Elme Communities 10-Q

ITEM 1A: RISK FACTORS The following risk factors update and supplement the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2024, filed on February 14, 2025. The proposed Portfolio Sale Transaction and Plan of Sale and Liquidation present certain risks to our current business and operations. In August 2025, we entered into the Purchase Agreement, which provides for the sale of a 19-asset portfolio an affiliate of Cortland Partners, LLC. In connection with approving the Purchase Agreement, our board of trustees approved the Plan of Sale and Liquidation. The transactions under the Purchase Agreement are expected to close in the fourth quarter of 2025, subject to customary closing conditions including the receipt of approval from our shareholders. Effectiveness of the Plan of Sale and Liquidation is also subject to the receipt of approval from the our shareholders. We intend to commence the marketing and sale of our remaining assets in the near future with a view toward completing these asset sales within the next 12 months. Prior to consummation of each of the Proposed Transactions, the Proposed Transactions may present certain risks to our business and operations, which could materially affect our business, financial results and stock price, including, among other things, that: • failure to complete the Portfolio Sale Transaction, including due to the failure of our shareholders to approve the Portfolio Sale Transaction or the failure of us or the Buyer to satisfy other closing conditions, could negatively impact our stock price and our future business and financial results; • we expect to incur substantial expenses related to the Proposed Transactions, whether or not the Portfolio Sale Transaction is completed, and the Plan of Sale and Liquidation is approved by our shareholders; and • pendency of the Proposed Transactions could adversely affect our business and operations, including by diverting significant focus of management, employees and other resources. Even if our shareholders approve the Portfolio Sale Transaction and the Plan of Sale and Liquidation, they may not be completed. In addition to the required approval of our shareholders, the closing of the Portfolio Sale Transaction is subject to several closing conditions, some of which are not entirely within our control, including: • the absence of a material adverse effect on either the Company Parties or the Buyer Parties; • compliance in all material respects by the parties to the Purchase Agreement with their respective covenants and agreements contained in the Purchase Agreement; and • the accuracy, subject to certain materiality standards, of the representations and warranties made by the parties in the Purchase Agreement. We cannot be certain when or if the conditions to the closing of the Portfolio Sale Transaction will be satisfied, and, as a result, even if the Portfolio Sale Transaction is approved by our shareholders, there can be no assurance that the Portfolio Sale Transaction will be completed. Our board of trustees may also amend or terminate the Plan of Sale and Liquidation even if approved by our shareholders at any time prior to the filing of a notice of termination, if it determines that doing so is in the best interest of us and our shareholders. Thus, the board of trustees could decide to conduct our liquidation and dissolution differently than as currently planned, or not at all. We cannot determine at this time the amount or timing of distributions to our shareholders in connection with the Proposed Transactions because there are many factors, some of which are not within our control, that could affect the amount or timing of any such distributions. 37 The amounts that may ultimately be available for distribution to our shareholders from these Proposed Transactions are not yet known. There are many factors that may affect the amounts available for distribution to our shareholders, including the costs to operate Elme Communities, and maintain our assets, through the liquidation and wind-down process, the time it will take to liquidate Elme Communities, the amounts necessary to satisfy our remaining financial obligations, transaction costs in connection with the Proposed Transactions and economic factors such as inflation and interest rate changes, all of which are subject to change. Contemporaneously with the execution of the Purchase Agreement, we entered into the Commitment Letter, to provide debt financing in the original principal amount of $520 million (or $565 million if one property is not included in the closing of the Portfolio Sale Transaction), secured by substantially all of our real estate assets and subsidiary equity interests that remain after the closing under the Purchase Agreement. A portion of the proceeds from this debt financing are intended to be used to pay an initial special distribution following consummation of the Portfolio Sale Transaction. If the loan is not ultimately provided pursuant to the Commitment Letter, or if the amount of the financing