elme-20240331

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 March 31, 2024


☐			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 April 29, 2024, 88,004,082 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	9
	Notes to Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4.	Controls and Procedures	33

Part II: Other Information

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	34

Item 6.	Exhibits	35

	Signatures	36

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, 2023 included in our 2023 Annual Report on Form 10-K filed on February 16, 2024.

ELME COMMUNITIES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)


	March 31, 2024		December 31, 2023
	(Unaudited)
Assets
Land	$	383,808	$	384,097
Income producing property	1,966,412		1,960,020
	2,350,220		2,344,117
Accumulated depreciation and amortization	(550,421)		(528,024)
Net income producing property	1,799,799		1,816,093
Properties under development or held for future development	30,980		30,980
Total real estate held for investment, net	1,830,779		1,847,073

Cash and cash equivalents	4,199		5,984
Restricted cash	2,704		2,554
Rents and other receivables	12,886		17,642
Prepaid expenses and other assets	25,971		26,775

Total assets	$	1,876,539	$	1,900,028
Liabilities
Notes payable, net	$	522,539	$	522,345

Line of credit	160,000		157,000
Accounts payable and other liabilities	31,112		38,997
Dividend payable	15,888		15,863
Advance rents	4,361		5,248
Tenant security deposits	6,235		6,225

Total liabilities	740,135		745,678
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; 88,003 and 87,867 shares issued and outstanding, as of March 31, 2024 and December 31, 2023, respectively	880		879
Additional paid in capital	1,736,524		1,735,530
Distributions in excess of net income	(588,923)		(569,391)
Accumulated other comprehensive loss	(12,365)		(12,958)
Total shareholders’ equity	1,136,116		1,154,060
Noncontrolling interests in subsidiaries	288		290
Total equity	1,136,404		1,154,350
Total liabilities and equity	$	1,876,539	$	1,900,028

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 March 31,
	2024		2023
Revenue
Real estate rental revenue	$	59,513	$	55,809
Expenses
Property operating and maintenance	13,464		12,339
Real estate taxes and insurance	8,255		7,182
Property management	2,218		1,769
General and administrative	6,196		6,841
Transformation costs	—		2,900
Depreciation and amortization	24,943		21,536


	55,076		52,567

Real estate operating income	4,437		3,242
Other income (expense)
Interest expense	(9,494)		(6,831)

Loss on extinguishment of debt	—		(54)
Other income	1,410		—

	(8,084)		(6,885)







Net loss	$	(3,647)	$	(3,643)






Basic net loss per common share	$	(0.04)	$	(0.04)




Diluted net loss per common share	$	(0.04)	$	(0.04)

Weighted average shares outstanding – basic	87,885		87,649
Weighted average shares outstanding – diluted	87,885		87,649

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 March 31,
	2024		2023
Net loss	$	(3,647)	$	(3,643)
Other comprehensive income:
Unrealized gain (loss) on interest rate hedges	83		(333)
Reclassification of unrealized loss on interest rate derivatives to earnings	510		510
Comprehensive loss	$	(3,054)	$	(3,466)

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, 2023	87,867	$	879	$	1,735,530	$	(569,391)	$	(12,958)	$	1,154,060	$	290	$	1,154,350

Net loss	—	—		—		(3,647)		—		(3,647)		—		(3,647)
Unrealized gain on interest rate hedges	—	—		—		—		83		83		—		83

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 forfeitures and tax withholdings	136	1		994		—		—		995		—		995
Balance, March 31, 2024	88,003	$	880	$	1,736,524	$	(588,923)	$	(12,365)	$	1,136,116	$	288	$	1,136,404


	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	—	—		—		(3,643)		—		(3,643)		—		(3,643)
Unrealized loss on interest rate hedges	—	—		—		—		(333)		(333)		—		(333)

Amortization of swap settlements	—	—		—		—		510		510		—		510
Distributions to noncontrolling interests	—	—		—		—		—		—		(2)		(2)
Dividends ($0.18 per common share)	—	—		—		(15,852)		—		(15,852)		—		(15,852)

Shares issued under Dividend Reinvestment Program	14	—		248		—		—		248		—		248
Share grants, net of forfeitures and tax withholdings	161	2		1,599		—		—		1,601		—		1,601
Balance, March 31, 2023	87,709	$	877	$	1,731,701	$	(472,503)	$	(14,056)	$	1,246,019	$	296	$	1,246,315

See accompanying notes to the consolidated financial statements.


