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Item 7. Management’s Discussion and Analysis

2024-02-16 compared with 2023-02-17 · 132 added, 159 removed, 307 unchanged (49% of the section changed)

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We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared.

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

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

Our remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 14 to the consolidated financial statements).

The dispositions of our office and retail properties are part of a strategic shift away from the commercial sector to the residential sector, which simplifies our portfolio to one reportable segment (residential) (the “strategic transformation”).

We used the net proceeds from the sales to fund the expansion of our residential platform through acquisitions in Sunbelt markets and to reduce our leverage by repaying outstanding debt.

During the third and fourth quarters of 2021, we completed the acquisitions of two apartment communities in Georgia with a combined total of 730 apartment homes for a total contract purchase prices of $154.0 million.

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

As of December 31, 2023, we owned approximately 9,400 residential apartment homes in the Washington, DC and Atlanta metro regions.

We also own and operate approximately 300,000 square feet of commercial space in the Washington, DC metro region.

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

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

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

This operating model redesign includes the internalization of community management

services currently performed by third-party management companies.

During 2023, we completed the acquisition of Elme Druid Hills, a 500-unit apartment community in Atlanta, Georgia for a contract purchase price of $108.0 million.

In connection with our strategic transformation, which shifted our business away from the commercial sector to the residential sector, we 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.

Community onboarding began in October 2022, and we have transitioned all of our residential communities to Elme management as of July 2023.

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 $9.7 million and $6.6 million of transformation costs, net of amounts capitalized, on the consolidated statements of operations during 2022 and 2021, respectively, and anticipate incurring approximately $3.0 - $4.0 million of additional transformation costs during 2023.

Community onboarding commenced in October 2022 and is expected to be completed in phases in 2023.

We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023.

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

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

We recognized $6.3 million and $9.7 million of transformation costs, net of amounts capitalized, on the consolidated statements of operations during 2023 and 2022, respectively.

We do not anticipate incurring any additional transformation costs in the future.

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

Operating Results

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The ability to compare one period to another is significantly affected

by the strategic transformation in 2021 and other acquisitions completed and dispositions made during 2021 and 2022 (see note 3 to the consolidated financial statements).

Net (loss) income, NOI and NAREIT FFO for the years ended December 31, 2022 and 2021 were as follows (in thousands, except percentage amounts):

by the acquisitions completed 2023 and 2022 (see note 3 to the consolidated financial statements).

Net loss, NOI and NAREIT FFO for the years ended December 31, 2023 and 2022 were as follows (in thousands, except percentage amounts):

Year Ended December 31,

2023 2022 Change % Change

Net (loss) income

$ (52,977) $ (30,868) $ (22,109) 71.6 %

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(2) See page 43 of the MD&A for reconciliations of NAREIT FFO to net (loss) income.

The increase in net loss is primarily due to gains on sale of real estate ($46.4 million) in 2021 and lower income from discontinued operations in 2022 ($23.1 million) due to the sales of the Office Portfolio and Retail Portfolio during 2021, higher depreciation and amortization expenses ($19.1 million), lower other income ($3.4 million), higher transformation costs, net of amounts capitalized, ($3.1 million), higher property management expenses ($1.3 million) and higher general and administrative expenses ($0.7 million).

These were partially offset by higher NOI ($27.0 million), lower interest expense ($9.1 million), lower loss on extinguishment of debt ($7.8 million) and lower loss on interest rate derivatives ($5.9 million).

The higher NOI is primarily due to the acquisitions of Assembly Eagles Landing ($4.2 million) and The Oxford ($1.1 million) in 2021 and Carlyle of Sandy Spring ($4.0 million), Marietta Crossing ($3.2 million) and Alder Park ($2.2 million) in 2022, higher NOI from same-store properties ($7.9 million), higher NOI from Trove ($3.7 million), which achieved stabilization in the fourth quarter of 2021, and higher NOI at Watergate 600 ($0.7 million).

The increase in net loss is primarily due to a real estate impairment in our office property ($41.9 million), higher interest expense ($5.5 million) and higher property management expenses ($0.7 million) in 2023.

These were partially offset by higher NOI ($12.7 million), lower loss on extinguishment of debt ($4.9 million), lower transformation costs ($3.3 million), lower depreciation and amortization expenses ($2.8 million), and lower general and administrative expenses ($2.4 million).

