What changed in this filing

/stocks — the workspaceLOADING

Item 1. Business

2024-02-16 compared with 2023-02-17 · 70 added, 62 removed, 119 unchanged (53% of the section changed)

Elme Communities Overview

Elme Communities, a Maryland real estate investment trust (the "Company"), is a self-administered equity real estate investment trust ("REIT") and successor to a trust organized in 1960.

Elme Communities, a Maryland real estate investment trust, formerly known as Washington Real Estate Investment Trust (the "Company"), is a self-administered equity real estate investment trust ("REIT") and successor to a trust organized in 1960.

Our business primarily consists of the ownership of apartment communities in the greater Washington, DC metro and Sunbelt regions.

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

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

As of December 31, 2023, we owned 28 apartment communities and one office property.

Business and Investment Strategy

8 unchanged sentences

• executing value-add renovations that are tailored to each submarket, target renter group and individual community to provide an improved yet affordable living experience while enhancing shareholder value;

• targeting investment opportunities that have operating upside through community management strategies.

• targeting investment opportunities that provide the potential for significant appreciation in value and that have operating upside through community management strategies.

Our research-focused approach enables us to craft optimal strategies to provide the best combination of value, quality, and resident experience in our apartment communities.

8 unchanged sentences

Regional Real Estate Markets (1)

While we have historically focused our investments in the greater Washington, DC metro region, we began expanding into the Sunbelt region in 2021.

Currently, approximately 20% of our residential homes are located in the Sunbelt region.

We target markets that have economies with diverse, innovative industries that drive outsized job creation, wage growth and in-migration.

Our current targeted expansion markets include Atlanta, Georgia, Dallas-Fort Worth, Texas, Raleigh/Durham, North Carolina, and Charlotte, North Carolina.

As of December 31, 2022, we have acquired five apartment communities in the Atlanta metro region and expect to continue to invest in the Sunbelt region in the coming years.

Our multifamily transformation and subsequent geographic expansion were designed to provide greater opportunities for growth as opposed to the headwinds facing the commercial office and retail sectors.

As expected, our portfolio experienced very strong rental rate growth during 2022.

Our in-place rent growth accelerated during the second half of the year.

Looking forward, we believe we are positioned with historically high embedded growth, which we expect will drive outsized revenue and net operating income growth in 2023.

Our portfolio's allocation in the Atlanta and Washington markets, and our focus on value-oriented price points, help enable our future growth, while also providing relative insulation during economic downturns.

While we have historically focused our investments in the greater Washington, DC metro region, we expanded our footprint to the Atlanta metro region in 2021.

Atlanta offers a range of diverse, innovative industries which we believe are poised to benefit from substantial job creation, rising wages, and continued migration in the coming years.

As of December 31, 2023, we have acquired six apartment communities in the Atlanta metro region and we remain optimistic about the near and longer-term demand drivers in the Atlanta metro region.

Looking forward, we plan to continue to expand our footprint outside of the Washington, DC metro region.

We intend to target markets with skilled labor development and in-migration, diverse economies with innovative industries, strong productivity and wage growth for middle income residents, and demand for affordable mid-market housing.

We believe our portfolio's allocation in the Atlanta and Washington, DC metro regions, and our focus on value-oriented price points, will help enable our future growth, while also providing relative insulation during economic downturns.

Over the past five and 10-year periods, Class B rent growth has outperformed Class A in both of our operating markets.

Additionally, our mid-market price points have not directly competed with new supply, as our average monthly rent is generally several hundred dollars below the asking rent for new deliveries.

Additionally, our mid-market price points generally do not compete with new supply, as our average monthly rent is generally several hundred dollars below the asking rent for new deliveries.

Moreover, the national cost of owning a home compared to renting a single-family starter home is the highest it’s been in over 20 years.

As housing remains undersupplied and the cost of homeownership remains unaffordable for many median-income households, we expect to benefit from sustained demand for quality, affordable rental options.

As housing remains undersupplied, interest rates remain high and the cost of homeownership remains unaffordable for many median-income households, we expect to benefit from sustained demand for quality, affordable rental options.

