Elme munities(ELME) - 2025 Q2 - Quarterly Report

Part I: Financial Information Item 1. Consolidated Financial Statements (Unaudited) Details Elme Communities' unaudited consolidated financial statements, including balance sheets, income, equity, and cash flows, with notes on strategic developments Consolidated Balance Sheets Presents a snapshot of the company's assets, liabilities, and equity at specific points in time | Metric | Dec 31, 2024 (in thousands) | Jun 30, 2025 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total assets | $1,845,762 | $1,810,204 | $(35,558) | -1.93% | | Total liabilities | $763,684 | $763,734 | $50 | 0.01% | | Total equity | $1,082,078 | $1,046,470 | $(35,608) | -3.29% | | Net income producing property | $1,765,034 | $1,735,430 | $(29,604) | -1.68% | | Cash and cash equivalents | $6,144 | $4,786 | $(1,358) | -22.10% | Condensed Consolidated Statements of Operations Summarizes the company's revenues, expenses, and net loss over specific reporting periods | Metric (in thousands) | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change | % Change | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :------- | :-------------------------- | :-------------------------- | :----- | :------- | | Real estate rental revenue | $62,099 | $60,103 | $1,996 | 3.32% | $123,592 | $119,616 | $3,976 | 3.32% | | Total expenses | $56,167 | $54,190 | $1,977 | 3.65% | $112,875 | $109,266 | $3,609 | 3.30% | | Net loss | $(3,566) | $(3,471) | $(95) | 2.74% | $(8,241) | $(7,118) | $(1,123) | 15.78% | | Basic net loss per common share | $(0.04) | $(0.04) | $0.00 | 0.00% | $(0.10) | $(0.08) | $(0.02) | 25.00% | Condensed Consolidated Statements of Comprehensive Income (Loss) Details the company's net loss and other comprehensive income items, such as unrealized gains or losses on hedges | Metric (in thousands) | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Net loss | $(3,566) | $(3,471) | $(95) | $(8,241) | $(7,118) | $(1,123) | | Unrealized gain (loss) on interest rate hedges | $334 | $(796) | $1,130 | $423 | $(713) | $1,136 | | Reclassification of unrealized loss on interest rate derivatives to earnings | $509 | $510 | $(1) | $1,019 | $1,020 | $(1) | | Comprehensive loss | $(2,723) | $(3,757) | $1,034 | $(6,799) | $(6,811) | $12 | Consolidated Statements of Equity Outlines changes in the company's total equity, including net loss, dividends, and share grants | Metric (in thousands) | Dec 31, 2024 | Jun 30, 2025 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total Equity | $1,082,078 | $1,046,470 | $(35,608) | | Net loss (6 months) | N/A | $(8,241) | N/A | | Dividends paid (6 months) | N/A | $(31,890) | N/A | | Share grants, net (6 months) | N/A | $3,085 | N/A | Consolidated Statements of Cash Flows Reports the cash generated and used by operating, investing, and financing activities over specific periods | Metric (in thousands) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :------- | | Net cash provided by operating activities | $46,023 | $50,073 | $(4,050) | -8.1% | | Net cash used in investing activities | $(14,451) | $(17,684) | $3,233 | -18.3% | | Net cash used in financing activities | $(33,088) | $(33,035) | $(53) | 0.2% | | Net decrease in cash, cash equivalents and restricted cash | $(1,516) | $(646) | $(870) | 134.67% | Notes to Consolidated Financial Statements Provides detailed explanations and additional information supporting the consolidated financial statements NOTE 1: NATURE OF BUSINESS Describes the company's primary operations as an equity REIT and outlines significant strategic transactions - Elme Communities is a self-administered equity REIT, primarily owning apartment communities in the greater Washington, DC metro and Sunbelt regions[27] - The company entered into a Purchase Agreement on August 1, 2025, to sell 19 multifamily properties for an aggregate purchase price of $1.6 billion, subject to customary adjustments[30] - A Plan of Sale and Liquidation has been approved by the board of trustees, providing for the company's complete liquidation and dissolution, both subject to shareholder approval[31][32] - A commitment letter for $520 million in debt financing (or $565 million if one property is excluded) has been obtained from Goldman Sachs Bank USA, secured by remaining real estate assets, contingent on the Portfolio Sale Transaction closing[33][34] NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONS Outlines the key accounting policies and principles used in preparing the consolidated financial statements - The company adopted ASU 2023-07, 'Segment Reporting - Improvements to Reportable Segments Disclosures,' in fiscal year 2024[36] - The company is currently evaluating the impact of ASU 2024-03, 'Disaggregation of Income Statement Expenses,' effective for public companies for fiscal years beginning after December 15, 2026[37] - Consolidated financial