elme-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________

FORM 10-Q

___________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

COMMISSION FILE NO. 1-6622


ELME COMMUNITIES
(Exact name of registrant as specified in its charter)


Maryland						53-0261100
(State of incorporation)						(IRS Employer Identification Number)

7550 WISCONSIN AVE, SUITE 900, BETHESDA, MD 20814

(Address of principal executive office) (Zip code)

Registrant’s telephone number, including area code: (202) 774-3200

___________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Shares of Beneficial Interest	ELME	NYSE

___________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 24, 2023, 87,832,608 common shares were outstanding.

ELME COMMUNITIES

INDEX


		Page
Part I: Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Comprehensive Income (Loss)	7
	Consolidated Statements of Equity	8
	Consolidated Statements of Cash Flows	10
	Notes to Consolidated Financial Statements	12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	40

Part II: Other Information

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 3.	Defaults upon Senior Securities	41

Item 4.	Mine Safety Disclosures	41

Item 5.	Other Information	41

Item 6.	Exhibits	42

	Signatures	43

PART I

FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

The information furnished in the accompanying unaudited Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Equity and Consolidated Statements of Cash Flows reflects all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes for the three years ended December 31, 2022 included in our 2022 Annual Report on Form 10-K filed on February 17, 2023.

ELME COMMUNITIES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)


	September 30, 2023		December 31, 2022
	(Unaudited)
Assets
Land	$	384,097	$	373,171
Income producing property	1,941,663		1,897,835
	2,325,760		2,271,006
Accumulated depreciation and amortization	(506,298)		(481,588)
Net income producing property	1,819,462		1,789,418
Properties under development or held for future development	31,095		31,260
Total real estate held for investment, net	1,850,557		1,820,678

Cash and cash equivalents	8,079		8,389
Restricted cash	2,104		1,463
Rents and other receivables	15,300		16,346
Prepaid expenses and other assets	34,233		25,730

Total assets	$	1,910,273	$	1,872,606
Liabilities
Notes payable, net	$	522,150	$	497,359

Line of credit	149,000		55,000
Accounts payable and other liabilities	40,666		34,386
Dividend payable	15,868		14,934
Advance rents	3,365		1,578
Tenant security deposits	6,171		5,563

Total liabilities	737,220		608,820
Equity
Shareholders’ equity
Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued or outstanding	—		—
Shares of beneficial interest, $0.01 par value; 150,000 shares authorized; 87,832 and 87,534 shares issued and outstanding, as of September 30, 2023 and December 31, 2022, respectively	878		875
Additional paid in capital	1,734,657		1,729,854
Distributions in excess of net income	(550,442)		(453,008)
Accumulated other comprehensive loss	(12,332)		(14,233)
Total shareholders’ equity	1,172,761		1,263,488
Noncontrolling interests in subsidiaries	292		298
Total equity	1,173,053		1,263,786
Total liabilities and equity	$	1,910,273	$	1,872,606

See accompanying notes to the consolidated financial statements.

ELME COMMUNITIES AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue
Real estate rental revenue	$	56,651	$	54,603	$	169,059	$	153,787
Expenses
Property operating and maintenance	12,747		13,092		38,510		35,404
Real estate taxes and insurance	7,050		6,469		21,066		19,893
Property management	1,935		1,916		5,882		5,462
General and administrative	6,370		6,403		19,891		20,998
Transformation costs	985		2,399		6,339		6,645
Depreciation and amortization	21,904		23,632		64,855		69,871

Real estate impairment	41,860		—		41,860		—
	92,851		53,911		198,403		158,273

Real estate operating (loss) income	(36,200)		692		(29,344)		(4,486)
Other income (expense)
Interest expense	(7,418)		(6,582)		(21,043)		(18,388)

Loss on extinguishment of debt	—		(4,917)		(54)		(4,917)
Other income	—		68		569		454

	(7,418)		(11,431)		(20,528)		(22,851)







Net loss	$	(43,618)	$	(10,739)	$	(49,872)	$	(27,337)






Basic net loss per common share	$	(0.50)	$	(0.12)	$	(0.57)	$	(0.32)




Diluted net loss per common share	$	(0.50)	$	(0.12)	$	(0.57)	$	(0.32)

Weighted average shares outstanding – basic	87,759		87,453		87,717		87,354
Weighted average shares outstanding – diluted	87,759		87,453		87,717		87,354

See accompanying notes to the consolidated financial statements.

ELME COMMUNITIES AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS)

(UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net loss	$	(43,618)	$	(10,739)	$	(49,872)	$	(27,337)
Other comprehensive income:
Unrealized (loss) gain on interest rate hedges	(149)		442		372		3,284
Reclassification of unrealized loss on interest rate derivatives to earnings	510		509		1,529		1,529
Comprehensive loss	$	(43,257)	$	(9,788)	$	(47,971)	$	(22,524)

See accompanying notes to the consolidated financial statements.

ELME COMMUNITIES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(IN THOUSANDS)

(UNAUDITED)


	Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity		Noncontrolling Interests in Subsidiaries		Total Equity
Balance, December 31, 2022	87,534	$	875	$	1,729,854	$	(453,008)	$	(14,233)	$	1,263,488	$	298	$	1,263,786

Net loss	—	—		—		(49,872)		—		(49,872)		—		(49,872)
Unrealized gain on interest rate hedges	—	—		—		—		372		372		—		372

Amortization of swap settlements	—	—		—		—		1,529		1,529		—		1,529
Distributions to noncontrolling interests	—	—		—		—		—		—		(6)		(6)

Dividends ($0.54 per common share)	—	—		—		(47,562)		—		(47,562)		—		(47,562)

Shares issued under Dividend Reinvestment Program	28	—		497		—		—		497		—		497
Share grants, net of forfeitures and tax withholdings	270	3		4,306		—		—		4,309		—		4,309
Balance, September 30, 2023	87,832	$	878	$	1,734,657	$	(550,442)	$	(12,332)	$	1,172,761	$	292	$	1,173,053


	Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity		Noncontrolling Interests in Subsidiaries		Total Equity
Balance, December 31, 2021	86,261	$	863	$	1,697,477	$	(362,494)	$	(19,091)	$	1,316,755	$	307	$	1,317,062

Net loss	—	—		—		(27,337)		—		(27,337)		—		(27,337)
Unrealized gain on interest rate hedges	—	—		—		—		3,284		3,284		—		3,284

Amortization of swap settlements	—	—		—		—		1,529		1,529		—		1,529
Distributions to noncontrolling interests	—	—		—		—		—		—		(6)		(6)
Dividends ($0.51 per common share)	—	—		—		(44,708)		—		(44,708)		—		(44,708)
Equity issuances, net of issuance costs	1,032	10		26,841		—		—		26,851		—		26,851
Shares issued under Dividend Reinvestment Program	32	—		777		—		—		777		—		777
Share grants, net of forfeitures and tax withholdings	179	2		3,745		—		—		3,747		—		3,747
Balance, September 30, 2022	87,504	$	875	$	1,728,840	$	(434,539)	$	(14,278)	$	1,280,898	$	301	$	1,281,199

See accompanying notes to the consolidated financial statements.