The higher NOI is primarily due to higher NOI from same-store properties ($9.2 million) and the acquisitions of Elme Marietta ($1.7 million) and Elme Cumberland ($1.0 million) in 2022 and Elme Druid Hills ($1.7 million) in 2023, partially offset by lower NOI at Watergate 600 ($0.3 million) and Elme Sandy Springs ($0.4 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 December 31, 2023 from 95.4% as of December 31, 2022.

The lower NAREIT FFO is primarily due to lower income from discontinued operations, net of depreciation and amortization ($46.0 million), lower other income ($3.4 million), higher transformation costs, net of amounts capitalized, ($3.1 million), higher property management expenses ($1.3 million) and higher general and administrative expenses ($0.7 million).

The higher NAREIT FFO is primarily due to higher NOI ($12.7 million), lower loss on extinguishment of debt ($4.9 million), lower transformation costs ($3.3 million) and lower general and administrative expenses ($2.4 million).

These were partially offset by higher interest expense ($5.5 million) and higher property management expenses ($0.7 million).

Investment Activity

Significant investment transactions during 2022 included the following:

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

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

We assumed a $42.8 million mortgage with this acquisition.

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

We assumed a $33.7 million mortgage with this acquisition.

Significant investment activity during 2023 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 third quarter of 2023.

The acquisition was funded through cash and borrowings under the Company's $700 million unsecured revolving credit facility (“Revolving Credit Facility”).

Financing Activity

Significant financing transactions during 2022 included the following:

• We issued 1.0 million common shares at a weighted average price per share of $26.27 for net proceeds of $26.8 million through our at-the-market program.

• In September 2022, we extinguished the aggregate $76.5 million of mortgages secured by Marietta Crossing and Alder Park through defeasance arrangements, recognizing an aggregate loss on extinguishment of debt of $4.9 million.

We partially funded the defeasances with a $65.0 million draw on our unsecured revolving credit facility.

Subsequent to the end of 2022, 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.

Significant financing activity during 2023 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 (subject to adjustment depending on Elme Communities' credit rating).

We used the proceeds from the 2023 Term Loan 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.

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

As of December 31, 2022, the interest rate on the $700.0 million unsecured revolving credit facility was one month LIBOR plus 0.85% and the facility fee was 0.20%.

The LIBOR was 4.39% as of that date.

Subsequent to the end of 2022, we executed an amendment to our revolving credit facility to convert the benchmark interest rate from LIBOR to an adjusted SOFR, with no change in the applicable interest rate margins.

During 2023, we executed an amendment to our Revolving Credit Facility to convert the benchmark interest rate from LIBOR to an adjusted SOFR, with no change in the applicable interest rate margins.

As of December 31, 2023, the interest rate on the Revolving Credit Facility is based on an adjusted daily SOFR (inclusive of the 0.10% credit spread adjustment) plus 0.85% applicable margin, the daily SOFR is 5.38% and the facility fee is 0.20%.

As of February 13, 2024, our Revolving Credit Facility has a borrowing capacity of $535.0 million.

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The discussion that follows is based on our consolidated results of operations for the two years ended December 31, 2023.

The ability to compare one period to another is significantly affected by the strategic transformation in 2021, including the resulting classification of certain assets as discontinued operations, and other acquisitions completed and dispositions made during those years (see note 3 to the consolidated financial statements).

The ability to compare one period to another is significantly affected by the acquisitions completed during those years (see note 3 to the consolidated financial statements).

Net Operating Income

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2023 2022 $ Change % Change

Net (loss) income $ (30,868) $ 16,384 $ (47,252) (288.4) %

Net loss $ (52,977) $ (30,868) $ (22,109) 71.6 %

Property management expense 8,108 7,436 672 9.0 %

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Real estate depreciation and amortization 88,950 91,722 (2,772) (3.0) %

Real estate impairment 41,860 — 41,860 100.0 %

Interest expense 30,429 24,940 5,489 22.0 %

Loss on interest rate derivatives — 5,866 (5,866) (100.0) %

Loss on extinguishment of debt, net 54 4,917 (4,863) (98.9) %

Other income (569) (712) 143 (20.1) %

Discontinued operations:

