Item 7. Management’s Discussion and Analysis
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We provide 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 activity, financing activity and capital requirements to provide context for the remainder of MD&A.
• Results of Operations. Discussion of our financial results comparing 2024 to 2023.
• 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.
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 December 31, 2024, we owned approximately 9,400 residential apartment homes in the Washington, DC and Atlanta metro regions. We also own and operate approximately 300,000 square feet of commercial space in the Washington, DC metro region.
During 2023, we completed the acquisition of Elme Druid Hills, a 500-unit apartment community in Atlanta, Georgia for a contract purchase price of $108.0 million.
In connection with our strategic transformation, which shifted our business away from the commercial sector to the residential sector, we redesigned our operating model for purposes of more efficiently and effectively supporting residential operations. This operating model redesign included insourcing the property-level management activities at our multifamily properties previously performed by third-party management companies. Community onboarding began in October 2022, and we have transitioned all of our residential communities to Elme management as of July 2023. Costs related to the strategic transformation, including the allocation of internal costs, consulting, advisory and termination benefits, are included in transformation costs on our consolidated statements of operations. We recognized $6.3 million of transformation costs, net of amounts capitalized, on the consolidated statements of operations during 2023. We did not incur transformation costs in 2024 and do not anticipate incurring any additional transformation costs in the future. We continue to realize significant operational benefits from this operating model redesign.
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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.
On February 13, 2025, the Company announced that its Board has initiated a formal review to evaluate strategic alternatives for the Company in an effort to maximize shareholder value. There is no deadline or definitive timetable set for completion of this review and there can be no assurance that this process will result in the Company pursuing a transaction or any other strategic outcome.
Operating Results
The discussion that follows is based on our Operating Results. The ability to compare one period to another is affected by the acquisition completed in 2023 (see note 3 to the consolidated financial statements).
Net loss, NOI and NAREIT FFO for the years ended December 31, 2024 and 2023 were as follows (in thousands, except percentage amounts):
Year Ended December 31,
2024 2023 Change % Change
Net loss
$ (13,103) $ (52,977) $ 39,874 (75.3) %
NOI (1)
$ 153,234 $ 148,081 $ 5,153 3.5 %
NAREIT FFO (2)
$ 82,832 $ 77,833 $ 4,999 6.4 %
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(1) See page 33 of the MD&A for reconciliations of NOI to net loss.
(2) See page 43 of the MD&A for reconciliations of NAREIT FFO to net loss.
The decrease in net loss is primarily due to real estate impairment in our office property ($41.9 million) and transformation costs ($6.3 million) during 2023, and higher NOI ($5.2 million) and lower general and administrative expenses ($0.9 million) during 2024. These were partially offset by higher interest expense ($7.4 million) and higher depreciation and amortization expenses ($7.0 million).
The increase in NOI is primarily due to the acquisition of Elme Druid Hills ($3.9 million) in 2023 and higher NOI from same-store properties ($1.9 million), partially offset by lower NOI at Watergate 600 ($0.6 million). The higher same-store NOI was primarily due to higher rental rates. Residential same-store average occupancy for our portfolio decreased to 94.8% as of December 31, 2024 from 95.2% as of December 31, 2023.
The higher NAREIT FFO is primarily due to higher NOI ($5.2 million), lower transformation costs ($6.3 million) and lower general and administrative expenses ($0.9 million). These were partially offset by higher interest expense ($7.4 million).
Investment Activity
There were no significant investment transactions during 2024.
Financing Activity
In July 2024, 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 February 11, 2025, our Amended and Restated Revolving Credit Facility has a borrowing capacity of $320.0 million.
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As of December 31, 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 4.49% and the facility fee is 0.20%.
During 2024, we entered into a first amendment (the “Term Loan Amendment”) to our $125.0 million unsecured term executed in 2023 (“2023 Term Loan”). The 2023 Term Loan has an interest rate of SOFR (subject to a credit spread adjustment of 10 basis points) plus a margin of 95 basis points (subject to adjustment depending on our credit rating).
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.
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).
In the fourth quarter of 2024, we exercised one of two one-year extension options on the 2023 Term Loan (as defined below) to extend the maturity of the loan to January 10, 2026.
Capital Requirements
We exercised one of two one-year extension options on the 2023 Term Loan which results in no current debt maturities scheduled for 2025. We expect to have additional capital requirements as set forth on page 37 (Liquidity and Capital Resources - Capital Requirements).