ELME COMMUNITIES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(IN THOUSANDS)

(UNAUDITED)


	Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity		Noncontrolling Interests in Subsidiaries		Total Equity
Balance, June 30, 2023	87,809	$	878	$	1,733,388	$	(490,939)	$	(12,693)	$	1,230,634	$	294	$	1,230,928

Net loss	—	—		—		(43,618)		—		(43,618)		—		(43,618)
Unrealized loss on interest rate hedges	—	—		—		—		(149)		(149)		—		(149)

Amortization of swap settlements	—	—		—		—		510		510		—		510
Distributions to noncontrolling interests	—	—		—		—		—		—		(2)		(2)

Dividends ($0.18 per common share)	—	—		—		(15,885)		—		(15,885)		—		(15,885)


Share grants, net of share grant amortization and forfeitures	23	—		1,269		—		—		1,269		—		1,269
Balance, September 30, 2023	87,832	$	878	$	1,734,657	$	(550,442)	$	(12,332)	$	1,172,761	$	292	$	1,173,053


	Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity		Noncontrolling Interests in Subsidiaries		Total Equity
Balance, June 30, 2022	87,392	$	874	$	1,727,031	$	(408,882)	$	(15,229)	$	1,303,794	$	302	$	1,304,096
Net loss	—	—		—		(10,739)		—		(10,739)		—		(10,739)
Unrealized gain on interest rate hedges	—	—		—		—		442		442		—		442

Amortization of swap settlements	—	—		—		—		509		509		—		509
Distributions to noncontrolling interests	—	—		—		—		—		—		(1)		(1)
Dividends ($0.17 per common share)	—	—		—		(14,918)		—		(14,918)		—		(14,918)

Shares issued under Dividend Reinvestment Program	12	—		259		—		—		259		—		259
Share grants, net of forfeitures and tax withholdings	100	1		1,550		—		—		1,551		—		1,551
Balance, September 30, 2022	87,504	$	875	$	1,728,840	$	(434,539)	$	(14,278)	$	1,280,898	$	301	$	1,281,199

See accompanying notes to the consolidated financial statements.


ELME COMMUNITIES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(49,872)	$	(27,337)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	64,855		69,871
Credit losses on lease related receivables	2,876		1,816

Real estate impairment	41,860		—

Share-based compensation expense	4,031		6,157

Net amortization of debt premiums, discounts and related financing costs	3,160		3,084

Loss on extinguishment of debt	54		4,917
Changes in operating other assets	(10,591)		(952)
Changes in operating other liabilities	5,443		(6,100)
Net cash provided by operating activities	61,816		51,456
Cash flows from investing activities
Real estate acquisitions, net	(107,595)		(204,433)


Capital improvements to real estate	(22,293)		(19,046)
Development in progress	—		(671)

Insurance proceeds	—		2,224
Non-real estate capital improvements	(395)		(1,322)
Net cash used in investing activities	(130,283)		(223,248)
Cash flows from financing activities
Line of credit repayments, net	94,000		43,000
Dividends paid	(48,495)		(44,440)
Repayments of mortgage notes payable	—		(76,598)


Repayments of unsecured term loan debt	(100,000)		—
Proceeds from term loan	125,000		—

Payment of financing costs	(844)		(39)
Distributions to noncontrolling interests	(6)		(6)
Proceeds from dividend reinvestment program	497		777
Net proceeds from equity issuances	—		26,851
Payment of tax withholdings for restricted share awards	(1,354)		(2,100)
Net cash provided by (used in) financing activities	68,798		(52,555)
Net decrease in cash, cash equivalents and restricted cash	331		(224,347)
Cash, cash equivalents and restricted cash at beginning of period	9,852		234,220
Cash, cash equivalents and restricted cash at end of period	$	10,183	$	9,873


ELME COMMUNITIES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

	Nine Months Ended September 30,
	2023		2022
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	20,066	$	18,386
Change in accrued capital improvements and development costs	7,343		2,510
Dividend payable	15,868		14,919
Mortgage notes payable assumed in connection with the acquisition of real estate	—		76,554

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	8,079	$	8,436
Restricted cash	2,104		1,437
Cash, cash equivalents and restricted cash	$	10,183	$	9,873

See accompanying notes to the consolidated financial statements.

ELME COMMUNITIES AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(UNAUDITED)

NOTE 1: NATURE OF BUSINESS

Elme Communities, a Maryland real estate investment trust, is a self-administered equity real estate investment trust (“REIT”), and successor to a trust organized in 1960. Our business primarily consists of the ownership of apartment communities in the greater Washington, DC metro and Sunbelt regions. Within these notes to the financial statements, we refer to the three months ended September 30, 2023 and September 30, 2022 as the “2023 Quarter” and the “2022 Quarter,” respectively, and the nine months ended September 30, 2023 and September 30, 2022 as the “2023 Period” and the “2022 Period,” respectively.

Federal Income Taxes

We believe that we qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”), and intend to continue to qualify as such. To maintain our status as a REIT, we are, among other things, required to distribute 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding net capital gains to our shareholders) on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold in a way that allows us to defer recognition of some or all taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders.

Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed taxable income and taxes on the income generated by our taxable REIT subsidiary (“TRS”). Our TRS is subject to corporate federal and state income tax on its taxable income at regular statutory rates. As of both September 30, 2023 and December 31, 2022, our TRS had a deferred tax asset of $1.4 million that was fully reserved.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONS

Significant Accounting Policies

We have prepared our consolidated financial statements using the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform ("Topic 848"), which was amended in December 2022 by ASU 2022-06, Reference Rate Reform (Topic 848). Topic 848 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in Topic 848 is optional and may be elected through December 31, 2024 as reference rate reform activities occur. During the first quarter of 2023, we executed an amendment to the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) to convert the benchmark interest rate from LIBOR to an adjusted SOFR ("Secured Overnight Financing Rate"). We elected to apply the optional expedients in Topic 848 to (i) assert that the hedged interest payments remain probable regardless of any expected modification in terms related to reference rate reform, and (ii) continue the method of assessing effectiveness as documented in the original hedge documentation so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The impact of this guidance did not have a material impact on our consolidated financial statements.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements include the consolidated accounts of Elme Communities and our subsidiaries and entities in which Elme Communities has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.

We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements

prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. In addition, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. These unaudited financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Lessee Accounting

For leases where we are the lessee, primarily our corporate office operating lease, we recognize a right-of-use asset and a lease liability in accordance with Accounting Standards Codification (“ASC”) Topic 842. The right-of-use asset and associated liability is equal to the present value of the minimum lease payments, applying our incremental borrowing rate. Our borrowing rate is computed based on observable borrowing rates taking into consideration our credit quality and adjusting to a secured borrowing rate for similar assets and term.

Lease expense for the operating lease is recognized on a straight-line basis over the expected lease term and is included in “General and administrative expense.”

Restricted Cash

Restricted cash includes funds held in escrow for tenant security deposits.

Transformation Costs

Transformation costs include costs related to the strategic shift away from the commercial sector to the residential sector, including the allocation of internal costs, consulting, advisory and termination benefits.

Use of Estimates in the Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 3: REAL ESTATE

Acquisitions

We acquired the following community during the 2023 Quarter (the “2023 Acquisition”):

Acquisition Date

Community

Type

Number of Homes

Ending Occupancy as of September 30, 2023

Contract Purchase Price (In thousands)

September 29, 2023

Elme Druid Hills

Residential

500

93.4

108,000

The results of operations from the acquired operating property for our period of ownership is included in the condensed consolidated statements of operations as of its acquisition date and was as follows (in thousands):


	Three and Nine Months Ended September 30, 2023
Real estate rental revenue	$	53
Net loss	(403)

We accounted for the 2023 Acquisition as an asset acquisition. We measured the value of the acquired physical assets (land and building) and in-place leases (absorption costs) by allocating the total cost of the acquisition on a relative fair value basis.