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

Gain on sale of real estate, net — (46,441) 46,441 (100.0) %

Total net operating income (NOI) $ 148,081 $ 135,379 $ 12,702 9.4 %

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Development — — — — %

10,510 6,375 4,135 64.9 %

Non-residential (2)

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(1) Acquisitions:

The Oxford and Assembly Eagles Landing

Carlyle of Sandy Springs, Alder Park, Marietta Crossing

(2) Development/redevelopment:

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

Elme Sandy Springs, Elme Cumberland, Elme Marietta

Elme Druid Hills

(2) Non-residential:

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Watergate 600

(5) Discontinued operations:

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

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

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

Real Estate Rental Revenue

Real estate rental revenue from our apartment communities is comprised of (a) rent from operating leases of residential apartments with terms of approximately one year or less, recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our residents, (c) credit losses on lease related receivables, (d) revenue from leases of retail space at our apartment communities and (e) parking and other tenant charges.

Real estate rental revenue from same-store residential properties increased $10.2 million, or 7.3%, to $151.5 million for 2022, compared to $141.3 million for 2021, primarily due to higher rental income ($8.2 million), lower rent abatements ($1.6 million) and higher fee income ($0.4 million).

Real estate rental revenue from acquisitions increased $25.1 million due to the acquisition of Carlyle of Sandy Springs ($6.6 million) during the first quarter of 2022, Marietta Crossing ($4.9 million) and Alder Park ($3.4 million) during the second quarter of 2022, Assembly Eagles Landing ($7.6 million) during the fourth quarter of 2021 and The Oxford ($2.6 million) during the third quarter of 2021.

Real estate rental revenue from development properties increased due to the continued lease-up of the Trove development ($4.1 million).

We placed the remainder of the Trove development costs into service during the first quarter of 2021 and achieved stabilization during the fourth quarter of 2021.

communities and (e) parking and other tenant charges.

Real estate rental revenue from same-store residential properties increased $11.5 million, or 6.6%, to $186.0 million for 2023, compared to $174.5 million for 2022, primarily due to higher rental income ($10.4 million), higher recoveries ($1.1 million), lower rent abatements ($0.5 million) and higher fee and ancillary income ($0.8 million).

The increase is partially offset by higher credit losses ($1.3 million).

Real estate rental revenue from acquisitions increased $7.5 million or 50.2% to $22.4 million for 2023, compared to $14.9 million for 2022, primarily due to the acquisitions of Elme Druid Hills ($2.6 million) during the third quarter of 2023, Elme Marietta ($2.6 million) and Elme Cumberland ($1.7 million) during the second quarter of 2022, and Elme Sandy Springs ($0.6 million) during the first quarter of 2022.

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

December 31, 2022 December 31, 2021 Increase

December 31, 2023 December 31, 2022 % Change

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

95.6 % 93.1 % 95.2 % 95.4 % 94.2 % 95.3 % 0.2 % (1.1) % (0.1) %

The increase in same-store average occupancy was primarily due to higher average occupancy at The Kenmore, 3801 Connecticut Avenue, Assembly Germantown and Assembly Herndon, partially offset by lower average occupancy at Roosevelt Towers and Clayborne Apartments.

The increase in same-store average occupancy was primarily due to higher average occupancy at Elme Bethesda, The Paramount, Roosevelt Towers, Riverside Apartments and The Maxwell.

The increase is partially offset by lower average occupancy at Elme Eagles Landing, Elme Manassas and Elme Conyers.

Real Estate Expenses

Residential real estate expenses as a percentage of residential revenue for 2023 and 2022 were 35.6% and 36.1%, respectively.

Real estate expenses from same-store residential properties increased $2.3 million, or 4.6%, to $53.4 million for 2022, compared to $51.1 million for 2021, primarily due to higher administrative ($0.7 million), real estate tax ($0.6 million), utilities ($0.5 million), insurance ($0.3 million) and contract maintenance and supplies ($0.2 million) expenses.

Real estate expenses from acquisitions increased $10.4 million due to the acquisitions of Carlyle of Sandy Springs ($2.6 million) during the first quarter of 2022, Marietta Crossing ($1.7 million) and Alder Park ($1.2 million) during the second quarter of 2022, Assembly Eagles Landing ($3.4 million) during the fourth quarter of 2021, and The Oxford ($1.5 million) during the third quarter of 2021.