Washington, DC metro region (22 apartment communities)

The apartment market in the Washington, DC metro region performed well in 2022, with moderation in fundamentals during the second half of the year.

In the fourth quarter of 2022, annual demand was flat, and the softening in demand the past three quarters caused overall market occupancy to decline by 190 basis points year-over-year to 95.1%.

In the fourth quarter of 2023, the Washington, DC metro region absorbed 1,600 units (the third highest 4th quarter performance on record for the Washington, DC metro region), as 4,000 units delivered concurrently.

The rebound in demand in 2023 brought annual demand to 10,800 units, a top five performance nationwide.

Despite healthy absorption, supply and demand remained imbalanced.

As a result, occupancy ticked down 40 basis points over the year to 94.7%.

Effective asking rents declined 0.4% in the fourth quarter of 2023 compared to the third quarter of 2023, averaging $2,110 per month, or $2.39 per square foot, pushing annual rent growth down to 2.5%.

Annual rent change, as of the fourth quarter of 2023, was highest among Class B multifamily properties at 3.7% with Class A multifamily properties trailing behind at 2.4%.

Generally, rents grew most in low supply submarkets, whereas rent cuts were most common in higher supply areas.

Occupancy remained strongest in Class B multifamily properties at 95.2%.

The Washington, DC metro economy is considered to be recession-resistant due to a high concentration of government and government-affiliated jobs.

Annual job growth for the Washington, DC metro region, as reported by the U.S.

Bureau of Labor Statistics was 1.4% or, 48,400 jobs as of November 2023, year-over-year.

The RealPage Market Analytics apartment market outlook points to a heavy construction pipeline with 29,400 units currently under construction, of which 18,200 are planned for delivery over the next year.

Given the projected pipeline, rent and occupancy performance are expected to vary across submarkets, with market-level readings that roughly match the national average in the coming two to three-year window.

Atlanta metro region (6 apartment communities)

The apartment market in the Atlanta metro region performed well in 2021 and 2022 due to the economic recovery, higher household formation and higher in-migration.

In the second half of 2022, the Atlanta apartment market experienced a cooling in demand relative to 2021, mirroring most national markets.

As a result, overall market occupancy in the fourth quarter of 2022 decreased by 320 basis points year-over-year to 93.8%.

Raleigh/Durham and Charlotte metro regions (targeted markets)

The apartment markets in the Raleigh/Durham and Charlotte metro regions were also strong in 2022, though apartment demand in both markets began to pull back in the second quarter of 2022, with continued tapering for the remainder of the year.

Overall market occupancy remained strong in the Raleigh/Durham and Charlotte markets, decreasing by 280 basis points to 94.4% and by 290 basis points to 94.2%, respectively, at the end of the fourth quarter of 2022, compared to the prior year.

In the fourth quarter of 2022, asking rent growth was 7.1% and 8.1% in the Raleigh/Durham and Charlotte markets, respectively.

Dallas-Fort Worth metro region (targeted market)

While annual demand cooled in the fourth quarter of 2022, the apartment market in the Dallas-Fort Worth metro region continued to lead the nation for new supply in absolute numbers.

As a percentage of existing inventory, the region’s inventory growth is in line with other Sunbelt markets and is lower than many mid-sized markets.

Overall market occupancy was approximately 94.1%, down 300 basis points from a year ago.

In the fourth quarter of 2022, asking rent growth remained strong at 8.6% year-over-year.

In the fourth quarter of 2023, the Atlanta metro region absorbed 2,900 units (the fourth highest 4th quarter performance on record for the Atlanta metro region), as 5,400 units delivered concurrently.

Quarterly occupancy in the market contracted 40 basis points year-over-year to about 92.3%.

Annual demand rose to 9,700 units, a significant improvement from the annual net move-outs of 7,000 units recorded in the first quarter of 2023.

The Atlanta metro region recorded an annual rent cut of 4.7%, with effective asking rents averaging $1,628 per month, or $1.60 per square foot.

Class C multifamily properties saw the steepest rent decline of 6.6% on average, followed by Class B multifamily properties with rent cuts of 4.3% on average, and Class A multifamily properties with rent cuts of 3.6% on average.