The total cost of the 2023 Acquisition was as follows (in thousands):


Contract purchase price	$	108,000
Capitalized acquisition costs	190
Total	$	108,190

We have recorded the 2023 Acquisition as follows (in thousands):


Land	$	25,249
Building	79,281
Absorption costs	3,660
Total carrying amount recorded	$	108,190

The weighted remaining average life for the absorption costs is seven months.

The difference in the total acquisition cost of $108.2 million for the 2023 Acquisition and the cash paid for the acquisition per the consolidated statements of cash flows of $107.6 million is due to net credits received at settlement totaling $0.6 million.

Development/Redevelopment

We have properties under development/redevelopment and held for current or future development. As of September 30, 2023, we have invested $30.4 million, including the cost of acquired land, in a residential development adjacent to Riverside Apartments. During the second quarter of 2022, we paused development activities at the aforementioned property and ceased associated capitalization of interest on spending and real estate taxes. However, we continue to capitalize qualifying costs on several other projects with minor development activity necessary to ready each project for its intended use.

Properties Sold and Held for Sale

We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties and to make occasional sales of properties that no longer meet our long-term strategy or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs or distributed to our shareholders. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale.

We did not sell or classify any properties as held for sale during the 2023 Period or in 2022.

Real Estate Impairment

During the 2023 Quarter, we recognized an impairment charge of $41.9 million on Watergate 600 in order to reduce its carrying value to its estimated fair value, which declined due to changes in market conditions in the Washington DC metro region office market. The estimated fair value is inherently subjective because there are few observable market transactions for similar office properties. This fair valuation fell into Level 3 in the fair value hierarchy due to its reliance on significant unobservable inputs (see note 7). In accordance with ASC 820, we estimated the fair value using a discounted cash flow model which required certain significant assumptions, including a discounted cash flow term of 5 years, an average economic occupancy of 80.5%, and a terminal capitalization rate of 7.5%.

No other properties, including assets held for development, had any recognized impairment charges during the 2023 Quarter. Should external or internal circumstances change requiring the need to shorten holding periods or adjust future estimated cash flows from our properties, we could be required to record impairment charges in the future.

NOTE 4: UNSECURED LINE OF CREDIT PAYABLE

During the third quarter of 2021, we entered into an amended and restated credit agreement (“Credit Agreement”) which provides for the Revolving Credit Facility and the continuation of an existing $250.0 million unsecured term loan (“2018 Term Loan”). The Revolving Credit Facility has a four-year term ending in August 2025, with two six-month extension options. The Credit Agreement has an accordion feature that allows us to increase the aggregate facility to $1.5 billion, subject to the lenders’ agreement to provide additional revolving loan commitments or term loans.

During the first quarter of 2023, we executed an amendment to the Revolving Credit Facility to convert the benchmark interest rate from LIBOR to an adjusted SOFR, with no change in the applicable interest rate margins. The Revolving Credit Facility bears interest at a rate of daily SOFR plus 0.10% plus a margin ranging from 0.70% to 1.40%. In addition, the Revolving Credit Facility requires the payment of a facility fee ranging from 0.10% to 0.30% (depending on Elme Communities’ credit rating) on the $700.0 million committed revolving loan capacity, without regard to usage. As of September 30, 2023, the interest rate on the Revolving Credit Facility is adjusted SOFR (inclusive of the 0.10% credit spread adjustment) plus 0.85%, the daily SOFR is 5.31% and the facility fee is 0.20%.

All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in August 2025, unless extended pursuant to one or both of the two six-month extension options. Interest only payments are due and payable generally on a monthly basis.

The amount of the Revolving Credit Facility’s unsecured line of credit unused and available at September 30, 2023 was as follows (in thousands):


Committed capacity	$	700,000
Borrowings outstanding	(149,000)

Unused and available	$	551,000

We executed borrowings and repayments on the Revolving Credit Facility during the 2023 Period as follows (in thousands):


Balance, December 31, 2022	$	55,000
Borrowings	294,000
Repayments	(200,000)
Balance, September 30, 2023	$	149,000

NOTE 5: NOTES PAYABLE

During the first quarter of 2023, we entered into a $125.0 million unsecured term loan ("2023 Term Loan") with an interest rate of 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.

NOTE 6: DERIVATIVE INSTRUMENTS

We had an interest rate swap arrangement with a notional amount of $100.0 million that had effectively fixed the remaining $100.0 million portion of the 2018 Term Loan prior to the prepayment. During the first quarter of 2023, we prepaid the 2018 Term Loan using proceeds from the $125.0 million 2023 Term Loan (see note 5). Subsequent to this transaction, the interest swap arrangement effectively fixed the interest rate on a $100.0 million portion of the 2023 Term Loan through the interest rate swap arrangement’s expiration date of July 21, 2023.

During the first quarter of 2023, we entered into two interest rate swap arrangements with an aggregate notional amount of $125.0 million that effectively fixed the interest at 4.73% for the 2023 Term Loan beginning on July 21, 2023 through the 2023 Term Loan’s maturity date of January 10, 2025.

The interest rate swap arrangements are recorded at fair value in accordance with GAAP, based on discounted cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedges in Other comprehensive income (loss). We assess the effectiveness of a cash flow hedge both at inception and on an ongoing basis. If a cash flow hedge is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness of our cash flow hedges is recorded in earnings.

The fair values of the interest rate swaps as of September 30, 2023 and December 31, 2022, were as follows (in thousands):


					Fair Value
					Derivative Assets
Derivative Instrument	Aggregate Notional Amount		Effective Date	Maturity Date	September 30, 2023		December 31, 2022
Interest rate swap	$	100,000	March 31, 2017	July 21, 2023	$	—	$	1,998
Interest rate swap	75,000		July 21, 2023	January 10, 2025	1,422		—
Interest rate swap	50,000		July 21, 2023	January 10, 2025	948		—
					$	2,370	$	1,998

We record interest rate swaps on our consolidated balance sheets within Prepaid expenses and other assets when in a net asset position and within Accounts payable and other liabilities when in a net liability position. The net unrealized gains and losses on the effective swaps were recognized in Other comprehensive income (loss), as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Unrealized (loss) gain on interest rate hedges	$	(149)	$	442	$	372	$	3,284

Amounts reported in Accumulated other comprehensive loss related to effective cash flow hedges will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional $2.0 million related to our two outstanding interest rate swap arrangements will be reclassified as a decrease to interest expense.

The losses reclassified from Accumulated other comprehensive loss into interest expense for the three and nine months ended September 30, 2023 and 2022, were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Loss reclassified from accumulated other comprehensive loss into interest expense	$	510	$	509	$	1,529	$	1,529

During the next twelve months, we estimate that an additional $2.0 million related to the previously settled interest rate swap arrangements will be reclassified as an increase to interest expense.

We have agreements with each of our derivative counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of September 30, 2023, the fair value of derivative assets, including accrued interest, was $2.4 million and we did not have any derivatives in a liability position. As of September 30, 2023, we have not posted any collateral related to these agreements.

Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreements. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. We monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration.