Other NOI classified as continuing operations increased due to higher NOI at Watergate 600 ($0.7 million).

Real estate expenses from same-store residential properties increased $2.2 million, or 3.6%, to $65.1 million for 2023, compared to $62.8 million for 2022, primarily due to higher utilities ($0.9 million), contract services ($0.5 million), real estate taxes ($0.5 million), marketing ($0.4 million) and insurance ($0.4 million) expenses.

The increase is partially offset by lower administrative ($0.3 million) and repairs and maintenance ($0.2 million) expenses.

Real estate expenses from acquisitions increased $3.5 million in 2023 due to the acquisitions of Elme Druid Hills ($0.9 million) during the third quarter of 2023, Elme Sandy Springs ($1.0 million) during the first quarter of 2022 and Elme Marietta ($0.9 million) and Elme Cumberland ($0.7 million) during the second quarter of 2022.

Other NOI decreased due to lower net operating income at Watergate 600 ($0.3 million).

Other Income and Expenses

Property management expenses:

Increase of $1.3 million primarily due to the acquisitions of The Oxford and Assembly Eagles Landing during the third and fourth quarters of 2021, the acquisitions of Carlyle of Sandy Springs, Marietta Crossing and Alder Park in 2022 and Trove reaching stabilization during the fourth quarter of 2021.

Increase of $0.7 million primarily due to higher management fee expenses at same-store properties ($0.4 million) and due to the acquisitions of Elme Druid Hills ($0.1 million) during the third quarter of 2023 and Elme Marietta ($0.1 million) and Elme Cumberland ($0.1 million) during the second quarter of 2022.

General and administrative expenses :

Increase of $0.7 million primarily due to corporate overhead no longer being allocated to

office management due to the sales of the Office and Retail Portfolios in 2021 ($1.9 million), higher legal fees ($0.9 million), higher office rent ($0.6 million) from the commencement of the corporate office lease during the third quarter of 2021 and higher shareholder expenses ($0.3 million) in 2022.

These increases were partially offset by lower short-term incentive compensation expense ($1.8 million), lower leasing expenses ($0.7 million) and lower deferred tax expense ($0.5 million) in 2022.

Decrease of $2.4 million primarily due to higher management fee offset ($4.7 million), lower incentive compensation ($2.4 million) and an adjustment to deferred taxes ($0.5 million) in 2023.

The decrease is partially offset by higher payroll ($2.0 million), computer software ($0.9 million), professional services fees ($0.7 million), employee benefits ($0.5 million), severance ($0.5 million), corporate office moving ($0.5 million), and other ($0.2 million) expenses.

Transformation costs:

Increase of $3.1 million primarily due to higher employee time allocations ($1.5 million) related to the strategic transformation, higher consulting costs ($1.1 million), higher software depreciation ($0.9 million) and higher software costs ($0.8 million), partially offset by lower severance expenses ($1.6 million).

Decrease of $3.3 million primarily due to lower consulting ($1.9 million), lower accelerated depreciation ($0.9 million), lower salary, benefit, and incentive compensation ($0.6 million), lower software implementation ($0.5 million), and lower third-party management transition ($0.3 million) costs.

The decrease is partially offset by higher signing bonuses for new employees ($0.9 million).

Depreciation and amortization :

Increase of $19.1 million primarily due to the acquisitions of Assembly Eagles Landing ($5.3 million), Carlyle of Sandy Springs ($5.8 million), Marietta Crossing ($5.2 million), Alder Park ($3.1 million) and The Oxford ($0.3 million) and higher depreciation and amortization at Watergate 600 ($0.9 million).

These increases were partially offset by lower depreciation and amortization at same-store residential properties ($1.4 million) and Trove ($0.1 million).

Decrease of $2.8 million primarily due to lower depreciation and amortization at same-store residential properties ($2.0 million), the acquisitions of Elme Sandy Springs ($1.7 million), Elme Marietta ($1.5 million) and Elme Cumberland ($0.3 million) and lower depreciation and amortization at Watergate 600 ($0.4 million).

The decrease is partially offset by higher depreciation and amortization at Elme Druid Hills ($3.1 million).

