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 announcement and pendency of the proposed Portfolio Sale Transaction and Plan of Sale and Liquidation present certain risks to our ongoing business and operations. On August 1, 2025, we entered into the Purchase Agreement. The transactions under the Purchase Agreement are expected to close in the fourth quarter of 2025 (currently expected to be in early November), subject to customary closing conditions, including the receipt of approval from our shareholders. In connection with approving the Purchase Agreement, the board of trustees approved the Plan of Sale and Liquidation. Effectiveness of the Plan of Sale and Liquidation is also subject to the receipt of approval from our shareholders. The Company is aiming to complete the sales of the assets remaining in the Company following the Portfolio Sale Transaction (the “Remaining Company Assets”) by June 30, 2026. Because the Portfolio Sale Transaction is subject to a number of conditions, including some that are outside our control, and the sales of the Remaining Company Assets are subject to, among other things, completion of the marketing and sale process, negotiation of sale terms and completion of the sales, the exact timing of completing the Proposed Transactions cannot be determined at this time. Prior to the closing of the Portfolio Sale Transaction and completion of the sales of all the Remaining Company Assets, as well as the wind-down of the Company’s business and affairs, and termination of the Company’s existence in accordance with the Plan of Sale and Liquidation, the Proposed Transactions present certain risks to our business and operations, which could materially and adversely affect our business, financial results and share price, including, among other things, that: • we may fail to complete the Portfolio Sale Transaction, including due to the failure of our shareholders to approve the proposal to approve the Portfolio Sale Transaction or the failure of us or Buyer to satisfy other closing conditions; • we may have difficulty completing, or fail to complete, the Remaining Company Asset sales; • 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 • our business and operations could be adversely affected, including by diverting significant focus of management, employees and other resources, by impacting our ability to retain our employees and our relationships with residents, tenants, vendors and other third parties, as a result of limitations on our conduct under purchase agreements (including the Purchase Agreement) during the pendency of sales under such agreements. Additionally, prior to the closing of the Portfolio Sale Transaction and completing the sales of all of the Remaining Company Assets, we will remain subject to all of the risks of operating our properties, including those described in the “Risk Factors” sections included in our annual and quarterly reports filed with the SEC, the risk that the cash flow and net working capital generated from the Company’s operations prior to completing the wind-down of the Company’s business and affairs and termination of the Company’s existence may be lower than we anticipate, and the risks and the costs associated with remaining a public company. In addition, such risks may result in our incurring additional obligations and liabilities which may be retained by us following the closing of the Portfolio Sale Transaction and the sales of the Remaining Company Assets and, in such event, could reduce the amounts ultimately available for distribution to our shareholders. We cannot determine at this time the amount or timing of distributions to our shareholders in connection with the Portfolio Sale Transaction and the Plan of Sale and Liquidation because there are many factors, some of which are not within our control, that could affect the amount or timing of any such distributions. There can be no assurances regarding the amounts of any shareholder distributions or the timing thereof. Our estimated range of distributions in connection with the Proposed Transactions was estimated as of a specific date and does not take into account interest rate, market volatility or other changes since that time or in the future and was derived, in part, from the estimated range of gross asset sales for the properties, less estimates for transaction costs, service costs and debt repayment amounts for the 37 Loan, general and administrative costs, including employee retention costs, capital expenditure requirements and REIT compliance costs, but adjusted upwards for estimated cash flow/net working capital to be generated from the Company’s operations prior to completing the sale of all of our properties. These estimates may overstate the proceeds from asset sales or understate the actual expenses, which means actual distributions may be significantly less than the estimated range. Other uncertainties that could cause the aggregate amount of liquidating distributions to be less than our estimate, or the timing of distributions to be delayed, in addition to other risks described elsewhere in this section, our Annual Report on Form 10-K for the year ended December 31, 2024 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2025, include the following: • failure to close the Portfolio Sale Transaction; • the estimated net proceeds from the Loan may be lower than we estimate due to, among other things, the results of lender real estate diligence, including property appraisals for lending purposes, establishment of customary reserves for property maintenance costs or special reserves for issues identified during lender real estate diligence and/or higher than estimated third party expenses associated with consummating the Loan; • the costs and expenses of the Portfolio Sale Transaction and the Plan of Sale and Liquidation may be higher than our estimates; • the estimated amount of cash flow/net working capital to be generated from the Company’s operations prior to competing the wind-down of the Company’s business and affairs and termination of the Company’s existence pursuant to the Plan of Sale and Liquidation may be lower than we anticipate; • costs and expenses of continuing to operate