the acquisition of Elme Marietta ($0.2 million) in 2022, partially offset by lower NOI at Elme Sandy Springs ($0.4 million) and Watergate 600 ($0.1 million). The higher same-store NOI was primarily due to higher rental rates. Residential same-store average occupancy for our portfolio increased to 95.6% as of September 30, 2023 from 95.4% as of September 30, 2022. The higher NAREIT FFO is primarily due to lower loss on extinguishment of debt ($4.9 million), higher NOI ($1.8 million) and lower transformation costs ($1.4 million), partially offset by higher interest expense ($0.8 million). Investment Activity Significant investment activity during the 2023 Period included the acquisition of Elme Druid Hills, a 500-unit apartment community in Atlanta, Georgia for a contract purchase price of $108.0 million during the 2023 Quarter. The acquisition was funded through cash and borrowings under the Revolving Credit Facility. Financing Activity Significant financing activity during the 2023 Period included entering 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 Revolving Credit Facility. The 2023 Term Loan has a two-year term ending in January 2025, with two one-year extension options. 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%. As of October 24, 2023, our Revolving Credit Facility has a borrowing capacity of $539.0 million. Capital Requirements 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). 26 Results of Operations The discussion that follows is based on our consolidated results of operations for the 2023 Quarter and 2022 Quarter and the 2023 Period and the 2022 Period. Net Operating Income NOI, defined as real estate rental revenue less direct real estate operating expenses, is a non-GAAP measure. NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations (including the gain or loss on sale, if any), plus interest expense, depreciation and amortization, lease origination expenses, general and administrative expenses, acquisition costs, real estate impairment, casualty gain and losses and gain or loss on extinguishment of debt. 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. NOI excludes certain components from net income in order to provide results more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. As a result of the foregoing, we provide NOI as a supplement to net income, calculated in accordance with GAAP. NOI does not represent net income or income from continuing operations calculated in accordance with GAAP. As such, NOI should not be considered an alternative to these measures as an indication of our operating performance. A reconciliation of net loss to NOI follows. 27 2023 Quarter Compared to 2022 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, 2023 2022 $ Change % Change Net loss $ (43,618) $ (10,739) $ (32,879) 306.2 % Adjustments: Property management expense 1,935 1,916 19 1.0 % General and administrative expense 6,370 6,403 (33) (0.5) % Transformation costs 985 2,399 (1,414) (58.9) % Real estate depreciation and amortization 21,904 23,632 (1,728) (7.3) % Real estate impairment 41,860 — 41,860 100.0 % Interest expense 7,418 6,582 836 12.7 % Loss on extinguishment of debt, net — 4,917 (4,917) (100.0) % Other income — (68) 68 (100.0) % Total net operating income (NOI) $ 36,854 $ 35,042 $ 1,812 5.2 % Residential revenue: Same-store portfolio $ 46,610 $ 44,735 $ 1,875 4.2 % Acquisitions (1) 5,233 4,897 336 6.9 % Non-residential (2) 222 257 (35) (13.6) % Total 52,065 49,889 2,176 4.4 % Residential expenses: Same-store portfolio 16,274 16,471 (197) (1.2) % Acquisitions 2,068 1,606 462 28.8 % Development 56 52 4 7.7 % Non-residential 33 69 (36) (52.2) % Total 18,431 18,198 233 1.3 % Residential NOI: Same-store portfolio 30,336 28,264 2,072 7.3 % Acquisitions 3,165 3,291 (126) (3.8) % Development (56) (52) (4) 7.7 % Non-residential 189 188 1 0.5 % Total 33,634 31,691 1,943 6.1 % Other NOI (3) 3,220 3,351 (131) (3.9) % Total NOI $ 36,854 $ 35,042 $ 1,812 5.2 % ______________________________ (1) Acquisitions: 2023: Elme Druid Hills 2022: Elme Sandy Springs, Elme Cumberland, Elme Marietta (2) Non-residential: Includes revenues and expenses from retail operations at residential properties. (3) Other: Watergate 600 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. 