All but one of Atlanta’s 39 submarkets posted rent cuts on an annual basis.

Annual job growth for the Atlanta metro region as reported by the U.S.

Bureau of Labor Statistics was 2.5%, or 76,500 jobs added as of November 2023, year-over-year.

The RealPage Market Analytics apartment market outlook has 34,300 units currently under construction, of which 23,100 are planned for delivery over the next year.

In the short term, rent change and occupancy are expected to remain muted and are expected to move closer to national norms in 2025, once the current supply wave moderates.

______________________________

(1) The source of all numerical data in this section is RealPage Market Analytics

(1) The source of all regional market numerical data in this section is RealPage Market Analytics

Our Portfolio

9 unchanged sentences

Total real estate rental revenue from continuing operations for each of the three years ended December 31, 2023, was $227.9 million, $209.4 million and $169.2 million, respectively.

During the three years ended December 31, 2022, we acquired five residential properties and placed one residential development project into service.

During that same period, we sold fifteen office properties and eight retail properties.

During the three years ended December 31, 2023, we acquired six residential properties and placed one residential development project into service.

During that same period, we sold twelve office properties and eight retail properties.

See note 14 to the consolidated financial statements for further discussion of our operating results by segment.

No single tenant accounted for more than 5% of real estate rental revenue from continuing operations in any of the three years ended December 31, 2023.

We enter into arrangements from time to time by which various service providers conduct day-to-day community management and/or leasing activities at our properties.

As of December 31, 2022, Bozzuto Management Company ("Bozzuto") and Greystar Real Estate Partners ("Greystar") provide community management and leasing services at the majority of our residential communities and Stream Realty Partners ("Stream") provides property management and leasing services at our sole office property, Watergate 600.

Bozzuto and Greystar provide such services under individual community management agreements for each residential community, each of which is separately terminable by us or Bozzuto/Greystar, as applicable.

Although they vary by community, on average, the fees charged by Bozzuto/Greystar under each agreement are approximately 3% of revenues at each residential community.

We are currently implementing a plan to perform day-to-day community management and leasing activities at our residential communities internally rather than outsource those activities.

This process began in October of 2022 and is scheduled to be completed in 2023.

As of December 31, 2022, 3 of our 27 residential communities were managed internally.

In October 2022, we began a process to internalize our management operations, and this process was completed in July 2023.

Prior to the completion of our management internalization, Bozzuto Management Company ("Bozzuto") and Greystar Real Estate Partners ("Greystar") provided community management and leasing services at the majority of our residential communities.

Bozzuto and Greystar provided such services under individual community management agreements for each residential community, each of which was separately terminable by us or Bozzuto/Greystar, as applicable.

Although they varied by community, on average, the fees charged by Bozzuto/Greystar under each agreement were approximately 3% of revenues at each residential community.

As of December 31, 2023, we have transitioned all of our residential communities to Elme management.

Stream Realty Partners ("Stream") provides property management and leasing services at our sole office property, Watergate 600.

We make capital improvements to our properties on an ongoing basis for the purpose of maintaining and increasing their value and income.

4 unchanged sentences

At Elme Communities, our Environmental, Social and Governance (“ESG”) strategy is to operate and grow in a sustainable, responsible manner that contributes to positive economic, social, and environmental outcomes for shareholders, employees, and the communities in which we serve.

Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures.

We intend to continue providing an annual ESG report that includes disclosures aligned with Global Reporting Initiative Standards 2016, the United Nations Sustainable Development Goals, the Sustainability Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures.

This report can be found online at https://www.elmecommunities.com/esg/.

2 unchanged sentences

In 2021, we announced our commitment to net zero carbon operation in alignment with the Urban Land Institute’s Greenprint Net Zero by 2050 Goal.

Meeting this goal will require that we fully integrate a focus on carbon reductions into our strategic approach and at all levels of our organization throughout our portfolio transformation.

As a first step toward this goal, we are reevaluating the appropriate interim energy and greenhouse gas emissions targets in support of this long-term objective.

In 2023, we joined the U.S.