Interest Expense :

Interest expense by debt type for the year ended December 31, 2022 and 2021 was as follows (in thousands):

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

Year Ended December 31,

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• Notes payable :

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

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 :

Increase due to the mortgages of $42.8 million and $33.7 million assumed in the acquisitions of Marietta Crossing and Alder Park, respectively, in the second quarter of 2022.

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

Decrease due to the mortgages of $42.8 million and $33.7 million assumed in the acquisitions of Elme Marietta and Elme Cumberland, respectively, in the second quarter of 2022 and the extinguishment, in September 2022, of the liabilities associated with these mortgages though defeasance arrangements.

• Line of credit :

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• Capitalized interest :

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

Loss on interest rate derivatives :

We terminated five interest rate swap arrangements with an aggregate notional value of $150.0 million and recognized a $5.8 million loss on interest rate derivatives during 2021 (see note 8 to the consolidated financial statements).

Decrease primarily due to ceasing capitalization of interest on spending related to the multifamily development adjacent to Riverside Apartments due to a pause in development activities resulting from macroeconomic uncertainty.

Loss on extinguishment of debt:

During 2022, we extinguished the liabilities associated with mortgage notes payable for Marietta Crossing and Alder Park through defeasance arrangements, recognizing aggregate losses on extinguishment of debt of $4.9 million.

During the third quarter of 2021 we recognized a $12.3 million loss on extinguishment of debt related to the prepayment of the $300.0 million of unsecured notes that were originally scheduled to mature in October 2022, a $0.2 million loss on extinguishment of debt related to the prepayment of a $150.0 million portion of the $250.0 million 2018 Term Loan and a $0.2 million loss on extinguishment of debt related to the renewal of our Revolving Credit Facility, all of which were repaid in connection with our strategic transformation, using the proceeds from the sales of the Office Portfolio and Retail Portfolio.

During 2022, 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 :

Income during 2022 relates to real estate tax refunds ($0.7 million) received on previously sold commercial properties.

Other income in 2021 primarily consists of a legal settlement ($1.3 million), a real estate tax refund for an office property sold in 2018 ($1.3 million), a gain on life insurance ($1.0 million) and a construction easement at a retail property ($0.4 million).

Discontinued operations

Income from properties sold or held for sale:

Decrease due to the sale of the Office Portfolio and the Retail Portfolio during 2021.

Gain on sale of real estate, net:

The net gain during 2021 is due to the gain on sale of the Retail Portfolio ($57.7 million), partially offset by the loss on sale of the Office Portfolio ($11.2 million).

Decrease of $0.1 million is due to lower tax refunds received in 2023 for office properties sold in prior years.

Real estate impairment :

The real estate impairment charge of $41.9 million during 2023 reduced the carrying value of Watergate 600 to its estimated fair value (see note 3 to consolidated financial statements).

2022 Compared to 2021

For a discussion comparing the Company’s financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, refer to subsection “Results of Operations - 2022 Compared to 2021” of Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022.

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, which include meeting our debt obligations, capital commitments and contractual obligations, as well as the payment of dividends, and funding possible growth opportunities.

Through our Office Portfolio and Retail Portfolio sales, which had a combined sale price of approximately $934.3 million, we executed strategic transactions that allowed us to expand into the Sunbelt regions.

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

We recognized $9.7 million and $6.6 million of transformation costs, net of amounts capitalized, on the consolidated statements of operations during 2022 and 2021, respectively.

Upon completion of the implementation in 2023, w e expect to realize significant operational benefits from this operating model redesign.

We also believe we have adequate liquidity beyond 2023, with only $155.0 million of scheduled debt maturities prior to 2027.

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 and contractual obligations, as well as the payment of dividends, and funding possible growth opportunities.

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

We recognized $6.3 million and $9.7 million and $6.6 million of transformation costs, net of amounts capitalized, on the consolidated statements of operations during 2023, 2022 and 2021, respectively.

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

We also believe we have adequate liquidity beyond 2023, with no debt maturities until 2025 and only $282.0 million of scheduled debt maturities prior to 2028, based on current amounts outstanding under our Revolving Credit Facility.

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 funds from operations and ongoing capital requirements to achieve a targeted payout ratio.

Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our Board which considers, among other factors, trends in our levels of funds from operations and ongoing capital requirements to achieve a targeted payout ratio.

