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Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2023-10-27 · 76 added, 203 removed, 207 unchanged (57% of the section changed)

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The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on February 16, 2024.

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.

We refer to the three months ended March 31, 2024 and March 31, 2023 as the “2024 Quarter” and the “2023 Quarter,” respectively.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements which involve risks and uncertainties.

This Form 10-Q contains forward-looking statements within the meaning of federal securities laws.

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.

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Additional factors which may cause the actual results, performance, or achievements of Elme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to:

risks associated with our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of apartment homes in the Sunbelt markets 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;

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

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

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);

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

risks related to our ability to control our expenses if revenues decrease;

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;

risks related to not having adequate insurance to cover potential losses;

changes in the market value of securities;

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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 2023 Form 10-K filed on February 16, 2024.

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• Results of Operations.

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

Discussion of our financial results comparing the 2024 Quarter to the 2023 Quarter.

• Liquidity and Capital Resources.

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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.

• 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.

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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.

As of March 31, 2024, 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,

Net loss, NOI and NAREIT FFO for the three months ended March 31, 2024 and 2023 were as follows (in thousands):

Three Months Ended March 31,

2024 2023 $ Change % Change

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

The increase in net loss is primarily due to 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).

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 increase in net loss is primarily due to higher depreciation and amortization expenses ($3.4 million), interest expense ($2.7 million) and property management expense ($0.4 million) in the 2024 Quarter.

These were partially offset by lower transformation costs (as described in Note 2 to the consolidated financial statements) ($2.9 million), higher NOI ($1.5 million), higher other income ($1.4 million) and lower general and administrative expenses ($0.6 million).

The increase in NOI is primarily due to the acquisition of Elme Druid Hills ($1.6 million) in the third quarter of 2023 and higher NOI from same-store properties ($0.1 million), partially offset by lower NOI at Watergate 600 ($0.2 million).

The higher same-store NOI was primarily due to higher rental rates.

Residential same-store average occupancy for our portfolio 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).

Residential same-store average occupancy for our portfolio decreased to 94.4% as of March 31, 2024 from 95.3% as of March 31, 2023.

The higher NAREIT FFO is primarily due to lower transformation costs ($2.9 million), higher NOI ($1.5 million), higher other income ($1.4 million) and lower general and administrative expenses ($0.6 million).

These were partially offset by higher interest ($2.7 million) and higher property management ($0.4 million) expenses.

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.

There were no significant investment transactions during the 2024 Quarter.

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.

As of March 31, 2024, 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 5.34% and the facility fee is 0.20%.

As of April 29, 2024, our Revolving Credit Facility has a borrowing capacity of $532.0 million.

Subsequent to the end of the 2024 Quarter, we entered into two forward interest rate swap arrangements with an aggregate notional amount of $150.0 million beginning on January 10, 2025 through January 10, 2026.

These forward interest rate swap arrangements will effectively fix a portion of our variable rate debt based on an adjusted daily SOFR at 4.72% (subject to applicable interest rate margins)

Capital Requirements

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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.

The discussion that follows is based on our consolidated results of operations for the 2024 Quarter and 2023 Quarter.

Net Operating Income

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All amounts are in thousands, except percentage amounts.

Three Months Ended September 30,

Three Months Ended March 31,

2024 2023 $ Change % Change

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Real estate depreciation and amortization 24,943 21,536 3,407 15.8 %

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

Interest expense 9,494 6,831 2,663 39.0 %

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2,497 — 2,497 100.0 %

Non-residential (2)

222 257 (35) (13.6) %

Total 54,871 50,991 3,880 7.6 %

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Development 57 58 (1) (1.7) %

Non-residential 33 69 (36) (52.2) %

Total 20,358 18,144 2,214 12.2 %

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Development (57) (58) 1 (1.7) %

Non-residential 189 188 1 0.5 %

Total 34,513 32,847 1,666 5.1 %

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Elme Druid Hills

Elme Sandy Springs, Elme Cumberland, Elme Marietta

(2) Non-residential:

Includes revenues and expenses from retail operations at residential properties.

Watergate 600

Real Estate Rental Revenue

Residential Revenue

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

Real estate rental revenue from same-store residential properties increased $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.

Real estate rental revenue from same-store residential properties increased $1.4 million, or 2.7%, to $52.4 million for the 2024 Quarter, compared to $51.0 million for the 2023 Quarter, primarily due to higher rental income ($1.6 million), higher recoveries ($0.7 million) and higher other rental and fee income ($0.3 million), partially offset by higher credit losses ($0.7 million) and higher vacancy loss ($0.4 million).