statements include Elme Communities and its subsidiaries, with all intercompany balances and transactions eliminated[38] NOTE 3: REAL ESTATE Details the company's real estate investments, including development projects and property sales - Investment in residential development adjacent to Riverside Apartments: $30.4 million as of June 30, 2025, with development activities paused since Q2 2022[43] - No properties were sold or classified as held for sale during the 2025 Period or in 2024[45] - No impairment charges were recognized during the 2025 Quarter[46] NOTE 4: UNSECURED LINE OF CREDIT PAYABLE Provides details on the company's revolving credit facility, including capacity, outstanding borrowings, and interest rates - Amended and Restated Revolving Credit Facility: $500.0 million committed capacity, maturing July 2028[47] - Borrowings outstanding as of June 30, 2025: $175.0 million[50] - Unused and available capacity as of June 30, 2025: $325.0 million[50] - Interest rate as of June 30, 2025: Adjusted Daily Simple SOFR (4.45%) + 0.85% margin + 0.10% credit spread adjustment[48] NOTE 5: NOTES PAYABLE Details the company's unsecured term loan, including its principal amount, maturity, and effective interest rate - The 2023 Term Loan is a $125.0 million unsecured term loan[51] - Maturity extended to January 10, 2026, using a one-year extension option[53] - Interest rate effectively fixed at 5.77% through interest rate swap arrangements until maturity[53] NOTE 6: DERIVATIVE INSTRUMENTS Explains the company's use of interest rate swap arrangements to manage variable rate debt exposure - Two forward interest rate swap arrangements with an aggregate notional amount of $150.0 million became effective January 10, 2025, and expire January 10, 2026[55] - These swaps effectively fix a portion of variable rate debt at 4.72% and the 2023 Term Loan's interest rate at 5.77%[55] - Fair value of interest rate swaps as of June 30, 2025: $(490) thousand (net liability)[57] - Estimated reclassification to interest expense in the next twelve months: $0.5 million from outstanding swaps and $2.0 million from previously settled swaps[57][58] NOTE 7: FAIR VALUE DISCLOSURES Provides information on assets and liabilities measured at fair value, categorized by valuation input levels - Assets measured at fair value on a recurring basis: SERP investments (Level 1) and interest rate derivatives (Level 2)[62][63] Fair Value of Assets and Liabilities (in thousands) | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | | SERP assets | $3,008 | $2,648 | | Interest rate swaps (net liability) | $(490) | $(913) | - Financial assets and liabilities not measured at fair value: Cash and cash equivalents, restricted cash (Level 1), Line of credit, Notes payable (Level 3)[66][67] NOTE 8: SHARE-BASED COMPENSATION Details the compensation expense related to share-based awards and information on unvested restricted shares Share-Based Compensation Expense (in thousands) | Metric (in thousands) | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total compensation expense | $1,700 | $1,000 | $3,100 | $2,100 | - Unvested restricted share awards at June 30, 2025: 490,833 shares, with a weighted average grant date fair value of $15.81 per share[70] - Total compensation cost related to unvested awards: $5.1 million, expected to be recognized over a weighted average period of 21 months[70] NOTE 9: EARNINGS PER COMMON SHARE Presents basic and diluted net loss per common share, along with dividends declared per common share Earnings Per Common Share | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic net loss per common share | $(0.04) | $(0.04) | $(0.10) | $(0.08) | | Diluted net loss per common share | $(0.04) | $(0.04) | $(0.10) | $(0.08) | | Dividends declared per common share | $0.18 | $0.18 | $0.36 | $0.36 | NOTE 10: SEGMENT INFORMATION Identifies the company's primary reportable segment and the key performance measure used by management - The company operates primarily in a single reportable segment: Residential (apartment communities)[75] - Watergate 600, an office property, is classified within 'Other' and does not meet reportable segment criteria[76] - Net Operating Income (NOI) is the key performance measure used by the Chief Operating Decision Maker (CODM)[77] Residential and Total NOI (in thousands) | Period | Residential NOI 2025 | Residential NOI 2024 | Residential NOI Change | Residential NOI % Change | Total NOI 2025 | Total NOI 2024 | Total NOI Change | Total NOI % Change | | :----- | :------------------- | :------------------- | :--------------------- | :----------------------- | :------------- | :------------- | :--------------- | :--------------- | | Q2 | $36,422 | $34,870 | $1,552 | 4.5% | $39,437 | $38,121 | $1,316 | 3.5% | | 6 Months | $72,820 | $69,383 | $3,437 | 5.0% | $78,936 | $75,915 | $3,021 | 4.0% | NOTE 11: SHAREHOLDERS' EQUITY