ELME COMMUNITIES AND SUBSIDIARIES

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

	Three Months Ended March 31,
	2024		2023
Cash flows from operating activities
Net loss	$	(3,647)	$	(3,643)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	24,943		21,536
Credit losses on lease related receivables	1,451		703



Share-based compensation expense	1,090		1,188

Net amortization of debt premiums, discounts and related financing costs	1,058		1,048

Loss on extinguishment of debt	—		54
Gain on land easements	(1,410)		—
Changes in operating other assets	(941)		(872)
Changes in operating other liabilities	(1,328)		(3,725)
Net cash provided by operating activities	21,216		16,289
Cash flows from investing activities



Capital improvements to real estate	(13,617)		(5,569)



Non-real estate capital improvements	(5)		(222)
Payments received for land easements	3,862		—
Net cash used in investing activities	(9,760)		(5,791)
Cash flows from financing activities
Line of credit borrowings (repayments), net	3,000		(20,000)
Dividends paid	(15,911)		(14,917)



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

Payment of financing costs	—		(844)
Distributions to noncontrolling interests	(2)		(2)
Proceeds from dividend reinvestment program	—		248

Payment of tax withholdings for restricted share awards	(178)		(1,304)
Net cash used in financing activities	(13,091)		(11,819)
Net decrease in cash, cash equivalents and restricted cash	(1,635)		(1,321)
Cash, cash equivalents and restricted cash at beginning of period	8,538		9,852
Cash, cash equivalents and restricted cash at end of period	$	6,903	$	8,531

Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	11,972	$	8,954
Change in accrued capital improvements and development costs	(7,309)		216
Dividend payable	15,888		15,869


Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	4,199	$	7,044
Restricted cash	2,704		1,487
Cash, cash equivalents and restricted cash	$	6,903	$	8,531

See accompanying notes to the consolidated financial statements.

ELME COMMUNITIES AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2024

(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 March 31, 2024 and March 31, 2023 as the “2024 Quarter” and the “2023 Quarter,” 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 March 31, 2024 and December 31, 2023, 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, 2023.

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 2023 Quarter, 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.

In November 2023, the FASB issued an amendment to the segment reporting standards which requires disclosure for each reportable segment, on an interim and annual basis, the significant expense categories and amounts that are regularly provided to the chief operating decision maker and included in each reported measure of a segment’s profit or loss. Additionally, it requires a disclosure of the title and position of the individual or the name of the group or committee identified as the chief operating decision maker. The new standard will be effective for annual periods beginning on January 1, 2024 and interim periods beginning on January 1, 2025 on a retrospective basis. We are currently evaluating the impact of adopting the standard on our consolidated financial statements.

In March 2024, the Securities and Exchange Commission (“SEC”) issued its final rule that requires registrants to provide climate disclosures in their annual reports and registration statements, beginning with annual reports for the year ending December 31, 2025. On April 4, 2024, the SEC voluntarily stayed the final rule pending the completion of judicial review of cases pending in the Eighth Circuit. We are continuing to evaluate the disclosure impact of the final rule.

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 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, 2023.

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

Development/Redevelopment

We have properties under development/redevelopment and held for current or future development. As of March 31, 2024, 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.

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 2024 Quarter or in 2023.

As of March 31, 2024, we assessed our properties, including assets held for development, for impairment and did not recognize any impairment charges during the 2024 Quarter. We applied reasonable estimates and judgments in evaluating each of the properties as of March 31, 2024. 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 2023 Quarter, 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 adjusted 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% (in each case, depending on Elme Communities’ credit rating) on the $700.0 million committed revolving loan capacity, without regard to usage. As of March 31, 2024, the interest rate on the Revolving Credit Facility is based on an adjusted daily SOFR (inclusive of the 0.10% credit spread adjustment) plus 0.85% applicable margin, the daily SOFR is 5.34% 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 March 31, 2024 was as follows (in thousands):


Committed capacity	$	700,000
Borrowings outstanding	(160,000)

Unused and available	$	540,000

We executed borrowings and repayments on the Revolving Credit Facility during the 2024 Quarter as follows (in thousands):


Balance, December 31, 2023	$	157,000
Borrowings	37,000
Repayments	(34,000)
Balance, March 31, 2024	$	160,000

NOTE 5: NOTES PAYABLE

During the 2023 Quarter, we entered into a $125.0 million unsecured term loan (“2023 Term Loan”) with an interest rate of adjusted 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

During the 2023 Quarter, 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.

Subsequent to the end of the 2024 Quarter, we entered into two forward interest rate swap arrangements with an aggregate notional amount of $150.0 million beginning on January 10, 2025 through January 10, 2026. These forward interest rate swap arrangements will effectively fix a portion of our variable rate debt based on an adjusted daily SOFR at 4.72% (subject to applicable interest rate margins).

