Elme Communities 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on February 16, 2024. 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 “2023 Period,” respectively. Forward-Looking Statements 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. In some cases, you can identify forward looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Elme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional factors which may cause the actual results, performance, or achievements of Elme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to: 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 the greater Washington, DC metro and Sunbelt regions; 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 risk of failure to enter into and/or complete acquisitions and dispositions; changes in the composition of our portfolio; reductions in or actual or threatened changes to the timing of federal government spending; the economic health of our residents; 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; risks related to not having adequate insurance to cover potential losses; changes in the market value of securities; terrorist attacks or actions and/or cyber-attacks; whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced; the availability and terms of financing and capital and the general volatility of securities markets; the risks related to our organizational structure and limitations of share ownership; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; 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. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise. General Introductory Matters We provide our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations and financial condition. We organize the MD&A as follows: • Overview. Discussion of our business outlook, operating results, investment and financing activity and capital requirements to provide context for the remainder of MD&A. • Results of Operations. Discussion of our financial results comparing the 2024 Quarter to the 2023 Quarter and the 2024 Period to the 2023 Period. • Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and cash flows. • Funds From Operations . Calculation of NAREIT Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental measure to net income. • Critical Accounting Estimates. Descriptions of accounting policies that reflect significant judgments and estimates used in the preparation of our consolidated financial statements. 21 When evaluating our financial condition and operating performance, we focus on the following financial and non-financial indicators: • Net operating income (“NOI”) , calculated as set forth below under the caption “ Results of Operations - Net Operating Income. ” NOI is a non-GAAP supplemental measure to net income. • Funds From Operations (“NAREIT FFO”) , calculated as set forth below under the caption “Funds from Operations.” NAREIT FFO is a non-GAAP supplemental measure to net income. • Average occupancy , calculated as average daily occupied apartment homes as a percentage of total apartment homes. For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store.” Same-store portfolio properties include properties that were owned for the entirety of the years being compared, and exclude properties under redevelopment or development and properties acquired, sold or classified as held for sale during the years being compared. We define development properties as those for which we have planned or ongoing major construction activities on existing or acquired land pursuant to an authorized development plan. Development properties are categorized as same-store when they have reached stabilized occupancy (90%) before the start of the prior year. We define redevelopment properties as those for which we have planned or ongoing significant development and construction activities on existing or acquired buildings pursuant to an authorized plan, which has an impact on current operating results, occupancy and the ability to lease space with the intended result of a higher economic return on the property. We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared. Overview Our revenues are derived primarily from the ownership and operation of income producing property. As of September 30, 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 the second quarter of 2024, as part of our previously announced centralization initiatives, we launched our shared services department, known as Elme Resident Services, which focuses on providing elevated customer service to our residents and onsite teams by streamlining community operations across our multifamily portfolio and enhancing process efficiencies across resident account management, collections and renewals. Operating Results Net loss, NOI and NAREIT FFO for the three months ended September 30, 2024 and 2023 were as follows (in thousands): Three Months Ended September 30, 2024 2023 $ Change % Change Net loss $ (2,970) $ (43,618) $ 40,648 (93.2) % NOI (1) $ 38,797 $ 36,854 $ 1,943 5.3 % NAREIT FFO (2) $ 20,504 $ 20,146 $ 358 1.8 % ______________________________ (1) See page 25 of the MD&A for a reconciliation of NOI to net income. (2) See page 35 of the MD&A for a reconciliation of NAREIT FFO to net income. The decrease in net loss is primarily due to real estate impairment ($41.9 million) and transformation costs ($1.0 million) (as described in Note 2 to the consolidated financial statements) in the 2023 Quarter and higher NOI ($1.9 million) in the 2024 Quarter. These were partially offset by higher interest expense ($2.1 million), higher depreciation and amortization expenses ($1.6 million), higher property management expenses ($0.3 million) and loss on extinguishment of debt ($0.1 million) in the 2024 Quarter. The increase in NOI is primarily due to the acquisition of Elme Druid Hills ($1.2 million) in the 2023 Quarter and higher NOI from same-store properties ($0.8 million). The higher same-store NOI was primarily due to higher rental rates. Residential same-store average occupancy for our portfolio decreased to 95.2% as of September 30, 2024 from 95.4% as of September 30, 2023. 22 The higher NAREIT FFO is primarily due to higher NOI ($1.9 million) and lower transformation costs ($1.0 million). These were partially offset by higher interest expense ($2.1 million), higher property management expenses ($0.3 million) and higher loss on extinguishment of debt ($0.1 million). Investment Activity There were no significant investment transactions during the 2024 Period. Financing Activity 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 November 1, 2024, our Amended and Restated Revolving Credit Facility has a borrowing capacity of $313.0 million. As of September 30, 2024, the interest rate on the Amended and Restated Revolving Credit Facility is 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 is 0.20%. 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 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 We have no debt maturities scheduled until the first quarter of 2025. We expect to have additional capital requirements as set forth on page 27 (Liquidity and Capital Resources – Capital Requirements). 23 Results of Operations The discussion that follows is based on our consolidated results of operations for the 2024 Quarter and 2023 Quarter and the 2024 Period and 2023 Period. Net Operating Income NOI, defined as real estate rental revenue less direct real estate operating expenses, is a non-GAAP measure. NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations (including the gain or loss on sale, if any), plus interest expense, depreciation and amortization, lease origination expenses, general and administrative expenses, acquisition costs, real estate impairment, casualty gain and losses and gain or loss on extinguishment of debt. NOI does not include management expenses, which consist of corporate property management costs and property management fees paid to third parties. NOI is the primary performance measure we use to assess the results of our operations at the property level. We believe that NOI is a useful performance measure because, when compared across periods, it reflects the impact on operations of trends in occupancy rates, rental rates and operating costs on an unleveraged basis, providing perspective not immediately apparent from net income. NOI excludes certain components from net income in order to provide results more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. As a result of the foregoing, we provide NOI as a supplement to net income, calculated in accordance with GAAP. NOI does not represent net income or income from continuing operations calculated in accordance with GAAP. As such, NOI should not be considered an alternative to these measures as an indication of our operating performance. A reconciliation of net loss to NOI follows. 24 2024 Quarter Compared to 2023 Quarter The following table reconciles net loss to NOI and provides the basis for our discussion of our consolidated results of operations and NOI in the 2024 Quarter compared to the 2023 Quarter. All amounts are in thousands, except percentage amounts. Three Months Ended September 30, 2024 2023 $ Change % Change Net loss $ (2,970) $ (43,618) $ 40,648 (93.2) % Adjustments: Property management expenses 2,235 1,935 300 15.5 % General and administrative expenses 6,354 6,370 (16) (0.3) % Transformation costs — 985 (985) (100.0) % Real estate depreciation and amortization 23,474 21,904 1,570 7.2 % Real estate impairment — 41,860 (41,860) 100.0 % Interest expense 9,557 7,418 2,139 28.8 % Loss on extinguishment of debt, net 147 — 147 100.0 % Total net operating income (NOI) $ 38,797 $ 36,854 $ 1,943 5.3 % Residential revenue: Same-store portfolio $ 53,949 $ 52,011 $ 1,938 3.7 % Acquisition (1) 2,478 54 2,424 4,488.9 % Total 56,427 52,065 4,362 8.4 % Residential expenses: Same-store portfolio 19,535 18,357 1,178 6.4 % Acquisition 1,224 18 1,206 6,700.0 % Development 61 56 5 8.9 % Total 20,820 18,431 2,389 13.0 % Residential NOI: Same-store portfolio 34,414 33,654 760 2.3 % Acquisition 1,254 36 1,218 3,383.3 % Development (61) (56) (5) 8.9 % Total 35,607 33,634 1,973 5.9 % Other NOI (2) 3,190 3,220 (30) (0.9) % Total NOI $ 38,797 $ 36,854 $ 1,943 5.3 % ______________________________ (1) Acquisition: 2023: Elme Druid Hills (2) Other: Watergate 600 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 3.7%, to $53.9 million for the 2024 Quarter, compared to $52.0 million for the 2023 Quarter, primarily due to higher rental income ($1.5 million), higher recoveries ($0.4 million) and higher ancillary income ($0.2 million), partially offset by higher concessions ($0.2 million). 