Details the company's equity distribution agreements and share issuance activities - The company has an Equity Distribution Agreement allowing for the sale of up to $350.0 million of common shares[81] - No common shares were issued under the Equity Distribution Agreement or any prior equity distribution agreements during the 2025 Period or 2024 Period[82] - No common shares were issued under the dividend reinvestment program during the 2025 Period or 2024 Period[83] NOTE 12: SUBSEQUENT EVENTS Reports significant events occurring after the reporting period, including a major property sale and liquidation plan - Subsequent to quarter-end, the company entered into a Purchase Agreement on August 1, 2025, to sell 19 multifamily properties for an aggregate purchase price of $1.6 billion[84] - In connection with the Purchase Agreement, the board of trustees approved a Plan of Sale and Liquidation, providing for the company's complete liquidation and dissolution, both subject to shareholder approval[85][86] - A commitment letter for $520 million in debt financing was secured from Goldman Sachs Bank USA, contingent on the Portfolio Sale Transaction closing, to be secured by remaining real estate assets[87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operational results, focusing on the proposed Portfolio Sale and Liquidation, liquidity, capital, and FFO General Provides an overview of the company's property portfolio and outlines recent strategic developments and tax legislation impacts - The company owns approximately 9,400 residential apartment homes in the Washington, DC and Atlanta metro regions, and 300,000 square feet of commercial space in the Washington, DC metro region[92] - Subsequent to quarter end, the company entered into a Purchase Agreement to sell 19 multifamily properties for $1.6 billion, subject to shareholder approval and customary closing conditions[93][95][97] - The board of trustees approved a Plan of Sale and Liquidation, providing for the company's complete liquidation and dissolution, also subject to shareholder approval[96][97] - A commitment for $520 million (or $565 million) in debt financing was obtained from Goldman Sachs Bank USA, secured by remaining real estate assets, contingent on the Portfolio Sale Transaction closing[99] - No significant investment transactions occurred during the 2025 Period[104] - Recent tax legislation includes a permanent extension of the 20% deduction for 'qualified REIT dividends,' an increase in the TRS asset test limit to 25%, and a change in the interest deduction limit calculation (based on EBITDA rather than EBIT)[106] Operating Results Summary Summarizes key financial metrics including net loss, NOI, and NAREIT FFO, highlighting factors influencing changes Operating Results Summary (in thousands) | Metric (in thousands) | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | $ Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Net loss | $(3,566) | $(3,471) | $(95) | 2.7% | | NOI | $39,437 | $38,121 | $1,316 | 3.5% | | NAREIT FFO | $19,994 | $20,424 | $(430) | (2.1)% | - Increase in net loss primarily due to higher general and administrative expenses ($1.6 million) and interest expense ($0.1 million), partially offset by lower depreciation and amortization ($0.3 million) and higher NOI ($1.3 million)[100] - Increase in NOI primarily due to higher NOI from same-store properties ($1.6 million), driven by higher rental rates. Residential same-store average occupancy increased to 94.7% from 94.5%[101] - Decrease in NAREIT FFO primarily due to higher general and administrative expenses ($1.6 million) and property management expenses ($0.1 million), partially offset by higher NOI ($1.3 million)[102] Results of Operations Analyzes the company's financial performance, focusing on Net Operating Income and period-over-period comparisons Net Operating Income (NOI) Defines Net Operating Income (NOI) as a non-GAAP measure and its significance in assessing property-level performance - NOI is a non-GAAP measure, defined as real estate rental revenue less direct real estate operating expenses[109] - It is the primary performance measure for property-level operations, reflecting trends in occupancy, rental rates, and operating costs on an unleveraged basis[109] 2025 Quarter Compared to 2024 Quarter Compares the company's financial performance for the three months ended June 30, 2025, against the prior year Quarterly Performance Comparison (in thousands) | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | $ Change | % Change | | :----- | :-------------------------- | :-------------------------- | :------- | :------- | | Net loss | $(3,566) | $(3,471) | $(95) | 2.7% | | Total NOI | $39,437 | $38,121 | $1,316 | 3.5% | - Residential revenue from same-store properties increased by $2.2 million (3.9%) to $57.7 million, driven by higher rental income ($0.8 million), lower