NOTE 7: FAIR VALUE DISCLOSURES

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements are required to be disclosed separately for each major category of assets and liabilities, as follows:

Level 1: Quoted prices in active markets for identical assets

Level 2: Significant other observable inputs

Level 3: Significant unobservable inputs

The only assets or liabilities we had at September 30, 2023 and December 31, 2022 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Plan (“SERP”), which primarily consist of investments in mutual funds, and the interest rate derivatives (see note 6).

We base the valuations related to the SERP on assumptions derived from significant other observable inputs and accordingly these valuations fall into Level 2 in the fair value hierarchy.

The valuation of the interest rate derivatives is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate derivative. This analysis reflects the contractual terms of the interest rate derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate derivatives are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Fair Value Measurement, we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate derivatives fall into Level 2 in the fair value hierarchy.

The fair values of these assets at September 30, 2023 and December 31, 2022 were as follows (in thousands):


	September 30, 2023								December 31, 2022
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets:
SERP	$	1,714	$	—	$	1,714	$	—	$	2,142	$	—	$	2,142	$	—
Interest rate derivatives	2,370		—		2,370		—		1,998		—		1,998		—

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets not measured at fair value on an ongoing basis but subject to fair value adjustments only in certain circumstances, such as when there is evidence of impairment, are measured at fair value on a nonrecurring basis. In the 2023 Quarter, we measured the fair value of Watergate 600 as there was evidence of impairment (see note 3).

Financial Assets and Liabilities Not Measured at Fair Value

The following disclosures of estimated fair value were determined by management using available market information and established valuation methodologies, including discounted cash flow models. Many of these estimates involve significant judgment. The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to September 30, 2023 may differ significantly from the amounts presented. The valuations of cash and cash equivalents and restricted cash fall into Level 1 in the fair value hierarchy and the valuations of debt instruments fall into Level 3 in the fair value hierarchy.

As of September 30, 2023 and December 31, 2022, the carrying values and estimated fair values of our financial instruments were as follows (in thousands):


	September 30, 2023				December 31, 2022
	Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and cash equivalents	$	8,079	$	8,079	$	8,389	$	8,389
Restricted cash	2,104		2,104		1,463		1,463

Line of credit	149,000		149,000		55,000		55,000
Notes payable, net	522,150		459,471		497,359		454,564

NOTE 8: SHARE-BASED COMPENSATION

Elme Communities maintains short-term (“STIP”) and long-term (“LTIP”) incentive plans that allow for stock-based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2016 Omnibus Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options and other awards up to an aggregate of 2,400,000 shares over the ten-year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares.

Total Compensation Expense

Total compensation expense recognized in the consolidated financial statements for all outstanding share-based awards was $1.4 million and $1.9 million for the 2023 Quarter and 2022 Quarter, respectively, and $4.0 million and $6.2 million for the 2023 and 2022 Period, respectively.

Restricted Share Awards

The total fair values of restricted share awards vested was $4.0 million and $4.8 million for the 2023 Period and 2022 Period, respectively.

The total unvested restricted share awards at September 30, 2023 was 391,777 shares, which had a weighted average grant date fair value of $19.78 per share. As of September 30, 2023, the total compensation cost related to unvested restricted share awards was $5.3 million, which we expect to recognize over a weighted average period of 26 months.

NOTE 9: EARNINGS PER COMMON SHARE

We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards and units have non-forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by dividing net income less the allocation of undistributed earnings to unvested restricted share awards and units by the weighted-average number of common shares outstanding for the period.

We also determine “Diluted earnings per share” as the more dilutive of the two-class method or the treasury stock method with respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our dilutive earnings per share calculation includes the dilutive impact of operating partnership units under the if-converted method and our share based awards with performance conditions prior to the grant date and all market condition awards under the contingently issuable method.

The computations of basic and diluted earnings per share for the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands, except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net loss	$	(43,618)	$	(10,739)	$	(49,872)	$	(27,337)

Allocation of earnings to unvested restricted share awards	(71)		(68)		(209)		(191)




Adjusted net loss	$	(43,689)	$	(10,807)	$	(50,081)	$	(27,528)
Denominator:
Weighted average shares outstanding – basic and diluted	87,759		87,453		87,717		87,354








Basic net loss per common share	$	(0.50)	$	(0.12)	$	(0.57)	$	(0.32)



Diluted net loss per common share	$	(0.50)	$	(0.12)	$	(0.57)	$	(0.32)

Dividends declared per common share	$	0.18	$	0.17	$	0.54	$	0.51

NOTE 10: SEGMENT INFORMATION

We operate in a single reportable segment which includes the ownership, development, redevelopment and acquisition of apartment communities. None of our operating properties meet the criteria to be considered separate operating segments on a stand-alone basis. Within the residential segment, we do not distinguish or group our consolidated operations based on size (only one community, Riverside Apartments, comprises more than 10% of consolidated revenues), type (all assets in the segment are residential) or geography (all but six communities are within the Washington, DC metro region). Further, our apartment communities have similar long-term economic characteristics and provide similar products and services to our residents. As a result, our operating properties are aggregated into a single reportable segment: residential.

We have one remaining office property, Watergate 600, which does not meet the criteria for a reportable segment, and has been classified within “Other” on our segment disclosure tables.

We evaluate performance based upon net operating income (“NOI”) of the combined properties in the segment. Our reportable operating segment consolidates similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segment’s performance. NOI is a key measurement of our segment profit and loss and is defined as real estate rental revenue less real estate expenses.

The following tables present revenues, NOI, capital expenditures and total assets for the three and nine months ended September 30, 2023 and 2022 from our Residential segment as well as Other, and reconcile NOI to net loss as reported (in thousands):


	Three Months Ended September 30, 2023
	Residential		Other (1)		Consolidated
Real estate rental revenue	$	52,065	$	4,586	$	56,651
Real estate expenses	18,431		1,366		19,797
Net operating income	$	33,634	$	3,220	$	36,854
Other income (expense):
Property management expenses					(1,935)
General and administrative expenses					(6,370)
Transformation costs					(985)
Depreciation and amortization					(21,904)

Interest expense					(7,418)




Real estate impairment					(41,860)






Net loss					$	(43,618)
Less: Net income attributable to noncontrolling interests in subsidiaries					—
Net loss attributable to the controlling interests					$	(43,618)
Capital expenditures	$	11,900	$	605	$	12,505
Total assets	$	1,770,921	$	139,352	$	1,910,273


	Three Months Ended September 30, 2022
	Residential		Other (1)		Consolidated
Real estate rental revenue	$	49,889	$	4,714	$	54,603
Real estate expenses	18,198		1,363		19,561
Net operating income	$	31,691	$	3,351	$	35,042
Other income (expense):
Property management expenses					(1,916)
General and administrative expenses					(6,403)
Transformation costs					(2,399)
Depreciation and amortization					(23,632)

Interest expense					(6,582)

Loss on extinguishment of debt					(4,917)
Other income					68








Net loss					$	(10,739)


Capital expenditures	$	7,764	$	567	$	8,331
Total assets	$	1,694,750	$	184,784	$	1,879,534


	Nine Months Ended September 30, 2023
	Residential		Other (1)		Consolidated
Real estate rental revenue	$	155,156	13,903		$	169,059
Real estate expenses	55,629		3,947		59,576
Net operating income	$	99,527	$	9,956	$	109,483
Other income (expense):
Property management expenses					(5,882)
General and administrative expenses					(19,891)
Transformation costs					(6,339)
Depreciation and amortization					(64,855)

Interest expense					(21,043)

Loss on extinguishment of debt					(54)
Other income					569

Real estate impairment					(41,860)







Net loss					$	(49,872)


Capital expenditures	$	21,447	$	1,241	$	22,688


	Nine Months Ended September 30, 2022
	Residential		Other (1)		Consolidated
Real estate rental revenue	139,869		13,918		$	153,787
Real estate expenses	51,411		3,886		55,297
Net operating income	$	88,458	$	10,032	$	98,490
Other income (expense):
Property management expenses					(5,462)
General and administrative expenses					(20,998)
Transformation costs					(6,645)
Depreciation and amortization					(69,871)

Interest expense					(18,388)
Loss on extinguishment of debt					(4,917)







Other income					454
Net loss					$	(27,337)


Capital expenditures	$	17,623	$	2,745	$	20,368

______________________________

(1) Other represents Watergate 600, an office property that does not meet the qualitative or quantitative criteria for a reportable segment.