Results of Operations
The discussion that follows is based on our consolidated results of operations for the two years ended December 31, 2024. The ability to compare one period to another is affected by the acquisition completed during 2023 (see note 3 to the consolidated financial statements).
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 NOI to net income follows.
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2024 Compared to 2023
The following tables reconcile net income to NOI and provide the basis for our discussion of our consolidated results of operations and NOI in 2024 compared to 2023. All amounts are in thousands except percentage amounts.
Year Ended December 31,
2024 2023 $ Change % Change
Net loss $ (13,103) $ (52,977) $ 39,874 (75.3) %
Adjustments:
Property management expense 8,861 8,108 753 9.3 %
General and administrative expense 24,969 25,887 (918) (3.5) %
Transformation costs — 6,339 (6,339) (100.0) %
Real estate depreciation and amortization 95,935 88,950 6,985 7.9 %
Real estate impairment — 41,860 (41,860) (100.0) %
Interest expense 37,835 30,429 7,406 24.3 %
Loss on extinguishment of debt, net 147 54 93 172.2 %
Other income (1,410) (569) (841) 147.8 %
Total net operating income (NOI) $ 153,234 $ 148,081 $ 5,153 3.5 %
Residential revenue:
Same-store portfolio $ 213,670 $ 206,762 $ 6,908 3.3 %
Acquisitions (1)
9,968 2,549 7,419 291.1 %
Development — — — — %
Total 223,638 209,311 14,327 6.8 %
Residential expenses:
Same-store portfolio 78,470 73,431 5,039 6.9 %
Acquisitions 4,363 880 3,483 395.8 %
Development 233 224 9 4.0 %
Total 83,066 74,535 8,531 11.4 %
Residential NOI:
Same-store portfolio 135,200 133,331 1,869 1.4 %
Acquisitions 5,605 1,669 3,936 235.8 %
Development (233) (224) (9) 4.0 %
Total 140,572 134,776 5,796 4.3 %
Other NOI (2)
12,662 13,305 (643) (4.8) %
Total NOI $ 153,234 $ 148,081 $ 5,153 3.5 %
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(1) 2023 Acquisition: 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 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.
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Real estate rental revenue from same-store residential properties increased $6.9 million, or 3.3%, to $213.7 million for 2024, compared to $206.8 million for 2023, primarily due to higher rental income ($5.8 million), higher recoveries ($1.6 million), higher ancillary income ($0.6 million) and higher other rental and fee income ($0.5 million), partially offset by higher concessions ($0.7 million), higher vacancy loss ($0.7 million) and higher credit losses ($0.2 million).
Real estate rental revenue from acquisitions increased $7.4 million or 291.1% to $10.0 million for 2024, compared to $2.5 million for 2023, primarily due to the acquisition of Elme Druid Hills during the third quarter of 2023.
Average occupancy for residential properties for 2024 and 2023 was as follows:
December 31, 2024 December 31, 2023 % Change
Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total
94.8 % 93.4 % 94.7 % 95.2 % 93.4 % 95.2 % (0.4) % — % (0.5) %
The decrease in same-store average occupancy was primarily due to lower average occupancy at Elme Marietta, Elme Eagles Landing, Elme Sandy Springs and Park Adams, partially offset by higher average occupancy at Elme Manassas, Elme Leesburg and Elme Alexandria.
Real Estate Expenses
Residential real estate expenses as a percentage of residential revenue for 2024 and 2023 were 37.1% and 35.6%, respectively.
Real estate expenses from same-store residential properties increased $5.0 million, or 6.9%, to $78.5 million for 2024, compared to $73.4 million for 2023, primarily due to higher utilities ($1.4 million), higher administrative ($1.2 million), higher real estate taxes ($1.1 million), higher maintenance ($1.1 million) and higher insurance ($0.8 million) expenses. The increase was partially offset by lower personnel ($0.7 million) expenses.
Real estate expenses from acquisitions increased $3.5 million in 2024 due to the acquisition of Elme Druid Hills during the third quarter of 2023.
Other NOI
Other NOI decreased primarily due to lower operating income ($0.3 million) and higher repairs and maintenance expense ($0.3 million) at Watergate 600.
Other Income and Expenses
Property management expenses: Increase of $0.8 million primarily due to higher internal management fee expenses at same-store properties ($0.5 million) and the acquisition of Elme Druid Hills during the 2023 Quarter ($0.3 million).
