Elme Communities 2022 Form 10-K Summary
Business context and reporting period
Elme Communities, formerly Washington Real Estate Investment Trust, reported for the fiscal year ended December 31, 2022. The company changed its name and NYSE ticker from WRE to ELME in October 2022, reflecting its transition to a primarily multifamily REIT. At year-end it owned 27 residential communities with 8,868 apartments—80% of homes in the Washington, DC metro and 20% in Atlanta—plus the 300,000-square-foot Watergate 600 office building.
Financial and operating results
| Metric | 2022 | 2021 |
|---|---|---|
| Real estate rental revenue | $209.4 million | $169.2 million |
| Net income (loss) | $(30.9) million | $16.4 million |
| Net operating income (NOI; non-GAAP) | $135.4 million | $108.4 million |
| NAREIT FFO (non-GAAP) | $60.9 million | $65.5 million |
| Cash provided by operating activities | $73.2 million | $89.2 million |
| Real estate investment spending | $241.2 million net cash used in investing activities | $702.2 million net cash provided |
Revenue increased 23.8%; NOI rose 24.9%, helped by acquisitions, Trove’s stabilization and same-store rent growth. Same-store residential revenue increased 7.3% and same-store NOI increased 8.8%. Same-store average occupancy was 95.6%, up from 95.3%. Residential operating expenses were 36.1% of residential revenue, compared with 36.8% in 2021.
The net loss reflected, among other factors, the absence of 2021 property-sale gains and discontinued-operations income, as well as higher depreciation and transformation costs. These were partly offset by higher NOI and lower interest expense. The 2021 comparison includes the results and sales of the former office and retail portfolios.
In the fourth quarter, rental revenue was $55.6 million and net loss was $3.5 million, or $0.04 per share. The comparable 2021 quarter recorded $44.7 million of rental revenue and a $6.8 million net loss.
Debt, liquidity and capital
At December 31, 2022, balance-sheet notes payable were $497.4 million and revolving-credit borrowings were $55.0 million; combined carrying value was $552.4 million. Scheduled debt principal was $555.0 million before unamortized discounts and issuance costs. Cash and cash equivalents were $8.4 million, with $645.0 million available under the $700 million revolving facility. Management reported $15.8 million of cash and $657 million of revolver availability as of February 14, 2023.
After year-end, the company borrowed $125 million under a new unsecured term loan, used proceeds to repay the remaining $100 million 2018 Term Loan and reduce revolver borrowings, and amended the revolver benchmark from LIBOR to adjusted SOFR. Management reported no debt maturities scheduled for 2023 after this refinancing and approximately $155 million of scheduled maturities before 2027. Debt covenants were satisfied at year-end. The company reported a debt-to-total-market-capitalization ratio of approximately 25% as of February 14, 2023.
Cash dividends paid were $59.4 million in 2022, and declared dividends were $0.68 per common share, versus $0.94 in 2021. The board reviews dividends quarterly. The company estimated 2023 spending of $15–$20 million on operating properties, less than $1 million on development and redevelopment, and $30–$35 million on major renovations.
Changes, outlook, risks and unusual items
- Elme acquired three Atlanta-area communities in 2022 for a combined contract purchase price of $283.2 million, adding 1,079 homes. It also issued 1.0 million common shares through its at-the-market program for $26.8 million net proceeds.
- Community-management internalization began in October 2022; 3 of 27 communities were internally managed at year-end. Completion was expected in phases during 2023. Transformation costs were $9.7 million in 2022; management anticipated another $3–$4 million in 2023 and expected operating benefits after implementation.
- Management cited historically high embedded rent growth and expected outsized revenue and NOI growth in 2023, but provided no quantified financial guidance. It characterized liquidity as adequate for the next twelve months.
- Development of a residential project adjacent to Riverside Apartments was paused in the second quarter of 2022. The company had invested $30.4 million, including land, and continued to consider completion probable.
- Key risks include the 80% concentration of homes in the Washington, DC metro, potential softening in apartment demand and occupancy, inflation and higher interest rates, new Sunbelt market execution, refinancing and covenant exposure, and successful execution of management internalization. Four Washington-area properties were subject to rent or income restrictions.
- The company reported no 2022 real estate impairment charges and no material off-balance-sheet arrangements. Management said ordinary-course legal matters were not expected to materially affect financial condition or results.
Important facts for investors to verify
- Reconcile GAAP net loss with NOI and NAREIT FFO, which are non-GAAP measures, and assess how much reported growth came from acquisitions versus same-store performance.
- Review the post-year-end $125 million term-loan refinancing, updated SOFR terms, debt maturities, interest-rate hedging and available revolver capacity.
- Track realized rent growth, occupancy and operating-cost trends against management’s 2023 growth expectations, particularly as market demand cooled in the second half of 2022.
- Monitor the costs, timing and operating results of management internalization, alongside renovation spending and the paused Riverside development.
- Assess dividend coverage and sustainability in light of lower declared dividends, operating cash flow, recurring capital needs and REIT distribution requirements.