25 Real estate rental revenue from acquisition increased $2.4 million due to the acquisition of Elme Druid Hills during the 2023 Quarter. Average occupancy for residential properties for the 2024 Quarter and 2023 Quarter was as follows: September 30, 2024 September 30, 2023 % Change Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total 95.2 % 93.9 % 95.2 % 95.4 % 93.4 % 95.3 % (0.2) % 0.5 % (0.1) % The decrease in same-store average occupancy was primarily due to lower average occupancy at Elme Marietta, Elme Sandy Springs, Elme Eagles Landing, Elme Bethesda and The Maxwell, partially offset by higher average occupancy at Elme Manassas, Elme Leesburg and Elme Alexandria. The increase in non-same-store average occupancy is due to higher average occupancy during the 2024 Quarter as compared to the ending occupancy as of the 2023 Quarter at Elme Druid Hills. As we acquired Elme Druid Hills on September 29, 2023 and it is the only non-same-store property during the 2023 Quarter, the stated 2023 Quarter occupancy percentage is the ending occupancy as of September 30, 2023. Residential Expenses Residential real estate expenses as a percentage of residential revenue for the 2024 Quarter and the 2023 Quarter were 36.9% and 35.4%, respectively. Real estate expenses from same-store residential properties increased $1.2 million, or 6.4%, to $19.5 million for the 2024 Quarter, compared to $18.4 million for the 2023 Quarter, primarily due to higher administrative ($0.4 million), higher utilities ($0.4 million), higher real estate tax ($0.3 million), higher contract maintenance ($0.3 million) and higher insurance ($0.2 million) expenses. The increase is partially offset by lower personnel ($0.4 million) expenses. Real estate expenses from acquisition increased $1.2 million due to the acquisition of Elme Druid Hills during the 2023 Quarter. Other Income and Expenses General and administrative expenses : Small decrease reflects a higher internal management fee offset ($0.3 million), lower corporate office moving expenses ($0.3 million) and lower rent for our corporate office ($0.2 million). These were offset by higher incentive compensation ($0.6 million) and higher software ($0.1 million) expenses. Transformation costs: Decrease of $1.0 million during the 2024 Quarter due to completion of strategic transformation in 2023. Real estate depreciation and amortization : Increase of $1.6 million primarily due to higher depreciation and amortization at same-store residential properties ($1.5 million) and Elme Druid Hills ($0.7 million). These increases were partially offset by lower depreciation and amortization at Watergate 600 ($0.6 million). Interest expense : Interest expense by debt type for the three months ended September 30, 2024 and 2023 was as follows (in thousands): Three Months Ended September 30, Debt Type 2024 2023 $ Change % Change Notes payable $ 6,130 $ 6,023 $ 107 1.8 % Line of credit 3,427 1,395 2,032 145.7 % Total $ 9,557 $ 7,418 $ 2,139 28.8 % • Notes payable : Increase primarily due to a higher effective interest rate on the $125.0 million 2023 Term Loan executed in January 2023. 26 • Line of credit : Increase primarily due to higher weighted average borrowings of $168.8 million and a weighted average interest rate of 6.3% in the 2024 Quarter, as compared to weighted average borrowings of $41.1 million and a weighted average interest rate of 6.2% in the 2023 Quarter. 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. Loss on Extinguishment of Debt: Loss during the 2024 Quarter was due to a write-off of capitalized debt origination costs in association with the execution of our Amended and Restated Revolving Credit Facility in July 2024. 27 2024 Period Compared to 2023 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 2024 Period compared to the 2023 Period. All amounts are in thousands, except percentage amounts. Nine Months Ended September 30, 2024 2023 $ Change % Change Net loss $ (10,088) $ (49,872) $ 39,784 (79.8) % Adjustments: Property management expenses 6,628 5,882 746 12.7 % General and administrative expenses 18,688 19,891 (1,203) (6.0) % Transformation costs — 6,339 (6,339) (100.0) % Real estate depreciation and amortization 72,312 64,855 7,457 11.5 % Real estate impairment — 41,860 (41,860) (100.0) % Interest expense 28,435 21,043 7,392 35.1 % Loss on extinguishment of debt, net 147 54 93 172.2 % Other income (1,410) (569) (841) 147.8 % Total net operating income (NOI) $ 114,712 $ 109,483 $ 5,229 4.8 % Residential revenue: Same-store portfolio $ 159,344 $ 155,102 $ 4,242 2.7 % Acquisition (1) 7,446 54 7,392 13,688.9 % Total 166,790 155,156 11,634 7.5 % Residential expenses: Same-store portfolio 58,394 55,443 2,951 5.3 % Acquisition 3,231 18 3,213 17,850.0 % Development 175 168 7 4.2 % Total 61,800 55,629 6,171 11.1 % Residential NOI: Same-store portfolio 100,950 99,659 1,291 1.3 % Acquisition 4,215 36 4,179 11,608.3 % Development (175) (168) (7) 4.2 % Total 104,990 99,527 5,463 5.5 % Other NOI (2) 9,722 9,956 (234) (2.4) % Total NOI $ 114,712 $ 109,483 $ 5,229 4.8 % ______________________________ (1) Acquisition: 2023: Elme Druid Hills (2) Other: Watergate 600 Real Estate Rental Revenue Real estate rental revenue from our apartment communities is comprised of (a) rent from operating leases of multifamily residential apartments with terms of approximately one year or less, recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our residents, (c) credit losses on lease related receivables, (d) revenue from leases of retail space at our apartment communities and (e) parking and other tenant charges. Real estate rental revenue from same-store residential properties increased $4.2 million, or 2.7%, to $159.3 million for the 2024 Period, compared to $155.1 million for the 2023 Period, primarily due to higher rental income ($4.6 million), higher recoveries ($1.2 million), higher other rental and fee income ($0.6 million) and higher ancillary income ($0.3 million), partially offset by higher credit losses ($1.0 million), higher vacancy loss ($0.9 million) and higher concessions ($0.5 million). 28 Real estate rental revenue from acquisition increased $7.4 million due to the acquisition of Elme Druid Hills during the 2023 Quarter. Average occupancy for residential properties for the 2024 Period and 2023 Period was as follows: September 30, 2024 September 30, 2023 % Change Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total 94.7 % 92.9 % 94.6 % 95.4 % 93.4 % 95.4 % (0.7) % (0.5) % (0.8) % The decrease in same-store average occupancy was primarily due to lower average occupancy at Elme Marietta, Elme Eagles Landing, Elme Sandy Springs and Elme Cumberland, partially offset by higher average occupancy at Elme Leesburg and Elme Dulles. The decrease in non-same-store average occupancy is due to lower average occupancy during the first six months of the 2024 Period as compared to the ending occupancy as of the 2023 Period at Elme Druid Hills. This decrease is partially offset by higher average occupancy during 2024 Quarter. As we acquired Elme Druid Hills on September 29, 2023 and it is the only non-same-store property during the 2023 Period, the stated 2023 Period occupancy percentage is the ending occupancy as of September 30, 2023. Real Estate Expenses Residential real estate expenses as a percentage of residential revenue for the 2024 Period and 2023 Period were 37.1% and 35.9%, respectively. Real estate expenses from same-store residential properties increased by $3.0 million, or 5.3%, to $58.4 million for the 2024 Period, compared to $55.4 million for the nine months ended September 30, 2023, primarily due to higher utilities ($0.9 million), higher administrative ($0.9 million), higher real estate taxes ($0.8 million), higher insurance ($0.8 million) and higher maintenance ($0.6 million) expenses. The increase is partially offset by lower personnel ($0.8 million) and turnover ($0.1 million) expenses. Real estate expenses from acquisitions increased $3.2 million due to the acquisition of Elme Druid Hills during the 2023 Quarter. Other NOI Other NOI decreased ($0.2 million) due to higher operating expenses at Watergate 600. Other Income and Expenses Property management expenses: Increase of $0.7 million primarily due to higher internal management fee expenses at same-store properties ($0.4 million) and the acquisition of Elme Druid Hills during the 2023 Quarter ($0.3 million). General and administrative expenses : Decrease of $1.2 million primarily due to higher internal management fee offset ($2.2 million), corporate office moving expenses ($0.6 million) in the 2023 Period and lower rent for our corporate office ($0.6 million). These were partially offset by higher payroll ($1.2 million), higher incentive compensation ($0.4 million), higher software ($0.4 million) and higher consulting ($0.2 million) expenses. Transformation costs: Decrease of $6.3 million due to completion of strategic transformation in 2023. Real estate depreciation and amortization : Increase of $7.5 million primarily due to higher depreciation and amortization at Elme Druid Hills ($5.0 million) and at same-store residential properties ($4.6 million). The increase was partially offset by lower depreciation and amortization at Watergate 600 ($2.1 million). 29 Interest expense : Interest expense by debt type for the nine months ended September 30, 2024 and 2023 was as follows (in thousands): Nine Months Ended September 30, Debt Type 2024 2023 $ Change % Change Notes payable $ 18,368 $ 17,022 $ 1,346 7.9 % Line of credit 10,067 4,021 6,046 150.4 % Total $ 28,435 $ 21,043 $ 7,392 35.1 % • 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. • Line of credit : Increase primarily due to higher weighted average borrowings of $166.2 million and a weighted average interest rate of 6.3% in the 2024 Period, as compared to weighted average borrowings of $40.8 million and a weighted average interest rate of 6.1% in the 2023 Period. Loss on Extinguishment of Debt: Loss during the 2024 Quarter was due to a write-off of capitalized debt origination costs in association with the execution of our Amended and Restated Revolving Credit Facility in July 2024. Other Income : Other income during the 2024 Period consists of additional payments received with respect to easements previously conveyed at The Wellington and Takoma Park, a previously owned retail property. Income of $0.6 million during the 2023 Period consists of tax refunds received for office properties sold in prior years. Real Estate Impairment : The real estate impairment charge of $41.9 million during the 2023 Period reduced the carrying value of Watergate 600 to its estimated fair value. 30 Liquidity and Capital Resources We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements, including meeting our debt obligations, capital commitments, acquisitions and contractual obligations, as well as the payment of dividends and funding possible growth opportunities. W e executed strategic transactions that will allow us to continue pursuing residential expansion in Sunbelt markets, meet our debt obligations for the next twelve months, and pay a dividend on a quarterly basis. We also believe we have adequate liquidity beyond 2024, with only $125.0 million of scheduled debt maturities in 2025 and no additional scheduled debt maturities prior to 2028. As of November 1, 2024, we had cash and cash equivalents totaling $3.9 million and a borrowing capacity of $313.0 million on our Amended and Restated Revolving Credit Facility, resulting in a total liquidity position of $316.9 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. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our board of trustees which considers, among other factors, trends in our levels of NAREIT FFO and ongoing capital requirements to achieve a targeted payout ratio. Capital Requirements As of the end of the 2024 Period, our full-year 2024 capital requirements are summarized below: • Funding dividends and distributions to our shareholders; • Approximately $40.0 - $45.0 million to invest in our existing portfolio of operating assets, inclusive of $25.0 - $30.0 million of major capital expenditures; • Less than $1.0 million to invest in our development and redevelopment projects; and • Funding for potential property acquisitions throughout 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 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 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. If capital were not available, we may be unable to satisfy the distribution requirement applicable to REITs, make required principal and interest payments, make strategic acquisitions or make necessary and/or routine capital improvements or undertake improvement/redevelopment opportunities with respect to our existing portfolio of operating assets. Debt Financing We generally use secured or unsecured, corporate-level debt, including unsecured notes, our Amended and Restated Revolving Credit Facility, bank term loans and mortgages to meet our borrowing needs. Long-term, we generally use fixed rate debt instruments in order to match the returns from our real estate assets. If we issue unsecured debt in the future, we will seek to “ladder” the maturities of our debt to mitigate exposure to interest rate risk in any particular future year. We also utilize variable rate debt for short-term financing purposes. At times, our mix of variable and fixed rate debt may not suit our needs. At those times, we may use derivative financial instruments including interest rate swaps and caps, forward interest rate options or interest rate options in order to assist us in managing our debt mix. We may either hedge our variable rate debt to give it an effective fixed interest rate or hedge fixed rate debt to give it an effective variable interest rate. 31 As of September 30, 2024, our future debt principal payments are scheduled as follows (in thousands): Future Maturities of Debt Year Unsecured Debt Revolving Credit Facility Total Debt Average Interest Rate 2024 $ — $ — $ — —% 2025 125,000 (1) — 125,000 4.7% 2026 — — — —% 2027 — — — —% 2028 50,000 168,000 (2) 218,000 6.1% Thereafter 350,000 — 350,000 4.1% Scheduled principal payments $ 525,000 $ 168,000 $ 693,000 4.9% Net discounts/premiums (77) — (77) Loan costs, net of amortization (2,009) — (2,009) Total maturities $ 522,914 $ 168,000 $ 690,914 4.9% ______________________________ (1) During the first quarter of 2023, 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. 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) During the 2024 Quarter, we executed the Amended Credit Agreement that provides for a revolving credit facility of $500.0 million that matures in July 2028, with two six-month extension options. As of September 30, 2024, the weighted average maturity for our debt is 4.4 years. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. Prevailing interest rates or other factors at the time of a refinancing, such as possible reluctance of lenders to make commercial real estate loans, may result in higher interest rates and increased interest expense or inhibit our ability to finance our obligations. From time to time, we may seek to repurchase and cancel our outstanding unsecured notes and term loans through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. 32 Debt Covenants Pursuant to the terms of the Amended Credit Agreement, 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 the Amended Credit Agreement, 2023 Term Loan, unsecured notes or other debt instruments could result in a default under one or more of our debt instruments. This could cause our lenders to accelerate the timing of payments and could therefore have a material adverse effect on our business, operations, financial condition and liquidity. In addition, our ability to draw on our Revolving Credit Facility or incur other unsecured debt in the future could be restricted by the debt covenants. As of September 30, 2024, we were in compliance with the covenants related to our Amended Credit Agreement, 2023 Term Loan, and unsecured notes. Common Equity We have authorized for issuance 150.0 million common shares, of which 88.0 million shares were outstanding at September 30, 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 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 $340.0 million remained unsold under such prior program. We did not issue common shares under the Equity Distribution Agreement or any prior equity distribution agreements during the 2024 Period or 2023 Period. We have a dividend reinvestment program whereby shareholders may use their dividends and optional cash payments to purchase common shares. The shares sold under this program may either be common shares issued by us or common shares purchased in the open market. We intend to use the proceeds of the sale of any newly issued common shares issued under this program, if any, for general corporate purposes. We did not issue common shares under the dividend reinvestment program during the 2024 Period. Our issuances and net proceeds on the dividend reinvestment program for the nine months ended September 30, 2023 were as follows ($ 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 Preferred Equity Elme Communities’ board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares. The ability to issue preferred equity provides Elme Communities an additional financing tool that may be used to raise capital for future acquisitions or other business purposes. As of September 30, 2024, no preferred shares were issued and outstanding. 33 Historical Cash Flows Cash flows from operations are an important factor in our ability to sustain our dividend at its current rate. If our cash flows from operations were to decline significantly from current levels, we may have to reduce our dividend. Consolidated cash flow information is summarized as follows (in thousands): Nine Months Ended September 30, Change 2024 2023 $ % Net cash provided by operating activities $ 70,739 $ 61,816 $ 8,923 14.4 % Net cash used in investing activities (29,622) (130,283) 100,661 (77.3) % Net cash (used in) provided by financing activities (42,457) 68,798 (111,255) (161.7) % Net cash provided by operating activities increased primarily due to higher rental revenue from the acquisition of Elme Druid Hills during the 2023 Quarter and from same-store communities. Net cash used in investing activities decreased primarily due to the acquisition of Elme Druid Hills during the 2023 Quarter. Net cash used in financing activities increased primarily due to executing the $125.0 million 2023 Term Loan during the 2023 Period and lower net borrowings on the Amended and Restated Revolving Credit Facility during the 2024 Period, partially offset by prepayment of a $100.0 million portion of the 2018 Term Loan during the 2023 Period. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements as of September 30, 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. 34 Funds From Operations 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, 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. Our NAREIT FFO may not be comparable to FFO reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently. 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, 2024 and 2023 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net loss $ (2,970) $ (43,618) $ (10,088) $ (49,872) Adjustments: Depreciation and amortization 23,474 21,904 72,312 64,855 Real estate impairment — 41,860 — 41,860 NAREIT FFO $ 20,504 $ 20,146 $ 62,224 $ 56,843 Critical Accounting Estimates We base the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There were no changes made by management to the critical accounting policies in the three and nine months ended September 30, 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. 35