General and administrative expenses : Decrease of $0.9 million primarily due to higher internal management fee offset ($2.3 million), corporate office moving expenses ($0.6 million) in 2023, lower rent for our corporate office ($0.6 million) and lower severance ($0.6 million) expenses in 2024. These were partially offset by higher payroll ($1.3 million), higher software ($0.8 million), higher incentive compensation ($0.6 million) expenses and an adjustment to deferred taxes ($0.5 million) in 2023.
Transformation costs: Decrease of $6.3 million due to completion of strategic transformation in 2023.
Depreciation and amortization : Increase of $7.0 million primarily due to higher depreciation and amortization at same-store residential properties ($5.7 million) and at Elme Druid Hills ($3.5 million). The increase was partially offset by lower depreciation and amortization at Watergate 600 ($2.3 million).
Interest Expense : Interest expense by debt type for the years ended December 31, 2024 and 2023 was as follows (in thousands):
Year Ended December 31,
Debt Type 2024 2023 $ Change % Change
Notes payable $ 24,497 $ 23,152 $ 1,345 5.8 %
Line of credit 13,338 7,277 6,061 83.3 %
Total $ 37,835 $ 30,429 $ 7,406 24.3 %
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• 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 a $250.0 million unsecured term loan (the “2018 Term Loan”) in January 2023.
• Line of credit : Increase primarily due to higher weighted average borrowings of $169.3 million and a weighted average interest rate of 6.1% in 2024, as compared to a weighted average borrowings of $70.6 million and weighted average interest rate of 6.2% in 2023.
Loss on extinguishment of debt: Loss during 2024 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 2024 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 2023 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 2023 reduced the carrying value of Watergate 600 to its estimated fair value.
2023 Compared to 2022
For a discussion comparing the Company’s financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022, refer to subsection “Results of Operations - 2023 Compared to 2022” of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023.
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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 and contractual obligations, as well as the payment of dividends, and funding possible growth opportunities.
We also believe we have adequate liquidity beyond 2024 and we have no debt maturities until 2026 and only $351 million of scheduled debt maturities prior to 2029, based on current amounts outstanding under our Amended and Restated Revolving Credit Facility.
We will continue to assess the payment of our dividends on a quarterly basis. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our Board which considers, among other factors, trends in our levels of funds from operations and ongoing capital requirements to achieve a targeted payout ratio.
Capital Structure
We manage our capital structure to reflect a long-term investment approach, generally seeking to match the cash flow of our assets with a mix of equity and various debt instruments. We expect that our capital structure will allow us to obtain additional capital from diverse sources that could include additional equity offerings of common shares, public and private secured and unsecured debt financings, asset dispositions, operating units and joint venture equity. Our ability to raise funds through the incurrence of debt and issuance of equity securities is dependent on, among other things, general economic conditions including general market conditions for REITs, our operating performance, our debt rating, the current trading price of our common shares and other capital market conditions. We analyze which source of capital we believe to be most advantageous to us at any particular point in time.
As of February 11, 2025, we had cash and cash equivalents of approximately $5.9 million and availability under our Amended and Restated Revolving Credit Facility of $320.0 million. We currently expect that our potential sources of liquidity for acquisitions, development, redevelopment, expansion and renovation of properties, and operating and administrative expenses, may include:
• Cash flow from operations;
• Borrowings under our Amended and Restated Revolving Credit Facility or other new short-term facilities;
• Issuances of our equity securities and/or common units in operating partnerships;
• Issuances of preferred shares;
• Proceeds from long-term secured or unsecured debt financings, including construction loans and term loans, or the issuance of debt securities;
• Investment from joint venture partners; and
• Net proceeds from the sale of assets.
During 2025, we expect that we will have significant capital requirements, including the following:
• Funding dividends and distributions to our shareholders (which we intend to continue to pay at or about current levels);
• Approximately $41.0 - $46.0 million to invest in our existing portfolio of operating assets inclusive of $27.0 - $32.0 million of major capital expenditures; and
• Funding for potential property acquisitions throughout 2025, 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 in 2025. However, as a result of the uncertainty of the general market conditions in the greater Washington, DC metro and Sunbelt regions, economic conditions affecting the ability to attract and retain residents and tenants or achieve anticipated rental rates, declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all. If we are unable to obtain capital from other sources, we may need to alter capital spending to be materially different than what is stated above. 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.
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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.
