Elme munities(ELME) - 2021 Q2 - Quarterly Report

Part I: Financial Information Consolidated Financial Statements (Unaudited) Unaudited Q2 2021 statements reflect total assets of $2.37 billion, a $7.0 million net loss, and reclassification of divested portfolios Consolidated Balance Sheets Total assets decreased to $2.37 billion as of June 30, 2021, with $779.1 million in real estate held for sale, and liabilities stable at $1.09 billion Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $2,368,405 | $2,409,818 | | Investment in real estate held for sale, net | $779,121 | $795,687 | | Total real estate held for investment, net | $1,455,230 | $1,476,532 | | Total Liabilities | $1,091,970 | $1,088,709 | | Notes payable, net | $945,905 | $945,370 | | Total Equity | $1,276,435 | $1,321,109 | Condensed Consolidated Statements of Operations Q2 2021 net loss increased to $7.0 million from $5.4 million in Q2 2020, driven by transformation costs and derivative losses Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Real estate rental revenue | $41,297 | $43,757 | | Loss from continuing operations | $(16,737) | $(11,995) | | Income from discontinued operations | $9,745 | $6,589 | | Net loss | $(6,992) | $(5,406) | | Diluted net loss per common share | $(0.08) | $(0.07) | - The company incurred $3.78 million in transformation costs during the second quarter of 2021, which were not present in the prior year's quarter, and a loss of $5.76 million on interest rate derivatives also contributed to the net loss[14] Condensed Consolidated Statements of Comprehensive Income (Loss) Q2 2021 comprehensive income was $0.3 million, a turnaround from a $7.2 million loss in Q2 2020, due to reclassification and unrealized derivative gains Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net loss | $(6,992) | $(5,406) | | Other comprehensive income (loss) | $7,273 | $(1,789) | | Comprehensive income (loss) | $281 | $(7,195) | Consolidated Statements of Equity Total equity decreased to $1.276 billion as of June 30, 2021, primarily due to an $8.1 million net loss and $50.9 million in dividends paid - For the six months ended June 30, 2021, total equity decreased by approximately $45 million, driven by a net loss of $8.1 million and dividends of $50.9 million ($0.60 per common share)[19] Consolidated Statements of Cash Flows Operating cash flow increased to $64.6 million for the six months ended June 30, 2021, with investing activities shifting to a net use of $18.2 million Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $64,622 | $51,182 | | Net cash (used in) provided by investing activities | $(18,195) | $12,131 | | Net cash used in financing activities | $(48,687) | $(69,463) | | Net decrease in cash | $(2,260) | $(6,150) | Notes to Consolidated Financial Statements Notes detail the strategic transformation to a multifamily-focused portfolio through office and retail property sales, reclassified as discontinued operations - The company is undergoing a strategic transformation to simplify its portfolio to one reportable segment (multifamily) by divesting its office and retail properties[31] - In June 2021, the company entered an agreement to sell a portfolio of twelve office properties for $766.0 million, and subsequently agreed to sell its remaining eight retail properties for $168.3 million, with both portfolios classified as held for sale[48][49] - Due to the planned prepayment of a $150.0 million portion of the 2018 Term Loan, related interest rate swaps were deemed no longer effective, resulting in a recognized loss of $5.8 million in the quarter[66] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic shift to multifamily, an increased Q2 2021 net loss of $7.0 million, and plans to use liquidity for acquisitions and debt repayment Overview The company is divesting commercial assets for $766.0 million (office) and $168.3 million (retail) to focus on multifamily - The company is undergoing a strategic transformation to focus on the multifamily sector by selling its office and retail properties[106] - Net proceeds from asset sales will be used to fund multifamily acquisitions in Southeastern markets and to repay outstanding debt[107] Key Operating Results (Q2 2021 vs Q2 2020, in thousands) | Metric | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(6,992) | $(5,406) | $(1,586) | 29.3% | | NOI | $25,067 | $27,169 | $(2,102) | (7.7)% | | NAREIT FFO | $20,559 | $31,732 | $(11,173) | (35.2)% | Results of Operations Consolidated NOI for Q2 2021 decreased 7.7% to $25.1 million, with net loss increasing due to transformation costs and derivative losses Consolidated NOI Comparison (Q2 2021 vs Q2 2020, in thousands) | Category | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Same-Store NOI | $24,644 | $25,230 | $(586) | (2.3)% | | Consolidated NOI | $25,067 | $27,169 | $(2,102) | (7.7)% | - Same-store multifamily average occupancy increased to 95.1% in Q2 2021 from 94.5% in Q2 2020[134] - Key drivers of the increased net loss in Q2 2021 were $3.8 million in transformation costs and a $5.8 million loss on interest rate derivatives, which were not present in Q2 2020[137][141] Liquidity and Capital Resources Liquidity is approximately $1.4 billion as of July 26, 2021, with plans to redeem $300 million Senior Notes and repay $150 million of its Term Loan - As of July 26, 2021, total liquidity was approximately $1.4 billion, consisting of approximately $665 million in cash and $700 million in credit facility availability[167] - The company plans to redeem all $300.0 million of its Senior Notes due in 2022 and repay $150.0 million of its 2018 Term Loan in Q3 2021[168][175] - After planned debt repayments, the company will have no debt maturities until 2023, with the weighted average maturity of its debt being 4.7 years[168][176] Funds From Operations NAREIT FFO for Q2 2021 decreased to $20.6 million from $31.7 million in Q2 2020, reflecting lower operating performance and derivative losses NAREIT FFO Reconciliation (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net loss | $(6,992) | $(5,406) | | Depreciation and amortization | $27,551 | $29,599 | | Loss on sale of depreciable real estate | $0 | $7,539 | | NAREIT FFO | $20,559 | $31,732 | Quantitative and Qualitative Disclosures about Market Risk Primary market risk is interest rate risk, managed with swaps, but a $5.8 million loss was recognized due to ineffective hedges from a planned $150 million term loan prepayment - The principal market risk is interest rate risk, and the company uses interest rate swaps to manage exposure on its variable-rate debt[195][196] - The company plans to prepay a $150.0 million portion of the 2018 Term Loan, consequently, the related interest rate swap hedges were determined to be no longer effective, leading to a recognized loss of $5.8 million[198] Controls and Procedures Management concluded that disclosure controls and procedures were effective at a reasonable assurance level, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of the end of the quarter[203] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[204] Part II: Other Information Legal Proceedings The company reports no material legal proceedings - None[207] Risk Factors A new risk factor highlights challenges in expanding the multifamily platform into new Southeastern markets due to unfamiliarity with local dynamics - A new risk factor highlights the challenges of expanding into new markets, stating the company may be unable to successfully expand its multifamily operations into the Southeastern U.S[209] - Risks include a lack of familiarity with the dynamics and market conditions of new markets, which could adversely affect the ability to build market share or achieve desired returns[210] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities - None[211] Exhibits This section lists exhibits filed with the Form 10-Q, including the office portfolio Purchase and Sale Agreement and CEO/CFO certifications - Key exhibits filed include the Purchase and Sale Agreement with BPG Acquisitions, LLC, dated June 14, 2021, and certifications by the CEO, CFO, and Chief Accounting Officer[216]