28 Real estate rental revenue from same-store residential properties increased $1.9 million, or 4.2%, to $46.6 million for the 2023 Quarter, compared to $44.7 million for the 2022 Quarter, primarily due to higher rental income ($2.3 million), higher recoveries ($0.2 million) and higher one-time fees ($0.2 million), partially offset by higher credit losses ($0.7 million) and higher rent abatements ($0.1 million). Real estate rental revenue from acquisitions increased $0.3 million due to the acquisitions of Elme Marietta ($0.2 million) and Elme Cumberland ($0.1 million) during the second quarter of 2022. Average occupancy for residential properties for the 2023 Quarter and 2022 Quarter was as follows: September 30, 2023 September 30, 2022 % Change Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total 95.6 % 93.5 % 95.3 % 95.4 % 94.2 % 95.3 % 0.2 % (0.7) % — % The increase in same-store average occupancy was primarily due to higher average occupancy at The Paramount, Elme Bethesda, Roosevelt Towers, Riverside Apartments and Trove, partially offset by lower average occupancy at Elme Conyers, Elme Eagles Landing and The Kenmore. Real Estate Expenses Residential real estate expenses as a percentage of residential revenue for the 2023 Quarter and the 2022 Quarter were 35.4% and 36.5%, respectively. Real estate expenses from same-store residential properties decreased $0.2 million, or 1.2%, to $16.3 million for the 2023 Quarter, compared to $16.5 million for the 2022 Quarter, primarily due to lower contract maintenance ($0.5 million) and lower repairs and maintenance ($0.2 million), partially offset by higher utilities ($0.2 million), real estate taxes ($0.1 million), insurance ($0.1 million) and administrative ($0.1 million) expenses. Real estate expenses from acquisitions increased $0.5 million due to the acquisitions of Elme Sandy Springs ($0.4 million) during the first quarter of 2022 and Elme Cumberland ($0.1 million) during the second quarter of 2022. Other NOI Other NOI decreased due to lower revenue at Watergate 600 ($0.1 million). Other Income and Expenses Transformation costs: Decrease of $1.4 million during the 2023 Quarter primarily due to lower consulting fees ($0.4 million), lower employee time allocations ($0.4 million) related to the strategic transformation, lower software costs ($0.2 million), lower transition fees ($0.2 million), lower branding expenses ($0.1 million) and lower accelerated software depreciation ($0.1 million) each due to the completion of community onboarding. Real estate depreciation and amortization : Decrease of $1.7 million primarily due to lower depreciation and amortization at Elme Marietta ($1.7 million), Elme Cumberland ($0.6 million), Elme Sandy Springs ($0.2 million) and Watergate 600 ($0.1 million). These decreases were partially offset by higher depreciation and amortization at same-store residential properties ($0.5 million) and at Elme Druid Hills ($0.4 million). Interest expense : Interest expense by debt type for the three months ended September 30, 2023 and 2022 was as follows (in thousands): Three Months Ended September 30, Debt Type 2023 2022 $ Change % Change Notes payable $ 6,023 $ 5,127 $ 896 17.5 % Mortgage notes payable — 524 (524) (100.0) % Line of credit 1,395 931 464 49.8 % Total $ 7,418 $ 6,582 $ 836 12.7 % 29 • Notes payable : Increase primarily due to the $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. • Mortgage notes payable : Decrease due to assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Elme Marietta and Elme Cumberland, respectively, during the second quarter of 2022. In September 2022, we extinguished the liabilities associated with these mortgages through defeasance arrangements. • Line of credit : Increase primarily due to higher weighted average borrowings of $41.1 million and a weighted average interest rate of 6.2% in the 2023 Quarter, as compared to weighted average borrowings of $22.4 million and a weighted average interest rate of 3.3% in the 2022 Quarter. Loss on extinguishment of debt : During the 2022 Quarter, we extinguished the liabilities associated with mortgage notes payable for Elme Marietta and Elme Cumberland through defeasance arrangements, recognizing aggregate losses on extinguishment of debt of $4.9 million. Real estate impairment : The real estate impairment charge of $41.9 million during 2023 Quarter reduced the carrying value of Watergate 600 to its estimated fair value (see note 3 to consolidated financial statements). 30 2023 Period Compared to 2022 Period The following tables reconcile net loss to NOI and provide the basis for our discussion of our consolidated results of operations and NOI in the 2023 Period compared to the 2022 Period. All amounts are in thousands, except percentage amounts. Nine Months Ended September 30, 2023 2022 $ Change % Change Net loss $ (49,872) $ (27,337) $ (22,535) 82.4 % Adjustments: Property management expense 5,882 5,462 420 7.7 % General and administrative expense 19,891 20,998 (1,107) (5.3) % Transformation costs 6,339 6,645 (306) (4.6) % Real estate depreciation and amortization 64,855 69,871 (5,016) (7.2) % Real estate impairment 41,860 — 41,860 100.0 % Interest expense 21,043 18,388 2,655 14.4 % Loss on extinguishment of debt, net 54 4,917 (4,863) (98.9) % Other income (569) (454) (115) 25.3 % Total net operating income (NOI) $ 109,483 $ 98,490 $ 10,993 11.2 % Residential revenue: Same-store portfolio $ 139,182 $ 129,440 $ 9,742 7.5 % Acquisitions (1) 15,269 9,622 5,647 58.7 % Non-residential (2) 705 807 (102) (12.6) % Total 155,156 139,869 15,287 10.9 % Residential expenses: Same-store portfolio 49,279 47,428 1,851 3.9 % Acquisitions 6,097 3,698 2,399 64.9 % Development 168 71 97 136.6 % Non-residential 85 214 (129) (60.3) % Total 55,629 51,411 4,218 8.2 % Residential NOI: Same-store portfolio 89,903 82,012 7,891 9.6 % Acquisitions 9,172 5,924 3,248 54.8 % Development (168) (71) (97) 136.6 % Non-residential 620 593 27 4.6 % Total 99,527 88,458 11,069 12.5 % Other NOI (3) 9,956 10,032 (76) (0.8) % Total NOI $ 109,483 $ 98,490 $ 10,993 11.2 % ______________________________ (1) Acquisitions: 2023: Elme Druid Hills 2022: Elme Sandy Springs, Elme Cumberland, Elme Marietta (2) Non-residential: Includes revenues and expenses from retail operations at residential properties. (3) Other: Watergate 600 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. 31 Real estate rental revenue from same-store residential properties increased $9.7 million, or 7.5%, to $139.2 million for the 2023 Period, compared to $129.4 million for the 2022 Period, primarily due to higher rental income ($8.7 million), higher recoveries ($0.8 million), lower rent abatements ($0.5 million) and higher fee income ($0.2 million), partially offset by higher credit losses ($0.5 million). Real estate rental revenue from acquisitions increased $5.6 million, or 58.7%, to $15.3 million for the 2023 Period, compared to $9.6 million for the 2022 Period, primarily due to the acquisitions of Elme Marietta ($2.8 million) and Elme Cumberland ($1.8 million) during the second quarter of 2022 and Elme Sandy Springs ($1.0 million) during the first quarter of 2022. Average occupancy for residential properties for the 2023 Period and 2022 Period was as follows: September 30, 2023 September 30, 2022 % Change Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total 95.6 % 93.8 % 95.4 % 95.6 % 94.1 % 95.5 % — % (0.3) % (0.1) % Same-store average occupancy remained consistent at 95.6% in the 2023 Period and the 2022 Period. Higher average occupancy at Roosevelt Towers, Riverside Apartments and The Trove was partially offset by lower average occupancy at Bennett Park, Elme Watkins Mill and Elme Eagles Landing. Real Estate Expenses Residential real estate expenses as a percentage of residential revenue for the 2023 Period and 2022 Period were 35.9% and 36.8%, respectively. Real estate expenses from same-store residential properties increased by $1.9 million, or 3.9%, to $49.3 million for the 2023 Period, compared to $47.4 million for the nine months ended September 30, 2022, primarily due to higher utilities ($1.0 million), administrative ($0.8 million), repairs and maintenance ($0.4 million), real estate taxes ($0.2 million) and insurance ($0.1 million) expenses. The increase is partially offset by lower contract maintenance and supplies ($0.7 million) expenses. Real estate expenses from acquisitions increased $2.4 million due to the acquisitions of Elme Marietta ($0.9 million) and Elme Cumberland ($0.6 million) during the second quarter of 2022, and Elme Sandy Springs ($0.9 million) during the first quarter of 2022. Other NOI Other NOI decreased due to higher operating expenses at Watergate 600 ($0.1 million). Other Income and Expenses Property management expenses: Increase of $0.4 million primarily due to higher management fee expenses at same-store properties. General and administrative expenses : Decrease of $1.1 million primarily due to lower incentive compensation ($1.9 million) and lower legal fees ($0.6 million). These were partially offset by higher computer software ($0.7 million) and corporate office moving ($0.6 million) expenses. Transformation costs: Decrease of $0.3 million primarily due to lower accelerated software depreciation ($0.7 million), lower consulting fees ($0.5 million) and lower software costs ($0.3 million). The decrease is partially offset by higher signing bonuses for new employees ($0.9 million), higher placement fee ($0.2 million), and higher branding expenses ($0.1 million). Depreciation and amortization : Decrease of $5.0 million primarily due to lower depreciation and amortization at same-store residential properties ($3.0 million), Elme Sandy Springs ($1.8 million) and Elme Marietta ($1.2 million). The decrease was partially offset by higher depreciation and amortization at Elme Druid Hills ($0.4 million), Elme Cumberland ($0.3 million), and Watergate 600 ($0.3 million). 32 Interest expense : Interest expense by debt type for the nine months ended September 30, 2023 and 2022 was as follows (in thousands): Nine Months Ended September 30, Debt Type 2023 2022 $ Change % Change Notes payable $ 17,022 $ 15,331 $ 1,691 11.0 % Mortgage notes payable — 1,014 (1,014) (100.0) % Line of credit 4,021 2,326 1,695 72.9 % Capitalized interest — (283) 283 (100.0) % Total $ 21,043 $ 18,388 $ 2,655 14.4 % • Notes payable : Increase primarily due to the $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. • Mortgage notes payable : Decrease due to the assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Elme Marietta and Elme Cumberland, respectively, during the 2022 Period. 