NOTE 11: SHAREHOLDERS' EQUITY

On February 17, 2021, we entered into separate amendments to each of our existing equity distribution agreements (“Original Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.), each dated May 4, 2018 (collectively, as amended, the “Equity Distribution Agreements”) for our at-the-market program. Also on February 17, 2021, we entered into a separate equity distribution agreement with BTIG, LLC on the same terms as the Amended Equity Distribution Agreements (the “BTIG Equity Distribution Agreement”). On September 22, 2021, BTIG, LLC notified us that it was terminating the BTIG Equity Distribution Agreement, effective as of September 27, 2021. Pursuant to the Equity Distribution Agreements, we may sell, from time to time, up to an aggregate price of $550.0 million of our common shares of beneficial interest, $0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing property or the repayment of debt. We did not issue common shares under the Equity Distribution Agreements during the 2023 Period and 2022 Quarter. Our issuances and net proceeds on the Equity Distribution Agreements for the 2022 Period were as follows ($ in thousands, except per share data):


	Nine Months Ended September 30,
		2022
Issuance of common shares		1,032
Weighted average price per share		$	26.27
Net proceeds		$	26,851

We have a dividend reinvestment program whereby shareholders may use their dividends and optional cash payments to purchase common shares. The shares sold under this program may either be common shares issued by us or common shares purchased in the open market. Net proceeds under this program are used for general corporate purposes.

We did not issue common shares under the dividend reinvestment program during the 2023 Quarter. Our issuances and net proceeds on the dividend reinvestment program for the three months ended September 30, 2022 and nine months ended September 30, 2023 and 2022 were as follows ($ in thousands, except per share data):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022		2023		2022
Issuance of common shares	12		28		32
Weighted average price per share	$	21.15	$	17.64	$	24.01
Net proceeds	$	259	$	497	$	777

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, 2022 filed with the Securities and Exchange Commission (“SEC”) on February 17, 2023.

We refer to the three months ended September 30, 2023 and September 30, 2022 as the “2023 Quarter” and the “2022 Quarter,” respectively, and the nine months ended September 30, 2023 and September 30, 2022 as the “2023 Period” and “2022 Period,” respectively.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements which involve risks and uncertainties. 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: 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 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 greater Washington, DC metro region and the larger Sunbelt region; the risk of failure to enter into and/or complete contemplated acquisitions and dispositions, within the price ranges anticipated and on the terms and timing anticipated, or at all; changes in the composition of our portfolio; risks related to changes in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers; the economic health of our residents; the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts); compliance with applicable laws and corporate social responsibility goals, including those concerning the environment and access by persons with disabilities; the 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; whether our estimated transformation costs for 2023 will be correct; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2022 Form 10-K filed on February 17, 2023. 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 2023 Quarter to the 2022 Quarter and the 2023 Period to the 2022 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.

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, 2023, 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 connection with our strategic transformation, the shift away from the commercial sector to the residential sector, we have 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. 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 transformation costs, net of amounts capitalized, on the condensed consolidated statements of operations of $1.0 million and $2.4 million during the 2023 Quarter and 2022 Quarter, respectively, and $6.3 million and $6.6 million during the 2023 Period and 2022 Period, respectively. We do not anticipate incurring additional transformation costs in the future. We expect to realize significant operational benefits from this operating model redesign. Community onboarding began in October 2022, and we have transitioned all of our residential communities to Elme management as of September 30, 2023.

Operating Results

Net loss, NOI and NAREIT FFO for the three months ended September 30, 2023 and 2022 were as follows (in thousands):


	Three Months Ended September 30,
	2023		2022		$ Change		% Change
Net loss	$	(43,618)	$	(10,739)	$	(32,879)	306.2	%
NOI (1)	$	36,854	$	35,042	$	1,812	5.2	%
NAREIT FFO (2)	$	20,146	$	12,893	$	7,253	56.3	%
______________________________
(1) See page 28 of the MD&A for a reconciliation of NOI to net income.
(2) See page 38 of the MD&A for a reconciliation of NAREIT FFO to net income.

The increase in net loss is primarily due to a real estate impairment ($41.9 million) and higher interest expense ($0.8 million) in the 2023 Quarter. These were partially offset by loss on extinguishment of debt ($4.9 million) in the 2022 Quarter, higher NOI ($1.8 million), lower depreciation and amortization expenses ($1.7 million) and lower transformation costs ($1.4 million).

The higher NOI is primarily due to higher NOI from same-store properties ($2.1 million) and the acquisition of Elme Marietta ($0.2 million) in 2022, partially offset by lower NOI at Elme Sandy Springs ($0.4 million) and Watergate 600 ($0.1 million). The higher same-store NOI was primarily due to higher rental rates. Residential same-store average occupancy for our portfolio increased to 95.6% as of September 30, 2023 from 95.4% as of September 30, 2022.

The higher NAREIT FFO is primarily due to lower loss on extinguishment of debt ($4.9 million), higher NOI ($1.8 million) and lower transformation costs ($1.4 million), partially offset by higher interest expense ($0.8 million).

Investment Activity

Significant investment activity during the 2023 Period included the acquisition of Elme Druid Hills, a 500-unit apartment community in Atlanta, Georgia for a contract purchase price of $108.0 million during the 2023 Quarter. The acquisition was funded through cash and borrowings under the Revolving Credit Facility.

Financing Activity

Significant financing activity during the 2023 Period included entering into a $125.0 million unsecured term loan ("2023 Term Loan") with an interest rate of SOFR (subject to a credit spread adjustment of 10 basis points) plus a margin of 95 basis points. 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. The 2023 Term Loan has a two-year term ending in January 2025, with two one-year extension options.

As of September 30, 2023, the interest rate on the Revolving Credit Facility is adjusted SOFR (inclusive of the 0.10% credit spread adjustment) plus 0.85%, the daily SOFR is 5.31% and the facility fee is 0.20%. As of October 24, 2023, our Revolving Credit Facility has a borrowing capacity of $539.0 million.

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 33 (Liquidity and Capital Resources – Capital Requirements).

Results of Operations

The discussion that follows is based on our consolidated results of operations for the 2023 Quarter and 2022 Quarter and the 2023 Period and the 2022 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.

2023 Quarter Compared to 2022 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 2023 Quarter compared to the 2022 Quarter. All amounts are in thousands, except percentage amounts.


