Elme munities(ELME) - 2023 Q3 - Quarterly Report

Part I: Financial Information Item 1. Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for the three and nine months ended September 30, 2023, highlighting a significant net loss primarily due to a real estate impairment charge Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total real estate held for investment, net | $1,850,557 | $1,820,678 | | Total assets | $1,910,273 | $1,872,606 | | Notes payable, net | $522,150 | $497,359 | | Line of credit | $149,000 | $55,000 | | Total liabilities | $737,220 | $608,820 | | Total equity | $1,173,053 | $1,263,786 | Condensed Consolidated Statements of Operations - A real estate impairment charge of $41.9 million in Q3 2023 was the primary driver of the significant increase in net loss compared to the prior year[13] Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Real estate rental revenue | $56,651 | $54,603 | $169,059 | $153,787 | | Real estate impairment | $41,860 | $0 | $41,860 | $0 | | Net loss | $(43,618) | $(10,739) | $(49,872) | $(27,337) | | Diluted net loss per common share | $(0.50) | $(0.12) | $(0.57) | $(0.32) | Consolidated Statements of Cash Flows Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Cash Flow Category | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $61,816 | $51,456 | | Net cash used in investing activities | $(130,283) | $(223,248) | | Net cash provided by (used in) financing activities | $68,798 | $(52,555) | - Cash from operations increased year-over-year, while cash used in investing decreased due to lower acquisition activity in 2023 compared to 2022. Financing activities provided cash in 2023, driven by net proceeds from a new term loan and line of credit borrowings, contrasting with a use of cash in 2022[23] Notes to Consolidated Financial Statements - The company acquired Elme Druid Hills, a 500-unit residential community, for a contract purchase price of $108.0 million on September 29, 2023[41] - A significant impairment charge of $41.9 million was recognized on the Watergate 600 office property during Q3 2023, reducing its carrying value to its estimated fair value due to declining market conditions[47] - In Q1 2023, the company entered into a new $125.0 million unsecured term loan (2023 Term Loan) and used the proceeds to prepay the $100.0 million 2018 Term Loan and a portion of its revolving credit facility[52] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, noting a 5.2% increase in Q3 2023 NOI but a widened net loss due to a $41.9 million impairment charge, while maintaining strong liquidity Overview - As of September 30, 2023, the company owned approximately 9,400 residential apartment homes in the Washington, DC metro and Sunbelt regions[88] - The company is undergoing a strategic transformation, shifting away from the commercial sector to focus on residential properties. This includes insourcing property-level management, with all residential communities transitioned to Elme management as of September 30, 2023[89] - Transformation costs of $1.0 million and $6.3 million were recognized in the third quarter and first nine months of 2023, respectively. The company does not anticipate incurring additional transformation costs in the future[89] Results of Operations Key Performance Indicators - Q3 2023 vs Q3 2022 (in thousands) | Metric | Q3 2023 | Q3 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(43,618) | $(10,739) | $(32,879) | 306.2% | | NOI | $36,854 | $35,042 | $1,812 | 5.2% | | NAREIT FFO | $20,146 | $12,893 | $7,253 | 56.3% | - Residential same-store NOI increased by 7.3% in Q3 2023 compared to Q3 2022, driven by a 4.2% increase in revenue from higher rental rates, while expenses decreased by 1.2%[101][103][107] - For the nine months ended September 30, 2023, same-store residential NOI grew 9.6% year-over-year, with revenue up 7.5% and expenses up 3.9%[116][118][122] Liquidity and Capital Resources - The company believes it has adequate liquidity for the next twelve months, with no debt maturities until 2025[133][134] - As of October 24, 2023, total liquidity was $542.0 million, consisting of $3.0 million in cash and $539.0 million available on its Revolving Credit Facility[134] - Full-year 2023 capital requirements are estimated at $35.0 - $40.0 million for investments in the existing portfolio, including major capital expenditures[136][138] Funds From Operations (FFO) NAREIT FFO Reconciliation (in thousands) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(43,618) | $(10,739) | $(49,872) | $(27,337) | | Depreciation and amortization | $21,904 | $23,632 | $64,855 | $69,871 | | Real estate impairment | $41,860 | $0 | $41,860 | $0 | | NAREIT FFO | $20,146 | $12,893 | $56,843 | $42,534 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk on debt, managed through fixed and variable rate debt and interest rate swaps - The principal material financial market risk is identified as interest rate risk, affecting the refinancing of long-term debt and variable rate borrowings[160] - The company uses interest rate swap arrangements to hedge against variability in cash flows from changes in interest rates. As of September 30, 2023, swaps with a notional amount of $125.0 million were in place to effectively fix the interest rate on its 2023 Term Loan[162][163] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls were effective with no material changes in internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period[166] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[167] Part II: Other Information Legal Proceedings The company reported no legal proceedings during the period - None[170] Risk Factors The company states that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes from the risk factors previously disclosed in the company's 2022 Form 10-K[171] Other Information This section discloses no Rule 10b5-1 trading plan changes and announces a new $50 million share repurchase program authorized by the Board - On October 26, 2023, the Board authorized a share repurchase program of up to $50 million of the company's common shares over a two-year period[176] - During the third quarter of 2023, no trustee or officer adopted or terminated a Rule 10b5-1 trading arrangement[175] Exhibits This section lists exhibits filed with the Form 10-Q, including certifications from the CEO, CFO, and CAO, and Inline XBRL documents - The report includes certifications from the CEO (31.1), CFO (31.2), and CAO (31.3) as required by the Securities Exchange Act of 1934[178]