Department of Energy (DOE) Better Climate Challenge, further aligning greenhouse gas emission reduction with industry leaders.

Meeting this goal requires that we fully integrate a focus on carbon reductions into our strategic approach and at all levels of our organization throughout our portfolio.

We implement sustainable policies and practices at all of our properties, for purposes of ensuring occupants and residents work and live in efficient, healthy spaces.

We track annual asset-level performance of energy use, greenhouse gas emissions, and water consumption, utilizing ENERGY STAR Portfolio Manager as well as Measurabl ESG software.

Over the past several years we have demonstrated continual progress in achieving reductions.

We apply industry standard rating systems such as the Leadership in Energy and Environmental Design (“LEED”) and Building Research Establishment Environmental Assessment Method (“BREEAM”) to establish sustainable practices for building design, construction, operations, and maintenance.

3 unchanged sentences

Additionally, we continue to expand our electric vehicle charging stations across our portfolio to support the transition of our residents to electric transportation.

Among our social initiatives is a commitment to financial inclusion, which aims to increase the availability and equality of financial service opportunities, remove barriers to the financial sector, and enable individuals to improve their financial wellbeing.

Among our social initiatives is a commitment to financial inclusion, pursuant to which we aim to increase the availability and equality of financial service opportunities, remove barriers to the financial sector, and enable individuals to improve their financial wellbeing.

Beyond credit history, life-altering events can interrupt a resident’s ability to pay rent, including job loss, medical emergencies, domestic violence, and other hardships.

1 unchanged sentence

In 2022, we announced a partnership with a financial technology company to dismantle barriers to housing for working families.

Through this partnership, on-time rent payments will be reported monthly to all three credit bureaus, providing an opportunity for residents to build their credit.

Through this partnership, on-time rent payments are reported monthly to all three credit bureaus, providing an opportunity for residents to build their credit.

This no-cost amenity is available to 100% of our community residents.

This initiative follows a “do no harm” mindset.

Therefore, only on-time payments—not delinquencies—will be reported.

Therefore, only on-time payments—not delinquencies—are reported.

In addition to credit reporting, our technology partner's platform offers housing stability loans for residents experiencing financial hardship.

2 unchanged sentences

These programs support the short- and long-term financial well-being of our residents.

We are committed to robust corporate governance and high ethical standards.

Our Board of Trustees (the “Board”) is responsible for corporate policy and management oversight to enhance long-term shareholder value.

In 2020, our Board formalized the oversight, implementation, and improvement of ESG initiatives, recognizing that environmental and social matters—together with strong corporate governance—play a critical role in the execution of our ESG strategy.

In addition to financial wellness, we support our residents physical and mental health and wellness through on-site amenities such as gymnasiums, pools, playgrounds, and community rooms, as well as close access to bike lanes, walking/running paths, parks, and other outdoor amenities.

In 2023, we certified our first five communities to Fitwel Health and Wellness.

The certification is awarded to buildings that promote occupant health and well-being by incorporating a number of evidence-based design and operations strategies that support the physical, mental, and social health of occupants.

At Elme, we hold ourselves, our suppliers, and the Board of Trustees (the "Board") to high ethical standards as we seek to increase shareholder value and foster a collaborative, innovative corporate culture.

Our team is required to read and certify their knowledge on our Code of Ethics, in addition to receiving ethics training throughout the year.

Our Board is responsible for corporate policy and management oversight to enhance long-term shareholder value.

In 2020, our Board formalized the oversight of ESG initiatives, recognizing that environmental and social matters—together with strong corporate governance—play a critical role in the execution of our ESG strategy.

Some of our ESG policies, including our Human Rights Policy, Vendor Code of Conduct, and Environmental Sustainability Policy, can be found on our website at elmecommunities.com/esg/governance/.

We are made up of growth-oriented, hardworking individuals dedicated to transforming creative ideas into decisive action.

5 unchanged sentences

On February 13, 2024, we had 243 employees, including 175 persons engaged in community management functions who were hired in connection with the internalization of our community management functions, and 68 persons engaged in corporate, financial, asset management and other functions.