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As of December 31, 2024, our future debt principal payments are scheduled as follows (in thousands):
Year Unsecured Notes Payable/Term Loans Amended and Restated Revolving Credit Facility
Total Debt Average Interest Rate
2025 — — $ — — %
2026 125,000 (1) — 125,000 4.7 %
2027 — — — — %
2028 50,000 176,000 (2) 226,000 5.7 %
2029 — — — — %
Thereafter 350,000 — 350,000 4.1 %
Scheduled principal payments 525,000 176,000 701,000 4.7 %
Premiums and discounts, net (71) — (71)
Debt issuance costs, net (1,976) — (1,976)
Total $ 522,953 $ 176,000 $ 698,953 4.7 %
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(1) During 2023, we entered into the 2023 Term Loan, which has an initial two-year term ending in January 2025, and provided for two one-year extension options. In the fourth quarter of 2024, we exercised one of two one-year extension options on the 2023 Term Loan to extend the maturity of the loan to January 10, 2026. In 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 2023 Term Loan’s interest rate at 4.73% beginning on July 21, 2023 through the 2023 Term Loan’s initial maturity date of January 10, 2025. In 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 the loan maturity date of 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).
(2) During the third quarter of 2024, 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.
The weighted average maturity for our debt was 4.4 years as of December 31, 2024. 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.
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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 Amended and Restated Revolving Credit Facility or incur other unsecured debt in the future could be restricted by the debt covenants.
As of December 31, 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 approximately 88.0 million shares were outstanding at December 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 $350.0 million 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 in 2024 or 2023. Our issuances and net proceeds on the prior equity distribution agreement in 2022, were as follows (in thousands, except per share data):
Year Ended December 31,
2024 2023 2022
Issuance of common shares — — 1,032
Weighted average price per share $ — $ — $ 26.27
Net proceeds $ — — $ 26,849
We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase common shares. The common shares sold under this program may either be common shares issued by us or common shares purchased in the open market.
We did not issue common shares under the dividend reinvestment program during 2024. Our issuances and net proceeds on the dividend reinvestment program for 2023 and 2022 were as follows (in thousands; except per share data):
Year Ended December 31,
2024 2023 2022
Issuance of common shares — 28 47
Weighted average price per share $ — $ 17.64 $ 22.40
Net proceeds $ — $ 497 $ 1,030
On October 26, 2023, the Board authorized and approved a share repurchase program of up to $50.0 million of the Company’s common shares of beneficial interest over a period of two years, subject to any applicable limitations or restrictions set forth in
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our existing credit facility and other debt agreements. The share repurchase program is scheduled to expire on October 25, 2025, unless extended by the Board.
Preferred Equity
Our Board can, at its discretion, authorize the issuance of up to 10.0 million preferred shares. The ability to issue preferred equity provides Elme Communities an additional financing tool that may be used to raise capital for future acquisitions or other business purposes. As of December 31, 2024, no preferred shares were issued and outstanding.
Capital Commitments
We will require capital for development and redevelopment projects currently underway and in the future. We previously engaged in predevelopment activities for the ground-up development of a residential property on land adjacent to Riverside Apartments, but as of the second quarter of 2022, we paused development activities. As of December 31, 2024, we had no outstanding contractual commitments related to our development and redevelopment projects and do not expect to spend on our development and redevelopment projects during 2025.
We anticipate funding approximately $27.0 - $32.0 million on several major renovation projects at our residential communities during 2025.
These projects include unit renovations, property technology initiatives, common area and mechanical upgrades, facade restorations and roof replacements. Not all of the anticipated spending had been committed via executed construction contracts at December 31, 2024. We expect to fund these projects using cash generated by our real estate operations, through borrowings on our Amended and Restated Revolving Credit Facility, or raising additional debt or equity capital in the public market.
Contractual Obligations
As of December 31, 2024, certain contractual obligations will require significant capital as follows (in thousands):
Payments due by Period
Total Less than 1
year 1-3 years 4-5 years After 5
years
Long-term debt (1)
$ 809,425 $ 24,908 $ 405,887 $ 378,630 $ —
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(1) See notes 6 and 7 of the consolidated financial statements. Amounts include principal, interest and facility fees.
In addition to our long-term debt, we have committed building capital expenditures of $2.0 million in 2025 based on contracts in place as of December 31, 2024, along with other various standing or renewable contracts with vendors. The majority of these contracts can be canceled with immaterial or no cancellation penalties, with the exception of our elevator maintenance agreements and our electricity and gas purchase agreements. Contract terms on leases that can be canceled are generally one year or less.