	Three Months Ended September 30,
	2023		2022		$ Change		% Change
Net loss	$	(43,618)	$	(10,739)	$	(32,879)	306.2	%
Adjustments:
Property management expense	1,935		1,916		19		1.0	%
General and administrative expense	6,370		6,403		(33)		(0.5)	%
Transformation costs	985		2,399		(1,414)		(58.9)	%
Real estate depreciation and amortization	21,904		23,632		(1,728)		(7.3)	%
Real estate impairment	41,860		—		41,860		100.0	%

Interest expense	7,418		6,582		836		12.7	%

Loss on extinguishment of debt, net	—		4,917		(4,917)		(100.0)	%
Other income	—		(68)		68		(100.0)	%



Total net operating income (NOI)	$	36,854	$	35,042	$	1,812	5.2	%

Residential revenue:
Same-store portfolio	$	46,610	$	44,735	$	1,875	4.2	%
Acquisitions (1)	5,233		4,897		336		6.9	%

Non-residential (2)	222		257		(35)		(13.6)	%
Total	52,065		49,889		2,176		4.4	%
Residential expenses:
Same-store portfolio	16,274		16,471		(197)		(1.2)	%
Acquisitions	2,068		1,606		462		28.8	%
Development	56		52		4		7.7	%
Non-residential	33		69		(36)		(52.2)	%
Total	18,431		18,198		233		1.3	%
Residential NOI:
Same-store portfolio	30,336		28,264		2,072		7.3	%
Acquisitions	3,165		3,291		(126)		(3.8)	%
Development	(56)		(52)		(4)		7.7	%
Non-residential	189		188		1		0.5	%
Total	33,634		31,691		1,943		6.1	%
Other NOI (3)	3,220		3,351		(131)		(3.9)	%
Total NOI	$	36,854	$	35,042	$	1,812	5.2	%

______________________________

(1)Acquisitions:

2023: Elme Druid Hills

2022: Elme Sandy Springs, Elme Cumberland, Elme Marietta

(2)Non-residential: Includes revenues and expenses from retail operations at residential properties.

(3)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 $1.9 million, or 4.2%, to $46.6 million for the 2023 Quarter, compared to $44.7 million for the 2022 Quarter, primarily due to higher rental income ($2.3 million), higher recoveries ($0.2 million) and higher one-time fees ($0.2 million), partially offset by higher credit losses ($0.7 million) and higher rent abatements ($0.1 million).

Real estate rental revenue from acquisitions increased $0.3 million due to the acquisitions of Elme Marietta ($0.2 million) and Elme Cumberland ($0.1 million) during the second quarter of 2022.

Average occupancy for residential properties for the 2023 Quarter and 2022 Quarter was as follows:


September 30, 2023						September 30, 2022						% Change
Same-Store		Non-Same-Store		Total		Same-Store		Non-Same-Store		Total		Same-Store		Non-Same-Store		Total
95.6	%	93.5	%	95.3	%	95.4	%	94.2	%	95.3	%	0.2	%	(0.7)	%	—	%

The increase in same-store average occupancy was primarily due to higher average occupancy at The Paramount, Elme Bethesda, Roosevelt Towers, Riverside Apartments and Trove, partially offset by lower average occupancy at Elme Conyers, Elme Eagles Landing and The Kenmore.

Real Estate Expenses

Residential real estate expenses as a percentage of residential revenue for the 2023 Quarter and the 2022 Quarter were 35.4% and 36.5%, respectively.

Real estate expenses from same-store residential properties decreased $0.2 million, or 1.2%, to $16.3 million for the 2023 Quarter, compared to $16.5 million for the 2022 Quarter, primarily due to lower contract maintenance ($0.5 million) and lower repairs and maintenance ($0.2 million), partially offset by higher utilities ($0.2 million), real estate taxes ($0.1 million), insurance ($0.1 million) and administrative ($0.1 million) expenses.

Real estate expenses from acquisitions increased $0.5 million due to the acquisitions of Elme Sandy Springs ($0.4 million) during the first quarter of 2022 and Elme Cumberland ($0.1 million) during the second quarter of 2022.

Other NOI

Other NOI decreased due to lower revenue at Watergate 600 ($0.1 million).

Other Income and Expenses

Transformation costs: Decrease of $1.4 million during the 2023 Quarter primarily due to lower consulting fees ($0.4 million), lower employee time allocations ($0.4 million) related to the strategic transformation, lower software costs ($0.2 million), lower transition fees ($0.2 million), lower branding expenses ($0.1 million) and lower accelerated software depreciation ($0.1 million) each due to the completion of community onboarding.

Real estate depreciation and amortization: Decrease of $1.7 million primarily due to lower depreciation and amortization at Elme Marietta ($1.7 million), Elme Cumberland ($0.6 million), Elme Sandy Springs ($0.2 million) and Watergate 600 ($0.1 million). These decreases were partially offset by higher depreciation and amortization at same-store residential properties ($0.5 million) and at Elme Druid Hills ($0.4 million).

Interest expense: Interest expense by debt type for the three months ended September 30, 2023 and 2022 was as follows (in thousands):


	Three Months Ended September 30,
Debt Type	2023		2022		$ Change		% Change
Notes payable	$	6,023	$	5,127	$	896	17.5	%
Mortgage notes payable	—		524		(524)		(100.0)	%
Line of credit	1,395		931		464		49.8	%

Total	$	7,418	$	6,582	$	836	12.7	%

•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.

•Mortgage notes payable: Decrease due to assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Elme Marietta and Elme Cumberland, respectively, during the second quarter of 2022. In September 2022, we extinguished the liabilities associated with these mortgages through defeasance arrangements.

•Line of credit: Increase primarily due to higher weighted average borrowings of $41.1 million and a weighted average interest rate of 6.2% in the 2023 Quarter, as compared to weighted average borrowings of $22.4 million and a weighted average interest rate of 3.3% in the 2022 Quarter.

Loss on extinguishment of debt: During the 2022 Quarter, we extinguished the liabilities associated with mortgage notes payable for Elme Marietta and Elme Cumberland through defeasance arrangements, recognizing aggregate losses on extinguishment of debt of $4.9 million.

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 (see note 3 to consolidated financial statements).

2023 Period Compared to 2022 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 2023 Period compared to the 2022 Period. All amounts are in thousands, except percentage amounts.


	Nine Months Ended September 30,
	2023		2022		$ Change		% Change
Net loss	$	(49,872)	$	(27,337)	$	(22,535)	82.4	%
Adjustments:
Property management expense	5,882		5,462		420		7.7	%
General and administrative expense	19,891		20,998		(1,107)		(5.3)	%
Transformation costs	6,339		6,645		(306)		(4.6)	%
Real estate depreciation and amortization	64,855		69,871		(5,016)		(7.2)	%
Real estate impairment	41,860		—		41,860		100.0	%

Interest expense	21,043		18,388		2,655		14.4	%

Loss on extinguishment of debt, net	54		4,917		(4,863)		(98.9)	%
Other income	(569)		(454)		(115)		25.3	%



Total net operating income (NOI)	$	109,483	$	98,490	$	10,993	11.2	%

Residential revenue:
Same-store portfolio	$	139,182	$	129,440	$	9,742	7.5	%
Acquisitions (1)	15,269		9,622		5,647		58.7	%

Non-residential (2)	705		807		(102)		(12.6)	%
Total	155,156		139,869		15,287		10.9	%
Residential expenses:
Same-store portfolio	49,279		47,428		1,851		3.9	%
Acquisitions	6,097		3,698		2,399		64.9	%
Development	168		71		97		136.6	%
Non-residential	85		214		(129)		(60.3)	%
Total	55,629		51,411		4,218		8.2	%
Residential NOI:
Same-store portfolio	89,903		82,012		7,891		9.6	%
Acquisitions	9,172		5,924		3,248		54.8	%
Development	(168)		(71)		(97)		136.6	%
Non-residential	620		593		27		4.6	%
Total	99,527		88,458		11,069		12.5	%
Other NOI (3)	9,956		10,032		(76)		(0.8)	%
Total NOI	$	109,483	$	98,490	$	10,993	11.2	%

______________________________

(1)Acquisitions:

2023: Elme Druid Hills

2022: Elme Sandy Springs, Elme Cumberland, Elme Marietta

(2)Non-residential: Includes revenues and expenses from retail operations at residential properties.