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 $40.8 million and a weighted average interest rate of 6.1% in the 2023 Period, as compared to weighted average borrowings of $7.5 million and a weighted average interest rate of 3.3% in the 2022 Period. • 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 resulting from macroeconomic uncertainty. Loss on extinguishment of debt: During the 2022 Period, we extinguished the liabilities associated with mortgage notes payable for Elme Marietta and Elme Cumberland through defeasance arrangements, recognizing aggregate losses on extinguishment of debt of $4.9 million. Other income : Increase of $0.1 million is due to higher tax refunds received for office properties sold in prior years. Real Estate Impairment : The real estate impairment charge of $41.9 million during 2023 Period reduced the carrying value of Watergate 600 to its estimated fair value (see note 3 to consolidated financial statements). 33 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, acquisitions and contractual obligations, as well as the payment of dividends, on-going transformational costs and funding possible growth opportunities. 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 no debt maturities until 2025 and only $274.0 million of scheduled debt maturities prior to 2028, based on current amounts outstanding under our Revolving Credit Facility. As of October 24, 2023, we had cash and cash equivalents totaling $3.0 million and a borrowing capacity of $539.0 million on our Revolving Credit Facility, resulting in a total liquidity position of $542.0 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. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our board of trustees which considers, among other factors, trends in our levels of NAREIT FFO and ongoing capital requirements to achieve a targeted payout ratio. Capital Requirements As of the end of the 2023 Period, our full-year 2023 capital requirements are summarized below: • Funding dividends and distributions to our shareholders; • Approximately $35.0 - $40.0 million to invest in our existing portfolio of operating assets, inclusive of $22.0 - $27.0 million of major capital expenditures; • Less than $1.0 million to invest in our development and redevelopment projects; and • Funding for potential property acquisitions throughout 2023, offset by proceeds from potential property dispositions. There can be no assurance that our capital requirements will not be materially higher or lower than the above expectations. We currently believe that we will generate sufficient cash flow from operations and potential property sales and have access to the capital resources necessary to fund our requirements for the remainder of 2023 . However, as a result of the uncertainty of the general market conditions in the greater Washington, DC metro and Sunbelt regions, economic conditions affecting the ability to attract and retain tenants, declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all. If we are unable to obtain capital from other sources, we may need to alter capital spending to be materially different than what is stated above. If capital were not available, we may be unable to satisfy the distribution requirement applicable to REITs, make required principal and interest payments, make strategic acquisitions or make necessary and/or routine capital improvements or undertake improvement/redevelopment opportunities with respect to our existing portfolio of operating assets. Debt Financing We generally use secured or unsecured, corporate-level debt, including unsecured notes, our Revolving Credit Facility, bank term loans and mortgages to meet our borrowing needs. Long-term, we generally use fixed rate debt instruments in order to match the returns from our real estate assets. If we issue unsecured debt in the future, we will seek to “ladder” the maturities of our debt to mitigate exposure to interest rate risk in any particular future year. We also utilize variable rate debt for short-term financing purposes. At times, our mix of variable and fixed rate debt may not suit our needs. At those times, we may use derivative financial instruments including interest rate swaps and caps, forward interest rate options or interest rate options in order to assist us in managing our debt mix. 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. 