the Company, including as a public company, such as the need for additional retention costs, particularly if the liquidation takes longer than expected, may be higher than estimated; • unanticipated or emergency capital expenditures may result in the need to incur additional debt financing or other costs and expenses that are not included in our estimates and which we cannot reasonably estimate at this time; • unknown or additional costs or liabilities that arise in the future, including future litigation, which we cannot reasonably estimate at this time, could delay completion of our liquidation and cause us to incur additional costs and expenses; • costs incurred to maintain our REIT status may be higher than estimated; • the number of issued and outstanding shares we used to calculate the estimated ranges of the distributions could change; and • the reserve amounts we may establish to satisfy known liabilities and liquidating expenses and estimated, unascertained or contingent liabilities and expenses may be higher than estimated. Any of these uncertainties could impact the amount and timing of the estimated distributions. Additionally, there can be no assurances regarding the amounts of your potential total return from receiving such distributions. Your total return will depend on the amount you paid for your common shares and the date on which you purchased such common shares. Please consult with your financial advisor for more information about your potential total return. There can be no assurance that the sale of all of our assets as contemplated in the Proposed Transactions 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. If our shareholders approve each of the Proposed Transactions, we will generally be focused on winding-down our operations, subject to the board of trustees’ determination to amend or terminate the Plan of Sale and Liquidation if it determines that doing so is in the best interest of shareholders. This, among other factors, 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. Once our assets are sold, you will no longer participate in any future earnings or growth of such assets or benefit from any increases in the value of such assets. It is possible that continuing with the status quo or pursuing one or more other strategic alternatives could result in greater returns on your investment over time. If the Plan of Sale and Liquidation becomes effective, we will be foregoing those alternative opportunities. If shareholders do not approve both the proposal to approve the Portfolio Sale Transaction and the proposal to approve the Plan of Sale and Liquidation at the special meeting, we would be subject to a number of additional material risks. If shareholders approve the proposal to approve the Portfolio Sale Transaction, but not the proposal to approve the Plan of Sale and Liquidation, in addition to the other risks described in this “Risk Factors” section and in our other filings with the SEC, we would be subject to a number of additional material risks, including the following: • under the terms of the Purchase Agreement, we would remain obligated to complete the Portfolio Sale Transaction in accordance with its terms; 38 • we would not move forward with an orderly wind-down of the Company’s business and affairs and termination of the Company’s existence by voluntary dissolution; • we would not be obligated to cease, and we intend to move forward with, the marketing and potential sale of certain of the Remaining Company Assets, regardless of the outcome of the shareholder vote on the proposal to approve the Plan of Sale and Liquidation (or the proposal to approve the Portfolio Sale Transaction); • if we complete the Portfolio Sale Transaction, the Company would have a significantly reduced number of assets with which to generate operating revenue and support ongoing operating activity, and operating expenses may not proportionally decrease, which will result in our ongoing operating expenses potentially exceeding revenue generated by our Remaining Company Assets, and we therefore may experience difficulty continuing as a going concern; • we may be required to continue to comply with the full reporting requirements of the Exchange Act, and other requirements under law and of regulatory bodies applicable to public companies and incur costs associated with such compliance, as well as the costs of certain insurance coverage; • assuming we continue to desire to remain a REIT, our estimated REIT compliance costs may increase; and • any distributions will generally be treated first as taxable dividends to the extent of the Company’s earnings and profits rather than tax-free liquidating distributions to the extent of a shareholder’s basis in their shares. If shareholders approve the proposal to approve the Plan of Sale and Liquidation, but not the proposal to approve the Portfolio Sale Transaction, in addition to the other risks described this “Risk Factors” section and in our other filings with the SEC, we would be subject to a number of additional material risks, including that our board of trustees may decide to review strategic alternatives again, and could determine not to move forward with the liquidation of the Company under the Plan of Sale and Liquidation and instead pursue another option or continue the Company’s operations in its current form. The occurrence of any of these events may impair our ability to conduct our business, including continuing as a going concern, may adversely affect our share price, may increase our costs or may reduce or delay the amounts otherwise available for distribution to our shareholders. 