Capital Structure

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• Funding dividends and distributions to our shareholders (which we intend to continue to pay at or about current levels);

• Approximately $15.0 - $20.0 million to invest in our existing portfolio of operating assets;

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

• Approximately $34.0 - $39.0 million to invest in our existing portfolio of operating assets inclusive of $23.0 - $28.0 million of major capital expenditures;

• Funding for potential property acquisitions throughout 2024, 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 have enough cash on hand and/or will generate sufficient cash flow from operations and potential property sales and have access to the capital resources necessary to fund our requirements in 2023.

However, as a result of general market conditions in the greater Washington, DC metro and Sunbelt regions, economic conditions affecting the ability to attract and retain residents and tenants or achieve anticipated rental rates, 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 in the prior paragraph.

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.

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 in 2024.

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 residents and tenants or achieve anticipated rental rates, 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.

opportunities with respect to our existing portfolio of operating assets.

Debt Financing

We generally use unsecured or secured, corporate-level debt, including unsecured notes, our Revolving Credit Facility, bank term loans and mortgages, to meet our borrowing needs.

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.

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______________________________

(1) Elme Communities entered into an interest rate swap to effectively fix a LIBOR plus 110 basis points floating interest rate to a 2.31% all-in fixed rate for the remaining $100.0 million portion of the 2018 Term Loan.

The interest rates were fixed through the term loan maturity of July 2023.

Subsequent to the end of 2022, we prepaid the 2018 Term Loan with proceeds from a $125.0 million unsecured term loan which matures in 2025 ("2023 Term Loan").

The 2023 Term Loan has an interest rate of SOFR (subject to a credit spread adjustment of 10 basis points) plus a margin of 95 basis points.

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

(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 was 4.5 years as of December 31, 2023.

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.

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.

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Debt Covenants

Pursuant to the terms of our Revolving Credit Facility, our term loans 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, our term loans, unsecured notes or other debt instruments could result in a default under one or more of our debt instruments.

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.

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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 properties or the repayment of debt.

Our issuances and net proceeds on the Equity Distribution Agreements in 2022 and 2021 and the Original Equity Distribution Agreements in 2020, respectively, were as follows (in thousands, except per share data):

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

Our issuances and net proceeds on the Equity Distribution Agreements in 2022 and 2021 and the Original Equity Distribution Agreements in 2021, were as follows (in thousands, except per share data):

Year Ended December 31,

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Net proceeds $ 497 $ 1,030 $ 1,744

On October 26, 2023, the Board authorized and approved a share repurchase program of up to $50.0 million of the Company’s common shares of beneficial interest over a period of two years, subject to any applicable limitations or restrictions set forth in our existing credit facility and other debt agreements.

The share repurchase program is scheduled to expire on October 25, 2025, unless extended by the Board.

Preferred Equity

Our board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares.

Our Board 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 December 31, 2022, no preferred shares are issued and outstanding.

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

Capital Commitments

We will require capital for development and redevelopment projects currently underway and in the future.

We are currently engaged in predevelopment activities for the ground-up development of a residential property on land adjacent to Riverside Apartments.

As of December 31, 2022, we had no outstanding contractual commitments related to our development and redevelopment projects and expect to fund less than $1.0 million of total development and redevelopment spending during 2023.

In addition to our development and redevelopment projects, we anticipate funding approximately $30.0 - $35.0 million on several major renovation projects at our residential communities during 2023.

These projects include unit renovations, property technology initiatives, common area and mechanical upgrades, pool deck renovations, facade and retaining wall restorations and fire system and roof replacements.

We previously engaged in predevelopment activities for the ground-up development of a residential property on land adjacent to Riverside Apartments, but as of the second quarter of 2022, we paused development activities.

As of December 31, 2023, we had no outstanding contractual commitments related to our development and redevelopment projects and do not expect to spend on our development and redevelopment projects during 2024.

We anticipate funding approximately $23.0 - $28.0 million on several major renovation projects at our residential communities during 2024.

These projects include unit renovations, property technology initiatives, common area and mechanical upgrades, facade and retaining wall restorations and fire system upgrades.

Not all of the anticipated spending had been committed via executed construction contracts at December 31, 2023.

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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, we may have to reduce our dividend.

Consolidated cash flows for the three years ended December 31, 2022 were as follows (in thousands):

If our cash flows from operations were to decline significantly from current levels, we may have to reduce our dividend.