We expect the number of employees engaged in community management functions to increase throughout 2023 as we continue the internalization of community management services at our apartment communities.

Of the 175 persons engaged in community management functions, 44 are employed in the Atlanta metro region at six different communities, with the remainder in the Washington, DC metro region.

All of our officers and substantially all of our corporate-level employees live and work in or near the greater Washington, DC metro region, and our community management employees live and work in or near their respective communities.

3 unchanged sentences

We financially support employees pursuing industry-specific training and certification programs and we encourage employees to join professional organizations that offer technical, soft skill and leadership development workshops.

Additionally, our equity and cash incentive plans are designed to attract, retain and reward our workforce through the granting of share-based and cash-based compensation awards, with the goal of motivating employees to perform to the best of their abilities and achieve our objectives, including increasing shareholder value.

Additionally, our compensation programs are designed to attract, retain and reward our workforce, with the goal of motivating employees to perform to the best of their abilities and achieve our objectives, including increasing shareholder value.

Health, Safety and Well-being

1 unchanged sentence

Additionally, we have a wellness program that provides fun, engaging challenges to encourage employees to continuously improve their physical, mental, and financial well-being.

Some of the programs we offer throughout the year include biometric screenings, personal finance check-ups, and healthy lunch challenges.

In our corporate office, we offer two wellness rooms for employees to take a break to decompress.

4 unchanged sentences

We believe diversity of backgrounds, experiences, cultures, ethnicities, and interests leads to new ways of thinking and drives engagement and organizational success.

Our diverse DEIA Council is overseen by our senior leadership team and board of trustees.

The DEIA Council tracks and monitors our diversity metrics and facilitates learning and training opportunities, including a diversity speaker series, targeted recruitment and relationship development with diverse industry groups for internships and employment opportunities and partnering with community-based non-profits for volunteer activities.

Our diverse Cultural Advisory Board ("CAB") is overseen by our senior leadership team and our Board.

The CAB tracks and monitors our diversity metrics and facilitates learning and training opportunities, including a diversity speaker series, targeted recruitment and relationship development with diverse industry groups for internships and employment opportunities and partnering with community-based non-profits for volunteer activities.

Community Engagement

As a real estate investment trust, investing is at the core of what we do, but the most valuable investments we make are not in our buildings but in our people and our community.

As a REIT, investing is at the core of what we do, but the most valuable investments we make are not in our buildings but in our people and our community.

We are passionate about making a difference in the regions we call home.

12 unchanged sentences

We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA.

However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants.

However, noncompliance with the ADA could result in an imposition of fines or an award of damages to private litigants.

The obligation to make readily accessible accommodations is an ongoing one, and we will continue to assess our properties and make alterations as appropriate in this respect.

6 unchanged sentences

We are subject to numerous federal, state and local environmental, health, safety and zoning laws and regulations that govern our operations, including with respect to air emissions, wastewater, and the use, storage and disposal of hazardous and toxic substances and petroleum products.

The cost to comply with such laws and regulations may be significant, and such laws may become more stringent over time.

If we fail to comply with such laws, including if we fail to obtain any required permits or licenses, we could face substantial fines or possible revocation of our authority to conduct some of our operations.

In addition, under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under, or migrating from such property, including costs to investigate and clean up such contamination and liability for natural resources damage.

In addition, we also may be liable for the costs of remediating contamination at off-site waste disposal facilities to which we have arranged for the disposal or treatment of hazardous substances, without regard to whether we complied with environmental laws in doing so.

In addition, under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under, or migrating from such property, including costs to investigate and remediate such contamination and liability for natural resources damage.

Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several.

These liabilities could be substantial and the cost of any required remediation, removal, fines, or other costs could exceed the value of the property and/or our aggregate assets.

These liabilities for remediation could be substantial and the cost of any required remediation, fines, or other costs could exceed the value of the property and/or our aggregate assets.

In addition, the presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or bodily injury or property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the properties as collateral.

In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination.

Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures.

Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or

businesses may be operated, and these restrictions may require substantial expenditures.

Availability of Reports

4 unchanged sentences

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-K

Item 1. Business