is reduced, the amount of our initial special distribution may be reduced. If our shareholders approve the Plan of Sale and Liquidation, we will be authorized to engage in the wind-down of our business and affairs, discharging, paying or setting aside reserves for our liabilities, disposing of our assets and distributing our remaining assets available for distribution to our shareholders (as determined by the board of trustees in its discretion). We intend to market for sale our remaining nine multifamily assets, as well as Watergate 600 in the near future with a view toward completing these asset sales within the next 12 months, and we intend to move forward with the marketing and sale of certain of the assets not included in the Portfolio Sale Transaction, regardless of the outcome of the shareholder votes on the Portfolio Sale Transaction and the Plan of Sale and Liquidation. While the Plan of Sale and Liquidation authorizes the sale of our remaining properties, we cannot predict whether we will be able to do so at all or at prices or on terms and conditions acceptable to us. Additionally, before making the liquidating distributions to our shareholders, we will need to pay or arrange for the payment of all of our transaction costs and our liabilities. The board of trustees may also decide to establish a reserve fund to pay any contingent claims. The costs in the Proposed Transactions are not yet final, so we have used estimates of these costs in calculating the amounts of our projected distributions. These estimates may not prove to be accurate, which could cause actual distributions to be less than our estimates. If the Portfolio Sale Transaction is not completed or the Plan of Sale and Liquidation is not approved by shareholders, we would be subject to a number of material risks, including that: • we may be unable to dispose of the Sale Portfolio, or the properties comprising the Sale Portfolio, for a price, individually or in the aggregate, equaling or exceeding the allocated purchase price in the Portfolio Sale Transaction; • we may be unable to enter into an alternative transaction to dispose of the Sale Portfolio on terms that are acceptable to our board of trustees; • we would still be required to pay expenses incurred in connection with the Portfolio Sale Transaction, including legal and accounting fees; • we would be required to reimburse the Buyer for up to $3 million in out-of-pocket expenses incurred by the Buyer in connection with the Purchase Agreement, if our shareholders do not approve the Portfolio Sale Transaction; • we may be required to pay a termination fee to the Buyer of up to $37.5 million in certain circumstances; • our board of trustees may need to review strategic alternatives, including our continuation as a going concern; and • we intend to move forward with the marketing and sale of certain of the assets not included in the Portfolio Sale Transaction, regardless of the outcome of the shareholder votes on the Portfolio Sale Transaction and the Plan of Sale and Liquidation. The occurrence of any of these events may impair our ability to conduct our business, may reduce the amounts otherwise available for distribution to our shareholders and the board of trustees could decide to conduct our liquidation and dissolution differently than as currently planned, or not at all. The Purchase Agreement significantly limits our ability to pursue alternatives to the Portfolio Sale Transaction. The Purchase Agreement contains provisions that make it more difficult for us to enter into a transaction with a party other than the Buyer regarding an alternative acquisition proposal, including a proposal to acquire all or a significant portion of the Sale Portfolio or the entire Company. These provisions include the general prohibition on our soliciting any third-party acquisition 38 proposal or entering into any agreement for an alternative acquisition proposal, and the requirement that we pay a termination fee of up to $37.5 million if the Purchase Agreement is terminated in specified circumstances (or $27.5 million with respect to any termination relating to entry into an alternative acquisition agreement with respect to a superior proposal that is communicated by the board of trustees to Buyer on or prior to August 31, 2025). These provisions of the Purchase Agreement could discourage a third party that might have an interest in acquiring a significant portion of the Sale Portfolio or the entire Company from considering or proposing a transaction, even if that party were prepared to pay consideration with a higher value relative to the purchase price to be paid by the Buyer for the Sale Portfolio. Furthermore, the termination fee may result in a potential acquiror offering to pay a lower purchase price to acquire a significant portion of the Sale Portfolio or the entire Company than it might otherwise have offered to pay. The payment of the termination fee (and cancellation of the Portfolio Sale Transaction) could also have an adverse effect on our financial