(3)Other: Watergate 600

Real Estate Rental Revenue

Real estate rental revenue from same-store residential properties increased $9.7 million, or 7.5%, to $139.2 million for the 2023 Period, compared to $129.4 million for the 2022 Period, primarily due to higher rental income ($8.7 million), higher recoveries ($0.8 million), lower rent abatements ($0.5 million) and higher fee income ($0.2 million), partially offset by higher credit losses ($0.5 million).

Real estate rental revenue from acquisitions increased $5.6 million, or 58.7%, to $15.3 million for the 2023 Period, compared to $9.6 million for the 2022 Period, primarily due to the acquisitions of Elme Marietta ($2.8 million) and Elme Cumberland ($1.8 million) during the second quarter of 2022 and Elme Sandy Springs ($1.0 million) during the first quarter of 2022.

Average occupancy for residential properties for the 2023 Period and 2022 Period was as follows:


September 30, 2023						September 30, 2022						% Change
Same-Store		Non-Same-Store		Total		Same-Store		Non-Same-Store		Total		Same-Store		Non-Same-Store		Total
95.6	%	93.8	%	95.4	%	95.6	%	94.1	%	95.5	%	—	%	(0.3)	%	(0.1)	%

Same-store average occupancy remained consistent at 95.6% in the 2023 Period and the 2022 Period. Higher average occupancy at Roosevelt Towers, Riverside Apartments and The Trove was partially offset by lower average occupancy at Bennett Park, Elme Watkins Mill and Elme Eagles Landing.

Real Estate Expenses

Residential real estate expenses as a percentage of residential revenue for the 2023 Period and 2022 Period were 35.9% and 36.8%, respectively.

Real estate expenses from same-store residential properties increased by $1.9 million, or 3.9%, to $49.3 million for the 2023 Period, compared to $47.4 million for the nine months ended September 30, 2022, primarily due to higher utilities ($1.0 million), administrative ($0.8 million), repairs and maintenance ($0.4 million), real estate taxes ($0.2 million) and insurance ($0.1 million) expenses. The increase is partially offset by lower contract maintenance and supplies ($0.7 million) expenses.

Real estate expenses from acquisitions increased $2.4 million due to the acquisitions of Elme Marietta ($0.9 million) and Elme Cumberland ($0.6 million) during the second quarter of 2022, and Elme Sandy Springs ($0.9 million) during the first quarter of 2022.

Other NOI

Other NOI decreased due to higher operating expenses at Watergate 600 ($0.1 million).

Other Income and Expenses

Property management expenses: Increase of $0.4 million primarily due to higher management fee expenses at same-store properties.

General and administrative expenses: Decrease of $1.1 million primarily due to lower incentive compensation ($1.9 million) and lower legal fees ($0.6 million). These were partially offset by higher computer software ($0.7 million) and corporate office moving ($0.6 million) expenses.

Transformation costs: Decrease of $0.3 million primarily due to lower accelerated software depreciation ($0.7 million), lower consulting fees ($0.5 million) and lower software costs ($0.3 million). The decrease is partially offset by higher signing bonuses for new employees ($0.9 million), higher placement fee ($0.2 million), and higher branding expenses ($0.1 million).

Depreciation and amortization: Decrease of $5.0 million primarily due to lower depreciation and amortization at same-store residential properties ($3.0 million), Elme Sandy Springs ($1.8 million) and Elme Marietta ($1.2 million). The decrease was partially offset by higher depreciation and amortization at Elme Druid Hills ($0.4 million), Elme Cumberland ($0.3 million), and Watergate 600 ($0.3 million).

Interest expense: Interest expense by debt type for the nine months ended September 30, 2023 and 2022 was as follows (in thousands):


	Nine Months Ended September 30,
Debt Type	2023		2022		$ Change		% Change
Notes payable	$	17,022	$	15,331	$	1,691	11.0	%
Mortgage notes payable	—		1,014		(1,014)		(100.0)	%
Line of credit	4,021		2,326		1,695		72.9	%
Capitalized interest	—		(283)		283		(100.0)	%
Total	$	21,043	$	18,388	$	2,655	14.4	%

•Mortgage notes payable: Decrease due to the assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Elme Marietta and Elme Cumberland, respectively, during the 2022 Period. In September 2022, we extinguished the liabilities associated with these mortgages though defeasance arrangements.

•Line of credit: Increase primarily due to higher weighted average borrowings of $40.8 million and a weighted average interest rate of 6.1% in the 2023 Period, as compared to weighted average borrowings of $7.5 million and a weighted average interest rate of 3.3% in the 2022 Period.

•Capitalized interest: Decrease primarily due to ceased capitalization of interest on spending related to the multifamily development adjacent to Riverside Apartments due to a pause in development activities resulting from macroeconomic uncertainty.

Loss on extinguishment of debt: During the 2022 Period, we extinguished the liabilities associated with mortgage notes payable for Elme Marietta and Elme Cumberland through defeasance arrangements, recognizing aggregate losses on extinguishment of debt of $4.9 million.

Other income: Increase of $0.1 million is due to higher tax refunds received for office properties sold in prior years.

Real Estate Impairment: The real estate impairment charge of $41.9 million during 2023 Period reduced the carrying value of Watergate 600 to its estimated fair value (see note 3 to consolidated financial statements).

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, on-going transformational costs and funding possible growth opportunities. We 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 2023, with no debt maturities until 2025 and only $274.0 million of scheduled debt maturities prior to 2028, based on current amounts outstanding under our Revolving Credit Facility. As of October 24, 2023, we had cash and cash equivalents totaling $3.0 million and a borrowing capacity of $539.0 million on our Revolving Credit Facility, resulting in a total liquidity position of $542.0 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 2023 Period, our full-year 2023 capital requirements are summarized below:

•Funding dividends and distributions to our shareholders;

•Approximately $35.0 - $40.0 million to invest in our existing portfolio of operating assets, inclusive of $22.0 - $27.0 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 2023, 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 2023. 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 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 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.

As of September 30, 2023, 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
2023	$	—		$	—		$	—	—%
2024	—			—			—		—%
2025	125,000		(1)	149,000		(2)	274,000		5.6%
2026	—			—			—		—%
2027	—			—			—		—%
Thereafter	400,000			—			400,000		4.5%
Scheduled principal payments	$	525,000		$	149,000		$	674,000	4.9%

Net premiums/discounts	(99)			—			(99)
Loan costs, net of amortization	(2,751)			—			(2,751)
Total	$	522,150		$	149,000		$	671,150	4.9%

______________________________

(1) During the first quarter of 2023, we entered into the $125.0 million 2023 Term Loan with 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 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) The credit facility's term ends in August 2025, with two six-month extension options.