Consolidated cash flows for the three years ended December 31, 2023 are summarized as follows (in thousands):

Year ended December 31, Variance

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Cash (used in) provided by investing activities (146,221) (241,163) 702,170 94,942 (943,333)

Cash used in financing activities (56,416) (565,396) (185,199) 508,980 (380,197)

Net cash provided by operating activities decreased in 2022 as compared to 2021 and in 2021 as compared to 2020 primarily due to the sales of the Office Portfolio and the Retail Portfolio during 2021 (see note 3 to the consolidated financial statements) and costs associated with our strategic transformation.

Net cash (used in) provided by investing activities decreased in 2022 as compared to 2021 and increased in 2021 as compared to 2020 primarily due to the sales of the Office Portfolio and the Retail Portfolio during 2021.

These were partially offset by the acquisitions of The Oxford and Assembly Eagles Landing during 2021 and acquisitions of Marietta Crossing, Alder Park and Carlyle of Sandy Springs during 2022.

Net cash used in financing activities decreased in 2022 as compared to 2021 primarily due to a higher volume of debt repayments during 2021 and higher net proceeds from equity issuances and lower dividends paid in 2022.

Net cash used in financing activities increased in 2021 as compared to 2020 primarily due to the repayment of $300.0 million of unsecured notes and higher net repayments on the Revolving Credit Facility during 2021.

Cash provided by (used in) financing activities 60,238 (56,416) (565,396) 116,654 508,980

Net cash provided by operating activities increased in 2023 as compared to 2022 primarily due to higher rental revenue from the acquisitions of Elme Druid Hills in 2023 and Elme Sandy Springs, Elme Marietta and Elme Cumberland during 2022.

Net cash provided by operating activities decreased in 2022 as compared to 2021 primarily due to the sales of twelve office properties (the "Office Portfolio") and eight retail properties (the "Retail Portfolio") during 2021 (see note 3 to the consolidated financial statements) and costs associated with our strategic transformation.

Net cash (used in) provided by investing activities decreased in 2023 as compared to 2022 primarily due to the acquisitions of Elme Sandy Springs, Elme Marietta and Elme Cumberland during 2022, partially offset by the acquisition of Elme Druid Hills during 2023.

Net cash (used in) provided by investing activities decreased in 2022 as compared to 2021 primarily due to the sales of the Office Portfolio and the Retail Portfolio during 2021.

These were partially offset by the acquisitions of Elme Conyers and Elme Eagles Landing during 2021 and acquisitions of Elme Marietta, Elme Cumberland and Elme Sandy Springs during 2022.

Net cash provided by (used in) financing activities increased in 2023 compared to 2022 primarily due to executing the $125.0 million 2023 Term Loan and net borrowings on the Revolving Credit Facility during 2023 and the repayment of mortgage notes during 2022.

These were partially offset by the repayment of the $100.0 million 2018 Term Loan during 2023 and proceeds from equity issuances during 2022.

Net cash (used in) provided by financing activities decreased in 2022 as compared to 2021 primarily due to a higher volume of debt repayments during 2021 and higher net proceeds from equity issuances and lower dividends paid in 2022.

Capital Improvements and Development Costs

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(1) We consider these capital improvements to be accretive to revenue and not necessarily to net income.

Included in the capital improvement and development costs listed above are capitalized interest in the amount of $0.3 million, $0.8 million and $2.2 million for the three years ended December 31, 2022, respectively, and capitalized employee compensation in the amount of $1.1 million, $1.6 million and $2.0 million for the three years ended December 31, 2022, respectively.

Included in the capital improvement and development costs listed above are capitalized employee compensation in the amount of $2.3 million, $1.1 million and $1.6 million for the three years ended December 31, 2023, respectively, and while none for the year ended December 31, 2023, capitalized interest in the amount of $0.3 million and $0.8 million for the two years ended December 31, 2022, respectively.

Accretive Capital Improvements

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Acquisition related improvements are capital improvements to properties acquired during the preceding three years which were anticipated at the time we acquired the properties.

These types of improvements were made in 2022 to the Carlyle of Sandy Springs, Assembly Eagles Landing and The Oxford.

These types of improvements were made in 2023 to the Elme Cumberland, Elme Marietta, Elme Sandy Springs, Elme Eagles Landing and Elme Conyers.