condition, may reduce the amounts of any distributions to our shareholders and the board of trustees could decide to conduct our liquidation and dissolution differently than as currently planned, or not at all. There can be no assurance that the liquidation of our assets will result in greater returns to you on your investment, within a reasonable period of time, than you would receive through other alternatives reasonably available to us. It is possible that continuing with the status quo or pursuing one or more other alternatives could result in greater returns on your investment. In that case, we will be foregoing those alternative opportunities if we implement the Plan of Sale and Liquidation. The Plan of Sale and Liquidation may adversely affect the value that a potential acquirer might place on us or our ability to sell the Sale Portfolio if the Portfolio Sale Transaction does not occur, or any remaining assets if the Portfolio Sale Transaction occurs. It may also preclude other possible courses of action not yet identified by our board of trustees. Please see the risk factor above titled “We cannot determine at this time the amount or timing of distributions to our shareholders in connection with the Proposed Transactions because there are many factors, some of which are not within our control, that could affect the amount or timing of any such distributions,” for further information regarding the risks related to the distribution to our shareholders. The sale of properties may cause us to incur penalty taxes, fail to maintain our REIT status, or own and sell properties through TRS’s, each of which would reduce the amount available for distribution to our shareholders. The sale of one or more of our properties may be considered a prohibited transaction under the Code. Any “inventory-like” sales or dealer sales could be considered such a prohibited transaction. If we are deemed to have engaged in a “prohibited transaction” (i.e., sale of a property held by us primarily for sale in the ordinary course of our trade or business), all net gain that we derive from such sale would be subject to a 100% penalty tax. The Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% penalty tax. The sale of our properties in anticipation of or in connection with the Plan of Sale and Liquidation may not satisfy the prohibited transaction safe harbor, depending on the circumstances in which such sales are completed. If we desire to sell a property pursuant to a transaction that does not satisfy the safe harbor, we may be able to avoid the prohibited transaction tax if, among other alternatives, we hold and sell the property through a TRS. In that case, any gain would be taxable to the TRS at regular corporate income tax rates. If we sell a significant portion of our assets, the composition of our portfolio will change, which could have a material impact on our ability to satisfy the various income, asset, distribution, and other requirements for qualification as a REIT. As a result of the foregoing circumstances, the amount available for distribution to our shareholders could be significantly reduced. Approval of the Portfolio Sale Transaction and the Plan of Sale and Liquidation, and the actions and transactions contemplated thereby, may lead to shareholder litigation which could result in substantial costs and distract management. Historically, extraordinary corporate actions such as the proposed Portfolio Sale Transaction and Plan of Sale and Liquidation, and the actions and transactions contemplated thereby, sometimes lead to securities class action lawsuits being filed against the company taking such actions. We may become involved in this type of litigation as a result of the shareholder votes on the Portfolio Sale Transaction and/or the Plan of Sale and Liquidation, which risk may be increased if our shareholders approve these Proposed Transactions. As of the date of this Quarterly Report on Form 10-Q, no such lawsuits related to the Portfolio Sale Transaction or the Plan of Sale and Liquidation, and the actions and transactions contemplated thereby, were pending or, to 39 our knowledge, threatened. However, if such a lawsuit is filed against us, the litigation is likely to be expensive, and, even if we ultimately prevail, the process will divert our attention from implementing the Portfolio Sale Transaction and following the closing thereof, our wind-up and liquidation. If we were not to prevail in such a lawsuit, we cannot predict the amount of any damages for which we may be obligated and if any plaintiffs are successful in obtaining an injunction prohibiting us from consummating the Plan of Sale and Liquidation or from completing the Portfolio Sale Transaction, such an injunction may delay the Plan of Sale and Liquidation or the Portfolio Sale Transaction or prevent them from being completed. However, if applicable, any such damages may be significant, may have a material adverse effect on our financial condition and may reduce the amounts available for distribution to our shareholders.