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 flows for the three years ended December 31, 2024 are summarized as follows (in thousands):
Year ended December 31, Variance
2024 2023 2022 2024 vs. 2023 2023 vs. 2022
Cash provided by operating activities $ 95,243 $ 84,669 $ 73,211 $ 10,574 $ 11,458
Cash used in investing activities
(43,740) (146,221) (241,163) 102,481 94,942
Cash (used in) provided by financing activities
(51,432) 60,238 (56,416) (111,670) 116,654
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Net cash provided by operating activities increased in 2024 as compared to 2023 primarily due to higher rental revenue from the acquisition of Elme Druid Hills in 2023 and from same-store communities. Net cash provided by operating activities increased in 2023 as compared to 2022 primarily due to the acquisitions of Elme Sandy Springs, Elme Marietta and Elme Cumberland in 2022.
Net cash used in investing activities decreased in 2024 as compared to 2023 primarily due to the acquisition of Elme Druid Hills during 2023. Net cash used in investing activities decreased in 2023 as compared to 2022 primarily due to the acquisitions of Elme Sandy Springs, Elme Marietta and Elme Cumberland during 2022, partially offset by the acquisition of Elme Druid Hills during 2023.
Net cash used in financing activities increased in 2024 primarily due to executing the $125.0 million 2023 Term Loan during 2023, partially offset by the prepayment of a $100.0 million portion of the 2018 Term Loan during 2023 and higher net borrowings on the Amended and Restated Revolving Credit Facility during 2024. Net cash provided by (used in) financing activities increased in 2023 compared to 2022 primarily due to executing the $125.0 million 2023 Term Loan and net borrowings on the Revolving Credit Facility during 2023 and the repayment of mortgage notes during 2022. These were partially offset by the repayment of the $100.0 million 2018 Term Loan during 2023 and proceeds from equity issuances during 2022.
Capital Improvements and Development Costs
Our capital improvement, development and redevelopment costs for the three years ended December 31, 2024 were as follows (in thousands):
Year Ended December 31,
2024 2023 2022
Accretive capital improvements and development costs:
Acquisition related improvements $ 6,685 $ 6,379 $ 5,236
Expansions and major renovations 29,634 22,340 21,476
Development/redevelopment — — 698
Tenant improvements (including first generation leases) — 17 1,337
Total accretive capital improvements (1)
36,319 28,736 28,747
Other capital improvements: 11,071 9,482 8,464
Total $ 47,390 $ 38,218 $ 37,211
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(1) We consider these capital improvements to be accretive to revenue and not necessarily to net income.
Included in the capital improvement and development costs listed above are capitalized employee compensation in the amount of $2.0 million, $2.3 million and $1.1 million for the three years ended December 31, 2024, respectively, and while none for the two years ended December 31, 2024, capitalized interest in the amount of $0.3 million for the year ended December 31, 2022.
Accretive Capital Improvements
Acquisition Related Improvements: Acquisition related improvements are capital improvements to properties acquired during the preceding three years which were anticipated at the time we acquired the properties. These types of improvements were made in 2024 to Elme Druid Hills, Elme Cumberland, Elme Marietta and Elme Sandy Springs.
Expansions and Major Renovations: Expansion projects increase the rentable area of a property, while major renovation projects are improvements sufficient to increase the income otherwise achievable at a property. Expansions and major renovations during 2024 included managed Wi-Fi deployments at Cascade at Landmark, Elme Cumberland, Elme Druid Hills, Elme Leesburg, Elme Manassas, The Maxwell and The Wellington; smart home technology at Elme Druid Hills; access control modernization at Elme Dulles, Elme Herndon, Elme Leesburg and Elme Manassas; the completion of a multi-phase fire alarm system modernization at Riverside Apartments; and over four hundred fifty unit renovations across twenty communities.
Development/Redevelopment: Development costs represent expenditures for ground up development of new operating properties. Redevelopment costs represent expenditures for improvements intended to reposition properties in their markets and generate more income than would be otherwise achievable. Development/redevelopment costs in 2022 included predevelopment costs for a future residential development adjacent to Riverside Apartments, which is currently on hold.