Expansions and Major Renovations:

Expansion projects increase the rentable area of a property, while major renovation projects are improvements sufficient to increase the income otherwise achievable at a property.

Expansions and major renovations during 2022 included unit, hallway, retaining walls renovations and SmartRent and wifi installations at Assembly Alexandria;

retail space conversion into additional units and plaza restoration at The Ashby;

unit renovations, roof and heating system replacement at Assembly Dulles;

unit and facade renovations and fire alarm system replacement at Riverside Apartments;

unit renovations and SmartRent installations at Assembly Manassas and unit renovations, roof awnings and

heating system replacement at The Wellington.

Expansions and major renovations during 2023 included facade and unit renovations and fire alarm system and flooring replacement at Riverside Apartments;

unit and hallway renovations at Elme Alexandria;

retail space conversion into additional units at The Ashby;

unit renovations and SmartRent installations at Elme Dulles;

roof replacement and unit renovations at Park Adams and unit and facade renovations at Elme Manassas.

Development/Redevelopment:

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Redevelopment costs represent expenditures for improvements intended to reposition properties in their markets and generate more income than would be otherwise achievable.

Development/redevelopment costs in 2022 include predevelopment costs for a future residential development adjacent to Riverside Apartments.

Development/redevelopment costs in 2022 and 2021 included predevelopment costs for a future residential development adjacent to Riverside Apartments, which is currently on hold.

Other Capital Improvements

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(a) the risks associated with ownership of real estate in general and our real estate assets in particular;

(b) the economic health of the areas in which our properties are located, particularly with respect to greater Washington, DC metro and Sunbelt region;

(c) risks associated with our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including our ability to realize any anticipated operational benefits from our internalization of community management functions;

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

(e) changes in the composition of our portfolio, including the acquisition of apartment homes in the Sunbelt markets;

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

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

(h) the risks related to use of third-party providers;

(i) the economic health of our residents;

(j) the ultimate duration of the COVID-19 global pandemic, including any mutations thereof, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, the effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and efficacy of the vaccines against emerging variants of COVID-19;

(k) the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts);

(l) compliance with applicable laws and corporate social responsibility goals, including those concerning the environment

and access by persons with disabilities;

(m) the risks related to not having adequate insurance to cover potential losses;

(n) changes in the market value of securities;

(o) terrorist attacks or actions and/or cyber-attacks;

(p) whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced;

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

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

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

(t) other factors discussed under the caption “Risk Factors.”

(b) the economic health of the areas in which our properties are located, particularly with respect to the greater Washington, DC metro and Sunbelt regions;

(c) 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;

(d) the risk of failure to enter into and/or complete acquisitions and dispositions;

(e) changes in the composition of our portfolio;

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

(g) the economic health of our residents;

(h) the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdowns or recessions and geopolitical conflicts);

(i) risks related to our ability to control our expenses if revenues decrease;

(j) compliance with applicable laws and corporate social responsibility goals, including those concerning the environment and access by persons with disabilities;

(k) risks related to not having adequate insurance to cover potential losses;

(l) changes in the market value of securities;

(m) terrorist attacks or actions and/or cyber-attacks;

(n) whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced;

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

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

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

(r) other factors discussed under the caption “Risk Factors.”

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance.

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Depreciation and amortization 88,950 91,722 72,656

Loss on sale of depreciable real estate, net — — 15,009

Real estate impairment 41,860 — —

Discontinued operations:

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We cannot assure you that actual results will not differ from those estimates.

We believe the following accounting estimates are the most critical to aid in fully understanding our reported financial results,

and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

We believe the following accounting estimates are the most critical to aid in fully understanding our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

Accounting for Asset Acquisitions

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We determine the fair values of acquired buildings on an “as-if-vacant” basis considering a variety of factors, including the replacement cost of the property, estimated rental and absorption rates, estimated future cash flows and valuation assumptions consistent with current market conditions.

We determine the fair value of land acquired based on comparisons to similar properties that have been recently marketed for sale or sold.

We determine the fair value of land

acquired based on comparisons to similar properties that have been recently marketed for sale or sold.

The fair value of in-place leases is based upon our evaluation of the specific characteristics of the leases.

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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 7. Management’s Discussion and Analysis