Real estate rental revenue from acquisitions increased $2.5 million due to the acquisition of Elme Druid Hills during the third quarter of 2023.

Average occupancy for residential properties for the 2024 Quarter and 2023 Quarter was as follows:

September 30, 2023 September 30, 2022 % Change

March 31, 2024 March 31, 2023 % 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

94.4 % 92.4 % 94.3 % 95.3 % N/A 95.3 % (0.9) % N/A (1.0) %

The decrease in same-store average occupancy was primarily due to lower average occupancy at Elme Eagles Landing, Elme Sandy Springs, Elme Marietta, Elme Cumberland, and The Kenmore, partially offset by higher average occupancy at Roosevelt Towers, Bennett Park, Elme Bethesda and Elme Leesburg.

Residential Expenses

Residential real estate expenses as a percentage of residential revenue for the 2024 Quarter and the 2023 Quarter were 37.1% and 35.6%, 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.

Real estate expenses from same-store residential properties increased $1.3 million, or 7.0%, to $19.4 million for the 2024 Quarter, compared to $18.1 million for the 2023 Quarter, primarily due to higher contract maintenance ($0.3 million), higher real estate taxes ($0.3 million), higher insurance ($0.3 million), higher utilities ($0.2 million), and higher administrative ($0.2 million) expenses.

Real estate expenses from acquisitions increased $0.9 million due to the acquisition of Elme Druid Hills during the third quarter of 2023.

Other NOI decreased due to lower revenue at Watergate 600 ($0.2 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 %

• 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).

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 %

Property management expense 5,882 5,462 420 7.7 %

General and administrative expense :

Decrease of $0.6 million primarily due to higher management fee offset ($1.4 million), lower severance ($0.4 million), corporate office moving expenses in the 2023 Quarter ($0.2 million) and lower rent ($0.2 million) expenses.

These were partially offset by higher payroll ($0.6 million), higher professional services ($0.4 million), higher incentive compensation ($0.2 million), higher computer software ($0.2 million) and higher employee benefits ($0.2 million) expenses.

Transformation costs:

Decrease of $2.9 million during the 2024 Quarter due to completion of strategic transformation in 2023.

Real estate depreciation and amortization :

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 %

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(1) Acquisitions:

Elme Druid Hills

Elme Sandy Springs, Elme Cumberland, Elme Marietta

(2) Non-residential:

Includes revenues and expenses from retail operations at residential properties.

Watergate 600

Real Estate Rental Revenue

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 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).

Increase of $3.4 million primarily due to higher depreciation and amortization at Elme Druid Hills ($2.9 million) and same-store residential properties ($1.4 million).

These increases were partially offset by lower depreciation and amortization at Watergate 600 ($0.9 million).

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,

Interest expense by debt type for the three months ended March 31, 2024 and 2023 was as follows (in thousands):

Three Months Ended March 31,

Debt Type 2024 2023 $ Change % Change

Notes payable $ 6,120 $ 5,454 $ 666 12.2 %

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

Line of credit 3,374 1,377 1,997 145.0 %

Capitalized interest — (283) 283 (100.0) %

Total $ 9,494 $ 6,831 $ 2,663 39.0 %

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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.

Increase primarily due to higher weighted average borrowings of $168.3 million and a weighted average interest rate of 6.3% in the 2024 Quarter, as compared to weighted average borrowings of $44.8 million and a weighted average interest rate of 6.1% in the 2023 Quarter.

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).

Other income during the 2024 Quarter consists of additional payments received with respect to easements previously conveyed at The Wellington and Takoma Park, a previously owned retail property.

Liquidity and Capital Resources

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We also believe we have adequate liquidity beyond 2024, with no debt maturities until 2025 and only $285.0 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.

As of April 29, 2024, we had cash and cash equivalents totaling $2.9 million and a borrowing capacity of $532.0 million on our Revolving Credit Facility, resulting in a total liquidity position of $534.9 million.

While we currently intend to continue to pay dividends at or about current levels , we will continue to assess the payment of our dividends on a quarterly basis.

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Capital Requirements

As of the end of the 2023 Period, our full-year 2023 capital requirements are summarized below:

As of the end of the 2024 Quarter, our full-year 2024 capital requirements are summarized below:

• Funding dividends and distributions to our shareholders;

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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 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 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.