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Other Capital Improvements
Other capital improvements, also referred to as recurring capital improvements, are those not included in the above categories. Over time these costs will be recurring in nature to maintain a property's income and value. This category includes improvements made as needed upon vacancy of an apartment. Such improvements totaled $6.1 million in 2024, averaging approximately $1,607 per unit for the 42% of units which turned over relative to our total portfolio of apartment homes. Aside from improvements related to apartment turnover, these improvements include facade repairs, installation of new heating and air conditioning equipment, asphalt replacement, permanent landscaping, new lighting and new finishes. In addition, we incurred repair and maintenance expense of $5.3 million during 2024 to maintain the quality of our buildings.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements as of December 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.
Forward-Looking Statements
Some of the statements contained in this Form 10-K constitute 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:
(a) the risks associated with the outcome, objectives and timing of the strategic alternatives review, including the incurrence of costs and expenses and diversion of management’s time in connection with such review;
(b) the risks associated with ownership of real estate in general and our real estate assets in particular;
(c) the economic health of the areas in which our properties are located, particularly with respect to the greater Washington, DC metro and Sunbelt regions;
(d) 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;
(e) the risk of failure to enter into and/or complete acquisitions and dispositions;
(f) changes in the composition of our portfolio;
(g) reductions in or actual or threatened changes to the timing of federal government spending;
(h) the economic health of our residents;
(i) the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdowns or recessions and geopolitical conflicts);
(j) risks related to our ability to control our expenses if revenues decrease;
(k) compliance with applicable laws and corporate social responsibility goals, including those concerning the environment and access by persons with disabilities;
(l) risks related to legal proceedings;
(m) risks related to not having adequate insurance to cover potential losses;
(n) changes in the market value of securities;
(o) terrorist attacks or actions and/or cyber-attacks;
(p) whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced;
(q) the availability and terms of financing and capital and the general volatility of securities markets;
(r) the risks related to our organizational structure and limitations of share ownership;
(s) failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and
(t) other factors discussed under the caption “Risk Factors.”
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While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors.” We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.
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 NAREIT FFO to net loss for the three years ended December 31, 2024 (in thousands):
Year Ended December 31,
2024 2023 2022
Net loss
$ (13,103) $ (52,977) $ (30,868)
Adjustments:
Depreciation and amortization 95,935 88,950 91,722
Real estate impairment — 41,860 —
NAREIT FFO $ 82,832 $ 77,833 $ 60,854
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 GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate these estimates on an on-going basis, including those related to estimated useful lives of real estate assets, estimated fair value of acquired leases, cost reimbursement income, bad debts, contingencies and litigation. We base the estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We cannot assure you that actual results will not differ from those estimates.
We believe the following accounting estimates are the most critical to aid in fully understanding our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Accounting for Asset Acquisitions
We allocate the purchase price, including transaction costs, of acquired assets, including physical assets and in-place leases, and assumed liabilities, based on their fair values. We determine the estimated fair values of the assets and liabilities in accordance with current GAAP fair value provisions. We determine the fair values of acquired buildings on an “as-if-vacant” basis considering a variety of factors, including the replacement cost of the property, estimated rental and absorption rates, estimated future cash flows and valuation assumptions consistent with current market conditions. We determine the fair value of land acquired based on comparisons to similar properties that have been recently marketed for sale or sold.
The fair value of in-place leases is based upon our evaluation of the specific characteristics of the leases. Factors considered in the fair value analysis include the estimated cost to replace the leases, including foregone rents and expense reimbursements during hypothetical expected lease-up periods (referred to as “absorption cost”), consideration of current market conditions and
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costs to execute similar leases. We classify absorption costs as other assets and amortize absorption costs as amortization expense on a straight-line basis over the remaining life of the underlying leases.
Real Estate Impairment
We recognize impairment losses on long-lived assets used in operations, development assets or land held for future development, if indicators of impairment are present and the net undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Estimates of undiscounted cash flows are based on forward-looking assumptions, including annual and residual cash flows and our estimated holding period for each property. Such assumptions involve a high degree of judgment and could be affected by future economic and market conditions. When determining if a property has indicators of impairment, we evaluate the property's occupancy, our expected holding period for the property, strategic decisions regarding the property's future operations or development and other market factors. If such carrying amount is in excess of the estimated undiscounted cash flows from the operation and disposal of the property, we would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair value, calculated in accordance with current GAAP fair value provisions. Assets held for sale are recorded at the lower of cost or fair value less costs to sell.
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