The weighted average maturity for our debt is 4.8 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.

Debt Covenants

Pursuant to the terms of our Revolving Credit Facility, 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 our Revolving Credit Facility, 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, 2023, we were in compliance with the covenants related to our Revolving Credit Facility, 2023 Term Loan, and unsecured notes.

Common Equity

We have authorized for issuance 150.0 million common shares, of which 87.8 million shares were outstanding at September 30, 2023.


	Nine Months Ended September 30,
		2022
Issuance of common shares		1,032
Weighted average price per share		$	26.27
Net proceeds		$	26,851

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 the 2023 Quarter. Our issuances and net proceeds on the dividend reinvestment program for the three and nine months ended September 30, 2023 and 2022 were as follows ($ in thousands, except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Issuance of common shares	—		12		28		32
Weighted average price per share	$	—	$	21.15	$	17.64	$	24.01
Net proceeds	$	—	$	259	$	497	$	777

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, 2023, no preferred shares were issued and outstanding.

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
	2023		2022		$		%
Net cash provided by operating activities	$	61,816	$	51,456	$	10,360	20.1	%
Net cash used in investing activities	(130,283)		(223,248)		92,965		(41.6)	%
Net cash provided by (used in) financing activities	68,798		(52,555)		121,353		(230.9)	%

Net cash provided by operating activities increased primarily due to higher rental revenue from same-store communities and the acquisitions of Elme Sandy Springs, Elme Marietta and Elme Cumberland during the 2022 Period.

Net cash used in investing activities decreased primarily due to the acquisitions of Elme Sandy Springs, Elme Marietta and Elme Cumberland during the 2022 Period, partially offset by the acquisition of Druid Hills during the 2023 Period.

Net cash provided by (used in) financing activities increased primarily due to executing the $125.0 million 2023 Term Loan and net borrowings on the Revolving Credit Facility during the 2023 Period and the repayment of mortgage notes during the 2022 Period. These were partially offset by the repayment of the $100.0 million 2018 Term Loan during the 2023 Period and proceeds from equity issuances during the 2022 Period.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of September 30, 2023 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.

Funds From Operations

NAREIT FFO is defined by the 2018 National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) FFO White Paper Restatement, 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 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. NAREIT FFO is a non-GAAP measure.

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, 2023 and 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net loss	$	(43,618)	$	(10,739)	$	(49,872)	$	(27,337)
Adjustments:
Depreciation and amortization	21,904		23,632		64,855		69,871

Real estate impairment	41,860		—		41,860		—






NAREIT FFO	$	20,146	$	12,893	$	56,843	$	42,534

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, 2023. We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 17, 2023.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal material financial market risk to which we are exposed is interest rate risk. Our exposure to market risk for changes in interest rates relates primarily to refinancing long-term fixed rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and our variable rate line of credit.

The table below presents principal, interest and related weighted average interest rates by year of maturity, with respect to debt outstanding on September 30, 2023 (in thousands):


	2023			2024			2025				2026			2027			Thereafter			Total			Fair Value
Unsecured fixed rate debt
Principal	$	—		$	—		$	125,000		(1)	$	—		—			$	400,000		$	525,000		$	459,471
Interest payments	$	922		$	23,908		$	17,995			$	17,995		$	17,995		$	44,216		$	123,031
Interest rate on debt maturities	—		%	—		%	5.6		%		—		%	—		%	4.5		%	4.9		%




Unsecured variable rate debt
Principal	$	—		$	—		$	149,000			$	—		$	—		$	—		$	149,000		$	149,000
Variable interest rate on debt maturities							6.3		%											6.3		%

______________________________

(1) Represents a $125.0 million term loan with a floating interest rate. A $100.0 million portion of the term loan was effectively fixed by an interest rate swap that expired on July 21, 2023. The full amount of the term loan is effectively fixed by two interest rate swaps that became effective on July 21, 2023 and expire on the loan’s maturity date of January 10, 2025.

We enter into interest rate swap arrangements designated and qualifying as cash flow hedges to reduce our exposure to the variability in future cash flows attributable to changes in interest rates. Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreement. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. As part of our ongoing control procedures, we monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration.

The following table sets forth information pertaining to interest rate swap contracts in place as of September 30, 2023 and December 31, 2022 and their respective fair values (in thousands):


Notional Amount			Floating Index Rate			Fair Value as of:
		Fixed Rate		Effective Date	Expiration Date	September 30, 2023		December 31, 2022
$	100,000	1.205%	USD-SOFR	3/31/2017	7/21/2023	$	—	$	1,998
75,000		3.670%	USD-SOFR	7/21/2023	1/10/2025	1,422		—
50,000		3.670%	USD-SOFR	7/21/2023	1/10/2025	948		—
						$	2,370	$	1,998

We enter into debt obligations primarily to support general corporate purposes including acquisition of real estate properties, capital improvements and working capital needs.

As the majority of our outstanding debt is long-term, fixed rate debt, our interest rate risk has not changed significantly from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 17, 2023. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Debt Financing.”

ITEM 4: CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Administrative Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief Administrative Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer, Chief Financial Officer and Chief Administrative Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There have not been any changes in Elme Communities’ internal control over financial reporting (as defined by Rule 13a-15(f)) that occurred during the period covered by the report that have materially affected, or are reasonably likely to materially affect, Elme Communities’ internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

None.

ITEM 1A: RISK FACTORS

There have been no material changes from the risk factors previously disclosed in response to “Part I - Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 filed on February 17, 2023.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

None.

ITEM 5: OTHER INFORMATION

Trading Arrangements

During the three months ended September 30, 2023, no trustee or officer of Elme Communities adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Share Repurchase Program

On October 26, 2023, the Board authorized and approved a share repurchase program of up to $50 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 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. Under the share repurchase program, the Company can effect share repurchases through open market purchases, including through Rule 10b5-1 trading programs, in privately negotiated transactions, or in such other manner that would comply with applicable securities laws and subject to compliance with existing debt agreements. The repurchase program does not obligate the Company to repurchase any specific number of shares, will be utilized at management’s discretion and may be suspended at any time in the Company’s discretion. The timing of share repurchases and the number of shares to be repurchased will depend upon prevailing market conditions and other factors. No share repurchases have been made to date under this program.

ITEM 6: EXHIBITS

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

File
Number

Exhibit

Filing Date

Filed
Herewith

3.1

Articles of Amendment and Restatement of Declaration of Trust of the Company, as amended

10-K

001-06622

3.1

2/17/2023

3.2

Amended and Restated Bylaws of Elme Communities, as amended

8-K

001-06622

3.1

9/20/2023

31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”)

31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act

31.3

Certification of the Chief Administrative Officer pursuant to Rule 13a-14(a) of the Exchange Act

Certification of the Chief Executive Officer, Chief Financial Officer and Chief Administrative Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


ELME COMMUNITIES

						/s/ Paul T. McDermott
						Paul T. McDermott
						President and Chief Executive Officer

						/s/ Steven M. Freishtat
						Steven M. Freishtat
						Executive Vice President and Chief Financial Officer (Principal Financial Officer)

						/s/ W. Drew Hammond
						W. Drew Hammond
						Senior Vice President, Chief Administrative Officer and Treasurer (Principal Accounting Officer)

DATE: October 27, 2023