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 March 31, 2024 and December 31, 2023, were as follows (in thousands):


				Fair Value
				Derivative Assets
Derivative Instrument	Aggregate Notional Amount	Effective Date	Maturity Date	March 31, 2024		December 31, 2023

Interest rate swap	75,000	July 21, 2023	January 10, 2025	$	790	$	740
Interest rate swap	50,000	July 21, 2023	January 10, 2025	527		494
				$	1,317	$	1,234

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 March 31,
	2024		2023
Unrealized gain (loss) on interest rate hedges	$	83	$	(333)

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 $1.3 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 months ended March 31, 2024 and 2023, were as follows (in thousands):


	Three Months Ended March 31,
	2024		2023
Loss reclassified from accumulated other comprehensive loss into interest expense	$	510	$	510

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 March 31, 2024, the fair value of derivative assets, including accrued interest, was $1.3 million and we did not have any derivatives in a liability position. As of March 31, 2024, 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 March 31, 2024 and December 31, 2023 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 quoted prices in active markets and accordingly these valuations fall into Level 1 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 as of March 31, 2024 and December 31, 2023 were as follows (in thousands):


	March 31, 2024								December 31, 2023
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets:
SERP	$	2,064	$	2,064	$	—	$	—	$	1,984	$	1,984	$	—	$	—
Interest rate derivatives	1,317		—		1,317		—		1,234		—		1,234		—

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 2024 Quarter, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis.

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 March 31, 2024 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 March 31, 2024 and December 31, 2023, the carrying values and estimated fair values of our financial instruments were as follows (in thousands):


	March 31, 2024				December 31, 2023
	Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and cash equivalents	$	4,199	$	4,199	$	5,984	$	5,984
Restricted cash	2,704		2,704		2,554		2,554

Line of credit	160,000		160,000		157,000		157,000
Notes payable, net	522,539		467,991		522,345		466,668

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, as amended, 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 $1.1 million and $1.2 million for the 2024 Quarter and 2023 Quarter, respectively.

Restricted Share Awards

The total fair values of restricted share awards vested was $0.6 million and $3.4 million for the 2024 Quarter and 2023 Quarter, respectively.

The total unvested restricted share awards at March 31, 2024 was 443,439 shares, which had a weighted average grant date fair value of $16.96 per share. As of March 31, 2024, the total compensation cost related to unvested restricted share awards was $6.2 million, which we expect to recognize over a weighted average period of 27 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 months ended March 31, 2024 and 2023 were as follows (in thousands, except per share data):


	Three Months Ended March 31,
	2024		2023
Numerator:
Net loss	$	(3,647)	$	(3,643)

Allocation of earnings to unvested restricted share awards	(80)		(70)




Adjusted net loss	$	(3,727)	$	(3,713)
Denominator:
Weighted average shares outstanding – basic and diluted	87,885		87,649








Basic net loss per common share	$	(0.04)	$	(0.04)



Diluted net loss per common share	$	(0.04)	$	(0.04)

Dividends declared per common share	$	0.18	$	0.18

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 months ended March 31, 2024 and 2023 from our Residential segment as well as Other, and reconcile NOI to net loss as reported (in thousands):


	Three Months Ended March 31, 2024
	Residential		Other (1)		Consolidated
Real estate rental revenue	$	54,871	$	4,642	$	59,513
Real estate expenses	20,358		1,361		21,719
Net operating income	$	34,513	$	3,281	$	37,794
Other income (expense):
Property management expenses					(2,218)
General and administrative expenses					(6,196)

Depreciation and amortization					(24,943)

Interest expense					(9,494)


Other income					1,410








Net loss					$	(3,647)


Capital expenditures	$	13,565	$	57	$	13,622
Total assets	$	1,751,228	$	125,311	$	1,876,539


	Three Months Ended March 31, 2023
	Residential		Other (1)		Consolidated
Real estate rental revenue	$	50,991	$	4,818	$	55,809
Real estate expenses	18,144		1,377		19,521
Net operating income	$	32,847	$	3,441	$	36,288
Other expense:
Property management expenses					(1,769)
General and administrative expenses					(6,841)
Transformation costs					(2,900)
Depreciation and amortization					(21,536)

Interest expense					(6,831)

Loss on extinguishment of debt					(54)









Net loss					$	(3,643)


Capital expenditures	$	5,417	$	374	$	5,791
Total assets	$	1,676,596	$	178,403	$	1,854,999

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