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, 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.

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We may either hedge our variable rate debt to give it an effective fixed interest rate or hedge fixed rate debt to give it an effective variable interest rate.

As of September 30, 2023, our future debt principal payments are scheduled as follows (in thousands):

As of March 31, 2024, our future debt principal payments are scheduled as follows (in thousands):

Future Maturities of Debt

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______________________________

(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).

(1) During the 2023 Quarter, we entered into the $125.0 million 2023 Term Loan with an interest rate of adjusted 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.

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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.

As of March 31, 2024, 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.

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,

Issuance of common shares 1,032

Weighted average price per share $ 26.27

Net proceeds $ 26,851

We have authorized for issuance 150.0 million common shares, of which 88.0 million shares were outstanding at March 31, 2024.

On February 20, 2024, we entered into an equity distribution agreement (the “Equity Distribution Agreement”) with Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Citigroup Global Markets Inc., Goldman Sachs & Co.

LLC, KeyBanc Capital Markets Inc., TD Securities (USA) LLC and Truist Securities, Inc.

as agents and forward sellers, as applicable, (collectively, the “Agents” or “Forward Sellers”, as applicable), and Wells Fargo Bank, National Association, The Bank of New York Mellon, Citibank, N.A., Goldman Sachs & Co.

LLC, KeyBanc Capital Markets Inc., The Toronto-Dominion Bank and Truist Bank as forward purchasers pursuant to which up to an aggregate gross sales price of $350,000,000 of Elme’s common shares of beneficial interest, $0.01 par value per share, may be offered and sold from time to time through the Agents, acting as the Company’s sales agents or, if applicable, the Forward Sellers, or directly to the Agents as principals for their own accounts.

In connection with entry into the Equity Distribution Agreement, we terminated our prior at-the-market offering program.

At the time of such termination, approximately $340.0 million remained unsold under such prior program

We did not issue common shares under the Equity Distribution Agreement or any prior equity distribution agreements during the 2024 Quarter or 2023 Quarter.

We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase common shares.

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We did not issue common shares under the dividend reinvestment program during the 2024 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

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

Three Months Ended March 31,

Issuance of common shares 14

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The ability to issue preferred equity provides Elme Communities an additional financing tool that may be used to raise capital for future acquisitions or other business purposes.

As of September 30, 2023, no preferred shares were issued and outstanding.

As of March 31, 2024, no preferred shares were issued and outstanding.

Historical Cash Flows

2 unchanged sentences

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

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2024 2023 $ %

1 unchanged sentence

Net cash used in investing activities (9,760) (5,791) (3,969) 68.5 %

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.

Net cash used in financing activities (13,091) (11,819) (1,272) 10.8 %

Net cash provided by operating activities increased primarily due to higher rental revenue from the acquisition of Elme Druid Hills during the third quarter of 2023 and from same-store communities.

Net cash used in investing activities increased primarily due to higher expenditures on capital improvements to our communities during the 2024 Quarter.

Net cash used in financing activities increased primarily due to executing the $125.0 million 2023 Term Loan during the 2023 Quarter.

This was partially offset by the repayment of the $100.0 million 2018 Term Loan during the 2023 Quarter and higher net borrowings on the Revolving Credit Facility during the 2024 Quarter.

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.

We have no off-balance sheet arrangements as of March 31, 2024 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Funds From Operations

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;

NAREIT FFO is a widely used measure of operating performance for real estate companies.

In its 2018 NAREIT FFO White Paper Restatement, the National Association of Real Estate Investment Trusts, Inc.

(“NAREIT”) defines NAREIT FFO 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.

We consider NAREIT FFO to be a standard supplemental measure for REITs, and believe it is a useful metric 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.

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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

The following table provides the calculation of our NAREIT FFO and a reconciliation of net loss to NAREIT FFO for the three months ended March 31, 2024 and 2023 (in thousands):

Three Months Ended March 31,

Net loss $ (3,647) $ (3,643)

Depreciation and amortization 24,943 21,536

Real estate impairment 41,860 — 41,860 —

NAREIT FFO $ 21,296 $ 17,893

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The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

There were no changes made by management to the critical accounting policies in the three and nine months ended September 30, 2023.

There were no changes made by management to the critical accounting policies in the three months ended March 31, 2024.

We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 16, 2024.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis