Elme Communities 10-Q

ITEM 1: FINANCIAL STATEMENTS The information furnished in the accompanying unaudited Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Equity and Consolidated Statements of Cash Flows reflects all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes for the three years ended December 31, 2023 included in our 2023 Annual Report on Form 10-K filed on February 16, 2024. 4 ELME COMMUNITIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA ) September 30, 2024 December 31, 2023 (Unaudited) Assets Land $ 383,808 $ 384,097 Income producing property 1,986,596 1,960,020 2,370,404 2,344,117 Accumulated depreciation and amortization ( 595,533 ) ( 528,024 ) Net income producing property 1,774,871 1,816,093 Properties under development or held for future development 30,980 30,980 Total real estate held for investment, net 1,805,851 1,847,073 Cash and cash equivalents 4,840 5,984 Restricted cash 2,358 2,554 Rents and other receivables 12,676 17,642 Prepaid expenses and other assets 27,434 26,775 Total assets $ 1,853,159 $ 1,900,028 Liabilities Notes payable, net $ 522,914 $ 522,345 Line of credit 168,000 157,000 Accounts payable and other liabilities 36,295 38,997 Dividend payable 15,906 15,863 Advance rents 4,801 5,248 Tenant security deposits 6,270 6,225 Total liabilities 754,186 745,678 Equity Shareholders’ equity Preferred shares, $ 0.01 par value; 10,000 shares authorized; no shares issued or outstanding — — Shares of beneficial interest, $ 0.01 par value; 150,000 shares authorized; 88,010 and 87,867 shares issued and outstanding, as of September 30, 2024 and December 31, 2023, respectively 880 879 Additional paid in capital 1,739,319 1,735,530 Distributions in excess of net income ( 627,186 ) ( 569,391 ) Accumulated other comprehensive loss ( 14,323 ) ( 12,958 ) Total shareholders’ equity 1,098,690 1,154,060 Noncontrolling interests in subsidiaries 283 290 Total equity 1,098,973 1,154,350 Total liabilities and equity $ 1,853,159 $ 1,900,028 See accompanying notes to the consolidated financial statements. 5 ELME COMMUNITIES AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenue Real estate rental revenue $ 61,055 $ 56,651 $ 180,671 $ 169,059 Expenses Property operating and maintenance 14,095 12,696 41,555 38,360 Real estate taxes and insurance 8,163 7,101 24,404 21,216 Property management 2,235 1,935 6,628 5,882 General and administrative 6,354 6,370 18,688 19,891 Transformation costs — 985 — 6,339 Depreciation and amortization 23,474 21,904 72,312 64,855 Real estate impairment — 41,860 — 41,860 54,321 92,851 163,587 198,403 Real estate operating income 6,734 ( 36,200 ) 17,084 ( 29,344 ) Other income (expense) Interest expense ( 9,557 ) ( 7,418 ) ( 28,435 ) ( 21,043 ) Loss on extinguishment of debt ( 147 ) — ( 147 ) ( 54 ) Other income — — 1,410 569 ( 9,704 ) ( 7,418 ) ( 27,172 ) ( 20,528 ) Net loss $ ( 2,970 ) $ ( 43,618 ) $ ( 10,088 ) $ ( 49,872 ) Basic net loss per common share $ ( 0.03 ) $ ( 0.50 ) $ ( 0.12 ) $ ( 0.57 ) Diluted net loss per common share $ ( 0.03 ) $ ( 0.50 ) $ ( 0.12 ) $ ( 0.57 ) Weighted average shares outstanding – basic 87,930 87,759 87,909 87,717 Weighted average shares outstanding – diluted 87,930 87,759 87,909 87,717 See accompanying notes to the consolidated financial statements. 6 ELME COMMUNITIES AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net loss $ ( 2,970 ) $ ( 43,618 ) $ ( 10,088 ) $ ( 49,872 ) Other comprehensive income: Unrealized (loss) gain on interest rate hedges ( 2,181 ) ( 149 ) ( 2,894 ) 372 Reclassification of unrealized loss on interest rate derivatives to earnings 509 510 1,529 1,529 Comprehensive loss $ ( 4,642 ) $ ( 43,257 ) $ ( 11,453 ) $ ( 47,971 ) See accompanying notes to the consolidated financial statements. 7 ELME COMMUNITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (IN THOUSANDS) (UNAUDITED) Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, December 31, 2023 87,867 $ 879 $ 1,735,530 $ ( 569,391 ) $ ( 12,958 ) $ 1,154,060 $ 290 $ 1,154,350 Net loss — — — ( 10,088 ) — ( 10,088 ) — ( 10,088 ) Unrealized loss on interest rate hedges — — — — ( 2,894 ) ( 2,894 ) — ( 2,894 ) Amortization of swap settlements — — — — 1,529 1,529 — 1,529 Distributions to noncontrolling interests — — — — — — ( 7 ) ( 7 ) Dividends ($ 0.54 per common share) — — — ( 47,707 ) — ( 47,707 ) — ( 47,707 ) Share grants, net of forfeitures and tax withholdings 143 1 3,789 — — 3,790 — 3,790 Balance, September 30, 2024 88,010 $ 880 $ 1,739,319 $ ( 627,186 ) $ ( 14,323 ) $ 1,098,690 $ 283 $ 1,098,973 Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, December 31, 2022 87,534 $ 875 $ 1,729,854 $ ( 453,008 ) $ ( 14,233 ) $ 1,263,488 $ 298 $ 1,263,786 Net loss — — — ( 49,872 ) — ( 49,872 ) — ( 49,872 ) Unrealized gain on interest rate hedges — — — — 372 372 — 372 Amortization of swap settlements — — — — 1,529 1,529 — 1,529 Distributions to noncontrolling interests — — — — — — ( 6 ) ( 6 ) Dividends ($ 0.54 per common share) — — — ( 47,562 ) — ( 47,562 ) — ( 47,562 ) Shares issued under Dividend Reinvestment Program 28 — 497 — — 497 — 497 Share grants, net of forfeitures and tax withholdings 270 3 4,306 — — 4,309 — 4,309 Balance, September 30, 2023 87,832 $ 878 $ 1,734,657 $ ( 550,442 ) $ ( 12,332 ) $ 1,172,761 $ 292 $ 1,173,053 See accompanying notes to the consolidated financial statements. 8 ELME COMMUNITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (IN THOUSANDS) (UNAUDITED) Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, June 30, 2024 88,011 $ 880 $ 1,737,941 $ ( 608,310 ) $ ( 12,651 ) $ 1,117,860 $ 285 $ 1,118,145 Net loss — — — ( 2,970 ) — ( 2,970 ) — ( 2,970 ) Unrealized loss on interest rate hedges — — — — ( 2,181 ) ( 2,181 ) — ( 2,181 ) Amortization of swap settlements — — — — 509 509 — 509 Distributions to noncontrolling interests — — — — — — ( 2 ) ( 2 ) Dividends ($ 0.18 per common share) — — — ( 15,906 ) — ( 15,906 ) — ( 15,906 ) Share grants, net of share grant amortization and forfeitures ( 1 ) — 1,378 — — 1,378 — 1,378 Balance, September 30, 2024 88,010 $ 880 $ 1,739,319 $ ( 627,186 ) $ ( 14,323 ) $ 1,098,690 $ 283 $ 1,098,973 Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, June 30, 2023 87,809 $ 878 $ 1,733,388 $ ( 490,939 ) $ ( 12,693 ) $ 1,230,634 $ 294 $ 1,230,928 Net loss — — — ( 43,618 ) — ( 43,618 ) — ( 43,618 ) Unrealized loss on interest rate hedges — — — — ( 149 ) ( 149 ) — ( 149 ) Amortization of swap settlements — — — — 510 510 — 510 Distributions to noncontrolling interests — — — — — — ( 2 ) ( 2 ) Dividends ($ 0.18 per common share) — — — ( 15,885 ) — ( 15,885 ) — ( 15,885 ) Share grants, net of forfeitures and tax withholdings 23 — 1,269 — — 1,269 — 1,269 Balance, September 30, 2023 87,832 $ 878 $ 1,734,657 $ ( 550,442 ) $ ( 12,332 ) $ 1,172,761 $ 292 $ 1,173,053 See accompanying notes to the consolidated financial statements. 9 ELME COMMUNITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Nine Months Ended September 30, 2024 2023 Cash flows from operating activities Net loss $ ( 10,088 ) $ ( 49,872 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 72,312 64,855 Credit losses on lease related receivables 4,046 2,876 Real estate impairment — 41,860 Share-based compensation expense 3,714 4,031 Net amortization of debt premiums, discounts and related financing costs 3,268 3,160 Loss on extinguishment of debt 147 54 Gain on land easements ( 1,410 ) — Changes in operating other assets ( 3,239 ) ( 10,591 ) Changes in operating other liabilities 1,989 5,443 Net cash provided by operating activities 70,739 61,816 Cash flows from investing activities Real estate acquisitions, net — ( 107,595 ) Capital improvements to real estate ( 33,356 ) ( 22,293 ) Non-real estate capital improvements ( 128 ) ( 395 ) Payments received for land easements 3,862 — Net cash used in investing activities ( 29,622 ) ( 130,283 ) Cash flows from financing activities Line of credit borrowings, net 11,000 94,000 Dividends paid ( 47,749 ) ( 48,495 ) Repayments of unsecured term loan debt — ( 100,000 ) Proceeds from term loan — 125,000 Payment of financing costs ( 5,500 ) ( 844 ) Distributions to noncontrolling interests ( 7 ) ( 6 ) Proceeds from dividend reinvestment program — 497 Payment of tax withholdings for restricted share awards ( 201 ) ( 1,354 ) Net cash (used in) provided by financing activities ( 42,457 ) 68,798 Net (decrease) increase in cash, cash equivalents and restricted cash ( 1,340 ) 331 Cash, cash equivalents and restricted cash at beginning of period 8,538 9,852 Cash, cash equivalents and restricted cash at end of period $ 7,198 $ 10,183 Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized $ 28,140 $ 20,066 Change in accrued capital improvements and development costs ( 6,749 ) 7,343 Dividend payable 15,906 15,868 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 4,840 $ 8,079 Restricted cash 2,358 2,104 Cash, cash equivalents and restricted cash $ 7,198 $ 10,183 See accompanying notes to the consolidated financial statements. 10 ELME COMMUNITIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 (UNAUDITED) NOTE 1: NATURE OF BUSINESS Elme Communities, a Maryland real estate investment trust, is a self-administered equity real estate investment trust (“REIT”), and successor to a trust organized in 1960. Our business primarily consists of the ownership of apartment communities in the greater Washington, DC metro and Sunbelt regions. Within these notes to the financial statements, we refer to the three months ended September 30, 2024 and September 30, 2023 as the “2024 Quarter” and the “2023 Quarter,” respectively, and the nine months ended September 30, 2024 and September 30, 2023 as the “2024 Period” and the “2023 Period,” respectively. Federal Income Taxes We believe that we qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”), and intend to continue to qualify as such. To maintain our status as a REIT, we are, among other things, required to distribute 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding net capital gains to our shareholders) on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold in a way that allows us to defer recognition of some or all taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders. Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed taxable income and taxes on the income generated by our taxable REIT subsidiary (“TRS”). Our TRS is subject to corporate federal and state income tax on its taxable income at regular statutory rates. As of both September 30, 2024 and December 31, 2023, our TRS had a deferred tax asset of $ 1.4 million that was fully reserved. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONS Significant Accounting Policies We have prepared our consolidated financial statements using the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2023. Recent Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (“Topic 848”), which was amended in December 2022 by ASU 2022-06, Reference Rate Reform (Topic 848). Topic 848 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in Topic 848 is optional and may be elected through December 31, 2024 as reference rate reform activities occur. During the first quarter of 2023, we executed an amendment to the unsecured revolving credit facility (“Revolving Credit Facility”) to convert the benchmark interest rate from LIBOR to an adjusted SOFR ("Secured Overnight Financing Rate"). We elected to apply the optional expedients in Topic 848 to (i) assert that the hedged interest payments remain probable regardless of any expected modification in terms related to reference rate reform, and (ii) continue the method of assessing effectiveness as documented in the original hedge documentation so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The impact of this guidance did not have a material impact on our consolidated financial statements. In November 2023, the FASB issued an amendment to the segment reporting standards which requires disclosure for each reportable segment, on an interim and annual basis, of the significant expense categories and amounts that are regularly provided to the chief operating decision maker and included in each reported measure of a segment’s profit or loss. Additionally, it requires a disclosure of the title and position of the individual or the name of the group or committee identified as the chief operating decision maker. The new standard will be effective for annual periods beginning on January 1, 2024 and interim periods beginning on January 1, 2025 on a retrospective basis. We are currently evaluating the impact of adopting the standard on our consolidated financial statements. 11 In March 2024, the Securities and Exchange Commission (“SEC”) issued its final rule that requires registrants to provide climate disclosures in their annual reports and registration statements, beginning with annual reports for the year ending December 31, 2025. On April 4, 2024, the SEC voluntarily stayed the final rule pending the completion of judicial review of cases pending in the Eighth Circuit. We are continuing to evaluate the disclosure impact of the final rule. Principles of Consolidation and Basis of Presentation The accompanying unaudited consolidated financial statements include the consolidated accounts of Elme Communities and our subsidiaries and entities in which Elme Communities has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation. We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. In addition, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. These unaudited financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2023. Lessee Accounting For leases where we are the lessee, primarily our corporate office operating lease, we recognize a right-of-use asset and a lease liability in accordance with Accounting Standards Codification (“ASC”) Topic 842. The right-of-use asset and associated liability is equal to the present value of the minimum lease payments, applying our incremental borrowing rate. Our borrowing rate is computed based on observable borrowing rates taking into consideration our credit quality and adjusting to a secured borrowing rate for similar assets and term. Lease expense for the operating lease is recognized on a straight-line basis over the expected lease term and is included in “General and administrative expenses.” Restricted Cash Restricted cash includes funds held in escrow for tenant security deposits. Transformation Costs Transformation costs include costs related to the strategic shift away from the commercial sector to the residential sector, including the allocation of internal costs, consulting, advisory and termination benefits. Use of Estimates in the Financial Statements The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3: REAL ESTATE Development/Redevelopment We have properties under development/redevelopment and held for current or future development. As of September 30, 2024, we have invested $ 30.4 million, including the cost of acquired land, in a residential development adjacent to Riverside Apartments. During the second quarter of 2022, we paused development activities at the aforementioned property and ceased associated capitalization of interest on spending and real estate taxes. Properties Sold and Held for Sale We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties and to make occasional sales of properties that no longer meet our long-term strategy or 12 return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs or distributed to our shareholders. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale. We did not sell or classify any properties as held for sale during the 2024 Period or in 2023. As of September 30, 2024, we assessed our properties, including assets held for development, for impairment and did no t recognize any impairment charges during the 2024 Quarter. We applied reasonable estimates and judgments in evaluating each of the properties as of September 30, 2024. Should external or internal circumstances change requiring the need to shorten holding periods or adjust future estimated cash flows from our properties, we could be required to record impairment charges in the future. NOTE 4: UNSECURED LINE OF CREDIT PAYABLE During the 2024 Quarter, we entered into a third amended and restated credit agreement (the “Amended Credit Agreement”) which provides for aggregate revolving loan commitments of $ 500.0 million (the “Amended and Restated Revolving Credit Facility”) with an accordion feature that allows us to increase the aggregate revolving loan commitments or add term loans of up to $ 1.0 billion, subject to the lenders’ agreement to provide additional revolving commitments or term loans. The Amended and Restated Revolving Credit Facility has a four-year term ending in July 2028, with two six-month extension options. Borrowings under the Amended and Restated Revolving Credit Facility will bear interest, at our option, at a rate of either (a)(i) daily SOFR plus 0.10 % (the “Adjusted Daily Simple SOFR”) or (ii) term SOFR plus 0.10 %, plus, in each case, a margin ranging from 0.70 % to 1.40 % (depending on our credit rating) or (b) the base rate plus a margin ranging from 0.00 % to 0.40 % (based upon our credit rating). The base rate is the highest of the administrative agent’s prime rate, the federal funds rate plus 0.50 % and Adjusted Daily Simple SOFR plus 1.0 %. In addition, the Amended Credit Agreement requires the payment of a facility fee equal to 0.10 % to 0.30 % (depending on our credit rating) on the $ 500.0 million committed capacity in respect of the Amended and Restated Revolving Credit Facility, without regard to usage. The initial interest rate is based on Adjusted Daily Simple SOFR plus a margin of 0.85 % and the initial facility fee equals 0.20 %. As of September 30, 2024, the interest rate on the Amended and Restated Revolving Credit Facility was based on the Adjusted Daily Simple SOFR (inclusive of the 0.10 % credit spread adjustment) plus 0.85 % applicable margin, the daily SOFR is 4.96% and the facility fee was 0.20 %. All outstanding advances for the Amended and Restated Revolving Credit Facility are due and payable upon maturity in July 2028, unless extended pursuant to one or both of the two six-month extension options. Interest only payments are due and payable generally on a monthly basis. The amount of the Amended and Restated Revolving Credit Facility’s unsecured line of credit unused and available at September 30, 2024 was as follows (in thousands): Committed capacity $ 500,000 Borrowings outstanding ( 168,000 ) Unused and available $ 332,000 We executed borrowings and repayments on the Amended and Restated Revolving Credit Facility during the 2024 Period as follows (in thousands): Balance, December 31, 2023 $ 157,000 Borrowings 114,000 Repayments ( 103,000 ) Balance, September 30, 2024 $ 168,000 13 NOTE 5: NOTES PAYABLE During the first quarter of 2023, we entered into a $ 125.0 million unsecured term loan (“2023 Term Loan”) with an interest rate of 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. We used the proceeds to prepay the remaining $ 100.0 million portion of the $ 250.0 million unsecured term loan (the “2018 Term Loan”) in full and a portion of our borrowings under our Revolving Credit Facility. During the 2024 Quarter, we entered into a first amendment of the 2023 Term Loan (the “Term Loan Amendment”). The Term Loan Amendment implements various covenant and technical amendments to make the 2023 Term Loan consistent with corresponding provisions in the Amended Credit Agreement. The Term Loan Amendment does not change the maturity or any of the pricing terms of the term loan outstanding under the 2023 Term Loan. NOTE 6: DERIVATIVE INSTRUMENTS During the first quarter of 2023, we entered into two interest rate swap arrangements with an aggregate notional amount of $ 125.0 million that effectively fixed the interest at 4.73 % for the 2023 Term Loan beginning on July 21, 2023 through the 2023 Term Loan’s maturity date of January 10, 2025. During the second quarter of 2024, 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 effectively fix a portion of our variable rate debt based on an adjusted daily SOFR at 4.72 % (subject to applicable interest rate margins). The interest rate swap arrangements are recorded at fair value in accordance with GAAP, based on discounted cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedges in Other comprehensive income (loss). We assess the effectiveness of a cash flow hedge both at inception and on an ongoing basis. If a cash flow hedge is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness of our cash flow hedges is recorded in earnings. The fair values of the interest rate swaps as of September 30, 2024 and December 31, 2023, were as follows (in thousands): Fair Value Derivative Assets (Liabilities) Derivative Instrument Aggregate Notional Amount Effective Date Maturity Date September 30, 2024 December 31, 2023 Interest rate swap $ 75,000 July 21, 2023 January 10, 2025 $ 197 $ 740 Interest rate swap 50,000 July 21, 2023 January 10, 2025 132 494 Interest rate swap 100,000 January 10, 2025 January 10, 2026 ( 1,325 ) — Interest rate swap 50,000 January 10, 2025 January 10, 2026 ( 663 ) — $ ( 1,659 ) $ 1,234 14 We record interest rate swaps on our consolidated balance sheets within Prepaid expenses and other assets when in a net asset position and within Accounts payable and other liabilities when in a net liability position. The net unrealized gains and losses on the effective swaps were recognized in Other comprehensive income (loss), as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Unrealized (loss) gain on interest rate hedges $ ( 2,181 ) $ ( 149 ) $ ( 2,894 ) $ 372 Amounts reported in Accumulated other comprehensive loss related to effective cash flow hedges will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional $ 1.0 million related to our outstanding interest rate swap arrangements will be reclassified as a net increase to interest expense. The losses reclassified from Accumulated other comprehensive loss into interest expense for the three and nine months ended September 30, 2024 and 2023, were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Loss reclassified from accumulated other comprehensive loss into interest expense $ 509 $ 510 $ 1,529 $ 1,529 During the next twelve months, we estimate that an additional $ 2.0 million related to the previously settled interest rate swap arrangements will be reclassified as an increase to interest expense. We have agreements with each of our derivative counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of September 30, 2024, the fair value of derivative assets, including accrued interest, was $ 0.3 million and the fair value of derivative liabilities was $ 2.0 million. As of September 30, 2024, we have not posted any collateral related to these agreements. Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreements. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. We monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration. NOTE 7: FAIR VALUE DISCLOSURES Assets and Liabilities Measured at Fair Value on a Recurring Basis For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements are required to be disclosed separately for each major category of assets and liabilities, as follows: Level 1: Quoted prices in active markets for identical assets Level 2: Significant other observable inputs Level 3: Significant unobservable inputs The only assets or liabilities we had at September 30, 2024 and December 31, 2023 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Plan (“SERP”), which primarily consist of investments in mutual funds, and the interest rate derivatives (see note 6). We base the valuations related to the SERP on quoted prices in active markets and accordingly these valuations fall into Level 1 in the fair value hierarchy. The valuation of the interest rate derivatives is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate derivative. This analysis reflects the contractual terms of the interest rate derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate derivatives are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward 15 curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Fair Value Measurement , we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate derivatives fall into Level 2 in the fair value hierarchy. The fair values of these assets as of September 30, 2024 and December 31, 2023 were as follows (in thousands): September 30, 2024 December 31, 2023 Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3 Assets: SERP $ 2,574 $ 2,574 $ — $ — $ 1,984 $ 1,984 $ — $ — Interest rate derivatives 329 — 329 — 1,234 — 1,234 — Liabilities: Interest rate derivatives $ ( 1,988 ) $ — $ ( 1,988 ) $ — $ — $ — $ — $ — Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Certain assets not measured at fair value on an ongoing basis but subject to fair value adjustments only in certain circumstances, such as when there is evidence of impairment, are measured at fair value on a nonrecurring basis. In the 2024 Quarter, the Company did no t have any assets or liabilities measured at fair value on a nonrecurring basis. Financial Assets and Liabilities Not Measured at Fair Value The following disclosures of estimated fair value were determined by management using available market information and established valuation methodologies, including discounted cash flow models. Many of these estimates involve significant judgment. The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to September 30, 2024 may differ significantly from the amounts presented. The valuations of cash and cash equivalents and restricted cash fall into Level 1 in the fair value hierarchy and the valuations of debt instruments fall into Level 3 in the fair value hierarchy. As of September 30, 2024 and December 31, 2023, the carrying values and estimated fair values of our financial instruments were as follows (in thousands): September 30, 2024 December 31, 2023 Carrying Value Fair Value Carrying Value Fair Value Cash and cash equivalents $ 4,840 $ 4,840 $ 5,984 $ 5,984 Restricted cash 2,358 2,358 2,554 2,554 Line of credit 168,000 168,000 157,000 157,000 Notes payable, net 522,914 482,500 522,345 466,668 16 NOTE 8: SHARE-BASED COMPENSATION Elme Communities maintains short-term (“STIP”) and long-term (“LTIP”) incentive plans that allow for stock-based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Elme Communities 2016 Omnibus Incentive Plan, as amended and restated effective May 30, 2024 (the “Omnibus Incentive Plan”). An amendment and restatement of the Omnibus Incentive Plan was approved by our board of trustees in April 2024 and approved by our shareholders in May 2024 to, among other changes, increase the number of shares available to be issued by 2,900,000 , from 2,400,000 shares to 5,300,000 shares (including shares issued pursuant to awards made under the Omnibus Incentive Plan prior to its amendment). The Omnibus Incentive Plan, as amended, allows for awards in the form of restricted shares, restricted share units, options and other awards up to an aggregate of 5,300,000 shares over the ten-year period in which the plan is in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares. Total Compensation Expense Total compensation expense recognized in the consolidated financial statements for all outstanding share-based awards was $ 1.6 million and $ 1.4 million for the 2024 Quarter and 2023 Quarter, respectively, and $ 3.7 million and $ 4.0 million for the 2024 Period and 2023 Period, respectively. Restricted Share Awards The total fair values of restricted share awards vested was $ 1.0 million and $ 4.0 million for the 2024 Period and 2023 Period, respectively. The total unvested restricted share awards at September 30, 2024 was 432,954 shares, which had a weighted average grant date fair value of $ 16.96 per share. As of September 30, 2024, the total compensation cost related to unvested restricted share awards was $ 4.4 million, which we expect to recognize over a weighted average period of 22 months. NOTE 9: EARNINGS PER COMMON SHARE We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards and units have non-forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by dividing net income less the allocation of undistributed earnings to unvested restricted share awards and units by the weighted-average number of common shares outstanding for the period. We also determine “Diluted earnings per share” as the more dilutive of the two-class method or the treasury stock method with respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our dilutive earnings per share calculation includes the dilutive impact of operating partnership units under the if-converted method and our share based awards with performance conditions prior to the grant date and all market condition awards under the contingently issuable method. 17 The computations of basic and diluted earnings per share for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands, except per share data): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Numerator: Net loss $ ( 2,970 ) $ ( 43,618 ) $ ( 10,088 ) $ ( 49,872 ) Allocation of earnings to unvested restricted share awards ( 78 ) ( 71 ) ( 236 ) ( 209 ) Adjusted net loss $ ( 3,048 ) $ ( 43,689 ) $ ( 10,324 ) $ ( 50,081 ) Denominator: Weighted average shares outstanding – basic and diluted 87,930 87,759 87,909 87,717 Basic net loss per common share $ ( 0.03 ) $ ( 0.50 ) $ ( 0.12 ) $ ( 0.57 ) Diluted net loss per common share $ ( 0.03 ) $ ( 0.50 ) $ ( 0.12 ) $ ( 0.57 ) Dividends declared per common share $ 0.18 $ 0.18 $ 0.54 $ 0.54 NOTE 10: SEGMENT INFORMATION We operate in a single reportable segment which includes the ownership, development, redevelopment and acquisition of apartment communities. None of our operating properties meet the criteria to be considered separate operating segments on a stand-alone basis. Within the residential segment, we do not distinguish or group our consolidated operations based on size (only one community, Riverside Apartments, comprises more than 10 % of consolidated revenues), type (all assets in the segment are residential) or geography (all but six communities are within the Washington, DC metro region). Further, our apartment communities have similar long-term economic characteristics and provide similar products and services to our residents. As a result, our operating properties are aggregated into a single reportable segment: residential. We have one remaining office property, Watergate 600, which does not meet the criteria for a reportable segment, and has been classified within “Other” on our segment disclosure tables. We evaluate performance based upon net operating income (“NOI”) of the combined properties in the segment. Our reportable operating segment consolidates similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segment’s performance. NOI is a key measurement of our segment profit and loss and is defined as real estate rental revenue less real estate expenses. The following tables present revenues, NOI, capital expenditures and total assets for the three and nine months ended September 30, 2024 and 2023 from our Residential segment as well as Other, and reconcile NOI to net loss as reported (in thousands): Three Months Ended September 30, 2024 Residential Other (1) Consolidated Real estate rental revenue $ 56,427 $ 4,628 $ 61,055 Real estate expenses 20,820 1,438 22,258 Net operating income $ 35,607 $ 3,190 $ 38,797 Other income (expense): Property management expenses ( 2,235 ) General and administrative expenses ( 6,354 ) Depreciation and amortization ( 23,474 ) Interest expense ( 9,557 ) Loss on extinguishment of debt ( 147 ) Net loss $ ( 2,970 ) 18 Capital expenditures $ 11,883 $ 55 $ 11,938 Total assets $ 1,728,078 $ 125,081 $ 1,853,159 Three Months Ended September 30, 2023 Residential Other (1) Consolidated Real estate rental revenue $ 52,065 $ 4,586 $ 56,651 Real estate expenses 18,431 1,366 19,797 Net operating income $ 33,634 $ 3,220 $ 36,854 Other expense: Property management expenses ( 1,935 ) General and administrative expenses ( 6,370 ) Transformation costs ( 985 ) Depreciation and amortization ( 21,904 ) Interest expense ( 7,418 ) Real estate impairment ( 41,860 ) Net loss $ ( 43,618 ) Capital expenditures $ 11,900 $ 605 $ 12,505 Total assets $ 1,770,921 $ 139,352 $ 1,910,273 (1) Other represents Watergate 600, an office property that does not meet the qualitative or quantitative criteria for a reportable segment. Nine Months Ended September 30, 2024 Residential Other (1) Consolidated Real estate rental revenue $ 166,790 13,881 $ 180,671 Real estate expenses 61,800 4,159 65,959 Net operating income $ 104,990 $ 9,722 $ 114,712 Other income (expense): Property management expenses ( 6,628 ) General and administrative expenses ( 18,688 ) Depreciation and amortization ( 72,312 ) Interest expense ( 28,435 ) Loss on extinguishment of debt ( 147 ) Other income 1,410 Net loss $ ( 10,088 ) Capital expenditures $ 33,320 $ 164 $ 33,484 19 Nine Months Ended September 30, 2023 Residential Other (1) Consolidated Real estate rental revenue 155,156 13,903 $ 169,059 Real estate expenses 55,629 3,947 59,576 Net operating income $ 99,527 $ 9,956 $ 109,483 Other income (expense): Property management expenses ( 5,882 ) General and administrative expenses ( 19,891 ) Transformation costs ( 6,339 ) Depreciation and amortization ( 64,855 ) Interest expense ( 21,043 ) Loss on extinguishment of debt ( 54 ) Real estate impairment ( 41,860 ) Other income 569 Net loss $ ( 49,872 ) Capital expenditures $ 21,447 $ 1,241 $ 22,688 ______________________________ (1) Other represents Watergate 600, an office property that does not meet the qualitative or quantitative criteria for a reportable segment. NOTE 11: SHAREHOLDERS' EQUITY On February 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 Communities’ 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 no t issue common shares under the Equity Distribution Agreement or any prior equity distribution agreements during the 2024 Period or 2023 Period. We have a dividend reinvestment program whereby shareholders may use their dividends and optional cash payments to purchase common shares. The shares sold under this program may either be common shares issued by us or common shares purchased in the open market. Net proceeds under this program are used for general corporate purposes. We did not issue common shares under the dividend reinvestment program during the 2024 Period. Our issuances and net proceeds on the dividend reinvestment program for the nine months ended September 30, 2023 were as follows ($ in thousands, except per share data): Nine Months Ended September 30, 2023 Issuance of common shares 28 Weighted average price per share $ 17.64 Net proceeds $ 497 20