vacancy loss ($0.6 million), and higher recoveries ($0.3 million)[112] - Residential expenses from same-store properties increased by $0.6 million (3.1%) to $21.2 million, primarily due to higher repairs and maintenance ($0.2 million) and utilities ($0.2 million)[115] - Residential NOI from same-store properties increased by $1.6 million (4.5%) to $36.5 million[111] - Same-store average occupancy increased to 94.7% as of June 30, 2025, from 94.5% as of June 30, 2024[113] - General and administrative expenses increased by $1.6 million (25.3%) to $7.7 million, mainly due to higher professional fees ($0.8 million) and incentive compensation ($1.0 million)[117] - Interest expense increased by $0.1 million (1.2%) to $9.5 million, with notes payable interest up $0.3 million (4.4%) and line of credit interest down $0.2 million (4.8%) due to a lower weighted average interest rate[118][119] 2025 Period Compared to 2024 Period Compares the company's financial performance for the six months ended June 30, 2025, against the prior year Six-Month Performance Comparison (in thousands) | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | $ Change | % Change | | :----- | :-------------------------- | :-------------------------- | :------- | :------- | | Net loss | $(8,241) | $(7,118) | $(1,123) | 15.8% | | Total NOI | $78,936 | $75,915 | $3,021 | 4.0% | - Real estate rental revenue from same-store residential properties increased by $4.3 million (3.9%) to $114.7 million, primarily due to higher rental income ($1.7 million), lower vacancy loss ($1.0 million), and higher ancillary income ($0.5 million)[122] - Real estate expenses from same-store residential properties increased by $0.9 million (2.2%) to $41.7 million, mainly due to higher repairs and maintenance ($0.4 million) and utilities ($0.3 million), partially offset by lower real estate taxes ($0.4 million)[126] - Residential NOI from same-store properties increased by $3.4 million (5.0%) to $72.9 million[121] - Same-store average occupancy increased to 94.7% from 94.4%[123] - General and administrative expenses increased by $4.6 million (37.2%) to $16.9 million, primarily due to higher professional fees ($3.2 million) related to strategic alternatives review and higher incentive compensation ($1.5 million)[129] - Interest expense increased by $0.1 million (0.4%) to $19.0 million, with notes payable interest up $0.5 million (4.0%) and line of credit interest down $0.4 million (6.1%) due to a lower weighted average interest rate[131][132] - Other income decreased by $1.4 million (100%) due to the absence of payments received for land easements in 2025[131] Liquidity and Capital Resources Assesses the company's ability to meet short-term and long-term financial obligations and fund operations - As of August 1, 2025, if the Proposed Transactions are not approved, the company's total liquidity position is $312.2 million, comprising $6.2 million in cash and cash equivalents and $306.0 million in available borrowing capacity on its revolving credit facility[134] - Full-year 2025 capital requirements include funding dividends (regular quarterly distributions expected to be suspended post-sale) and approximately $29.0 - $34.0 million for existing portfolio capital improvements[137] Debt Maturities as of June 30, 2025 (in thousands) | Year | Unsecured Debt | Amended and Restated Revolving Credit Facility | Total Debt | Average Interest Rate | | :--- | :------------- | :--------------------------------------------- | :--------- | :-------------------- | | 2025 | $— | $— | $— | —% | | 2026 | $125,000 | $— | $125,000 | 5.8% | | 2027 | $— | $— | $— | —% | | 2028 | $50,000 | $175,000 | $225,000 | 5.8% | | 2029 | $— | $— | $— | —% | | Thereafter | $350,000 | $— | $350,000 | 4.1% | | Total Scheduled Principal Payments | $525,000 | $175,000 | $700,000 | 4.9% | - The weighted average maturity for the company's debt is 3.8 years as of June 30, 2025[140] - The company was in compliance with all debt covenants related to its Amended Credit Agreement, 2023 Term Loan, and unsecured notes as of June 30, 2025[146] - Net cash provided by operating activities decreased by 8.1% for the six months ended June 30, 2025, to $46.0 million, primarily due to a higher net loss[153] - No off-balance sheet arrangements as of June 30, 2025[156] Funds From Operations Defines NAREIT FFO as a non-GAAP measure and its role in evaluating the company's operating performance and financial capacity - NAREIT FFO is a non-GAAP measure used to assess operating performance by excluding real estate depreciation and amortization, providing an indication of the company's ability to incur and service debt, make capital expenditures, and fund other needs[158] NAREIT FFO (in thousands) | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss | $(3,566) | $(3,471) | $(8,241) | $(7,118) | | Depreciation and amortization | $23,560 | $23,895 | $46,799 | $48,838 | | NAREIT FFO | $19,994 | $20,424 | $38,558 | $41,720 | Critical Accounting Estimates Confirms that no changes were made to critical accounting policies or estimates during the reporting period - No changes were made by management to the critical accounting policies or estimates during the three and six months ended June 30, 2025[160] Item 3. Quantitative and Qualitative Disclosures about Market Risk Details the company's primary market risk as interest rate risk, managed through fixed-rate debt and interest rate swaps - The principal material financial market risk to which the company is exposed is interest rate risk, primarily related to refinancing long-term fixed-rate obligations and its variable rate line of credit[162] Debt Outstanding as of June 30, 2025 (in thousands) | Debt Type | Principal | Interest Payments (2025-Thereafter) | Weighted Average Interest Rate | | :-------------------- | :-------- | :---------------------------------- | :----------------------------- | | Unsecured fixed rate debt | $525,000 | $93,574 | 4.9% | | Unsecured variable rate debt | $175,000 | N/A | 5.3% | | Total | $700,000 | N/A | 4.9% | - The company uses interest rate swap arrangements, designated as cash flow hedges, to reduce exposure to variability in future cash flows attributable to changes in interest rates[164] - The fair value of interest rate swap contracts in place as of June 30, 2025, was a net liability of $(490) thousand[165] Item 4. Controls and Procedures Management confirmed the effectiveness of disclosure controls and procedures, with no material changes in internal control over financial reporting - The company's disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2025[168] - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting during the period[169] Part II: Other Information Item 1. Legal Proceedings No legal proceedings were reported by the company during the period - No legal proceedings were reported[172] Item 1A. Risk Factors Updates risk factors, focusing on the proposed Portfolio Sale and Liquidation, including completion risks, expenses, distribution uncertainty, and REIT status impacts - The proposed Portfolio Sale Transaction and Plan of Sale and Liquidation present certain risks to the company's current business and operations[174] - Key risks include: failure to complete the Portfolio Sale Transaction, substantial expenses (whether or not completed), adverse effects on business operations due to pendency, and potential shareholder litigation[175][178][197][198] - There is uncertainty regarding the amount or timing of distributions to shareholders due to factors such as operational costs, liquidation time, financial obligations, and transaction costs[177][179] - The Purchase Agreement significantly limits the company's ability to pursue alternatives to the Portfolio Sale Transaction and includes a potential termination fee of up to $37.5 million[186][188][189] - The sale of properties may cause the company to incur penalty taxes or fail to maintain its REIT status, which would reduce the amount available for distribution to shareholders[193][195][196] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the authorized share repurchase program of $50.0 million, noting no shares were repurchased during the second quarter of 2025 - A share repurchase program of up to $50.0 million of common shares was authorized, scheduled to expire on October 25, 2025[199] - No shares were repurchased under the program during the 2025 Quarter[199] Item 3. Defaults upon Senior Securities No defaults upon senior securities were reported by the company - No defaults upon senior securities[200] Item 4. Mine Safety Disclosures No mine safety disclosures were reported by the company - No mine safety disclosures[201] Item 5. Other Information No trustee or officer adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the second quarter of 2025 - No trustee or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the three months ended June 30, 2025[202] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including key agreements for the proposed Portfolio Sale and Liquidation, and various certifications - Key exhibits include the Purchase and Sale Agreement (Exhibit 2.1), Plan of Sale and Liquidation (Exhibit 2.2), Commitment Letter (Exhibit 10.1), and Certifications of the Chief Executive Officer, Chief Financial Officer, and Chief Administrative Officer (Exhibits 31.1, 31.2, 31.3, and 32)[204] Signatures The report is signed by Elme Communities' President and CEO, EVP and CFO, and SVP, Chief Administrative Officer and Treasurer - The report is signed by Paul T. McDermott (President and Chief Executive Officer), Steven M. Freishtat (Executive Vice President and Chief Financial Officer), and W. Drew Hammond (Senior Vice President, Chief Administrative Officer and Treasurer)[206]