34 As of September 30, 2023, our future debt principal payments are scheduled as follows (in thousands): Future Maturities of Debt Year Unsecured Debt Revolving Credit Facility Total Debt Average Interest Rate 2023 $ — $ — $ — —% 2024 — — — —% 2025 125,000 (1) 149,000 (2) 274,000 5.6% 2026 — — — —% 2027 — — — —% Thereafter 400,000 — 400,000 4.5% Scheduled principal payments $ 525,000 $ 149,000 $ 674,000 4.9% Net premiums/discounts (99) — (99) Loan costs, net of amortization (2,751) — (2,751) Total $ 522,150 $ 149,000 $ 671,150 4.9% ______________________________ (1) During the first quarter of 2023, 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 Revolving 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 fixed 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 effectively fixed the 2023 Term Loan’s interest rate at 4.73% beginning on July 21, 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 4.8 years. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. 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 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. The amounts involved may be material. 35 Debt Covenants 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, 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 87.8 million shares were outstanding at September 30, 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. 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 common shares sold under this program may either be common shares issued by us or common shares purchased in the open market. We did not 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 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 Issuance of common shares — 12 28 32 Weighted average price per share $ — $ 21.15 $ 17.64 $ 24.01 Net proceeds $ — $ 259 $ 497 $ 777 36 Preferred Equity Elme Communities’ board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares. The ability to issue preferred equity provides Elme Communities an additional financing tool that may be used to raise capital for future acquisitions or other business purposes. As of September 30, 2023, no preferred shares were issued and outstanding. Historical Cash Flows Cash flows from operations are an important factor in our ability to sustain our dividend at its current rate. If our cash flows from operations were to decline significantly from current levels, we may have to reduce our dividend. Consolidated cash flow information is summarized as follows (in thousands): Nine Months Ended September 30, Change 2023 2022 $ % Net cash provided by operating activities $ 61,816 $ 51,456 $ 10,360 20.1 % Net cash used in investing activities (130,283) (223,248) 92,965 (41.6) % Net cash provided by (used in) financing activities 68,798 (52,555) 121,353 (230.9) % Net cash provided by operating activities increased primarily due to higher rental revenue from same-store communities and the acquisitions of Elme Sandy Springs, Elme Marietta and Elme Cumberland during the 2022 Period. Net cash used in investing activities decreased primarily due to the acquisitions of Elme Sandy Springs, Elme Marietta and Elme Cumberland during the 2022 Period, partially offset by the acquisition of Druid Hills during the 2023 Period. Net cash provided by (used in) financing activities increased primarily due to executing the $125.0 million 2023 Term Loan and net borrowings on the Revolving Credit Facility during the 2023 Period and the repayment of mortgage notes during the 2022 Period. These were partially offset by the repayment of the $100.0 million 2018 Term Loan during the 2023 Period and proceeds from equity issuances during the 2022 Period. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements as of September 30, 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. 37 Funds From Operations NAREIT FFO is defined by the 2018 National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) FFO White Paper Restatement, as net income (computed in accordance with GAAP) excluding gains (or losses) associated with sales of properties; impairments of depreciable real estate, and real estate depreciation and amortization. We consider NAREIT FFO to be a standard supplemental measure for REITs because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that the value of real estate assets diminishes predictably over time. Since real estate values have instead historically risen or fallen with market conditions, we believe that NAREIT FFO more accurately provides investors an indication of our ability to incur and service debt, make capital expenditures and fund other needs. Our NAREIT FFO may not be comparable to FFO reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently. NAREIT FFO is a non-GAAP measure. The following table provides the calculation of our NAREIT FFO and a reconciliation of net loss to NAREIT FFO for the three and nine months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net loss $ (43,618) $ (10,739) $ (49,872) $ (27,337) Adjustments: Depreciation and amortization 21,904 23,632 64,855 69,871 Real estate impairment 41,860 — 41,860 — NAREIT FFO $ 20,146 $ 12,893 $ 56,843 $ 42,534 Critical Accounting Estimates We base the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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, 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. 38