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 Buyer; • the absence of an injunction or other judgment, order or decree restricting or prohibiting the Portfolio Sale Transaction; • the performance of the parties’ obligations under the Purchase Agreement; and • the accuracy, subject to certain materiality standards, of the representations and warranties made by the parties in the Purchase Agreement. The Portfolio Sale Transaction may not be completed on the terms or timeline currently contemplated, or at all, and other events may intervene to delay the Portfolio Sale Transaction or result in the termination of the Purchase Agreement, including if the conditions to the closing of the Portfolio Sale Transaction are not 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. If the Portfolio Sale Transaction is not completed, we would be subject to a number of material risks. If the Portfolio Sale Transaction is not completed, we would be subject to a number of material risks, including the following: • 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 the board of trustees; • we would still be required to pay expenses incurred in connection with the Portfolio Sale Transaction, including legal, accounting, financial advisory, filing, printing and mailing fees; • if our shareholders do not approve the proposal to approve the Portfolio Sale Transaction, we would be required to reimburse the Buyer Parent for up to $3 million in reasonable out-of-pocket costs, fees and expenses incurred by the Buyer Parties in connection with the Purchase Agreement and the transactions contemplated thereby; • we may be required to pay a termination fee of $37.5 million in certain specified circumstances; and • the price of our common shares could decline. 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 termination of the Company’s existence differently than as currently planned, or not at all. 39 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 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 proposal or entering into any agreement for an alternative acquisition proposal, and the requirement that we pay a termination fee of $37.5 million if the Purchase Agreement is terminated in specified circumstances. These provisions of the Purchase Agreement could discourage a third party that might have an interest in acquiring all or any 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 Buyer for the Sale Portfolio. Furthermore, a termination fee of $37.5 million may result in a potential acquiror offering to pay a lower purchase price to acquire all or any portion of the Sale Portfolio or the entire Company than it might otherwise have offered to pay. The payment of a termination fee of $37.5 million (and cancellation of the Portfolio Sale Transaction) could also have an adverse effect on our financial condition and may reduce the amounts of any distributions to our shareholders. If the Plan of Sale and Liquidation is approved by our shareholders, we would be subject to a number of material risks. If the Plan of Sale and Liquidation is approved by our shareholders, we would be subject to a number of material risks, including the following: • additional liabilities and obligations could arise during the liquidation process; • we may be unable to find buyers for the Remaining Company Assets on a timely basis or at our expected sales prices, which may reduce or delay our liquidating distributions; • our ability to implement the Plan of Sale and Liquidation depends upon the participation of key personnel who may not remain in place; • we may require additional capital or financing to complete the wind-down of the Company’s business and affairs, dissolution and termination of the Company’s existence under the Plan of Sale and Liquidation, which may reduce the amount available for distribution to shareholders; • shareholders may be liable to our creditors, up to the amounts received from us pursuant to the Plan of Sale and Liquidation, if our reserve fund or the assets transferred to a liquidating trust are inadequate; • during the course of the liquidation process, we will change our basis of accounting, which could require us to write down our assets; • costs and expenses of continuing to operate the Company, including as a public company, such as the need for additional retention costs, particularly if the liquidation takes longer than expected, may be higher than estimated; and • we anticipate that our common shares will be delisted from the NYSE at a future date to be determined by the board of trustees. The occurrence of any of these events may impair our ability to conduct our business, including completing the liquidation process, may reduce the amounts otherwise available for distribution to our shareholders and the board of trustees could decide to conduct our liquidation and termination of the Company’s existence differently than as currently planned, or not at all. The sale of properties may cause us to incur penalty taxes, or own and sell properties through taxable REIT subsidiaries (“TRS”), 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, or the sales of our properties if shareholders do not approve the proposal to approve 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. As a result of the foregoing circumstances, the amount available for distribution to our shareholders could be significantly reduced. 40 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, which can delay or prevent altogether the completion of 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. As of the date of this 10-Q, two purported holders of the Company’s common shares have filed substantially similar complaints against the Company and its members of the board of trustees in the Supreme Court of the State of New York, County of New York, alleging that the proxy statement negligently misrepresents or omits material information in violation of New York common law and seeking, among other things, to enjoin or rescind the Proposed Transactions, an award of damages if the Proposed Transactions are consummated and an award of expenses and attorneys’ fees. With respect to any lawsuits filed against us, the litigation costs may 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, the wind-down of the Company’s business and affairs and termination of the Company’s existence. 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, it may prohibit us from conducting the wind-down and termination of the Company’s existence under the Plan of Sale and Liquidation or from completing the Portfolio Sale Transaction. If applicable, any such damages may be significant, may have a material adverse effect on our financial condition and may reduce, eliminate or delay the amounts available for distribution to our shareholders.