Elme Communities — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company, formerly Washington Real Estate Investment Trust, changed its name to Elme Communities and its NYSE ticker to ELME in October 2022. It is focused primarily on apartments in the Washington, DC area and Sunbelt markets, with about 8,900 apartment homes and approximately 300,000 square feet of commercial space at quarter-end.
Financial highlights
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Real estate rental revenue | $54.6 million | $42.5 million | $153.8 million | $124.4 million |
| Net income (loss) | $(10.7) million | $31.3 million | $(27.3) million | $23.2 million |
| Net operating income (NOI), non-GAAP | $35.0 million | $27.1 million | $98.5 million | $79.2 million |
| NAREIT FFO, non-GAAP | $12.9 million | $3.1 million | $42.5 million | $52.2 million |
| Operating cash flow | Not separately reported | Not separately reported | $51.5 million | $66.4 million |
- Q3 residential same-store revenue rose 9.5%; same-store NOI increased 10.4%. Nine-month same-store revenue and NOI rose 6.7% and 7.8%, respectively.
- Residential real estate expenses were 36.5% of residential revenue in Q3 and 36.8% for the nine-month period, versus 37.2% and 37.3% in the respective 2021 periods. Same-store occupancy was 95.6% at September 30, 2022, compared with 95.8% a year earlier.
- At September 30, cash and cash equivalents were $8.4 million; restricted cash was $1.4 million. Notes payable, net, were $497.2 million and revolver borrowings were $43.0 million. Scheduled principal debt totaled $543.0 million, with a weighted average interest rate of 4.1% and weighted average maturity of 6.3 years. The company reported $657.0 million of unused revolver capacity at quarter-end.
- As of October 24, management reported $19.7 million cash and $634.0 million revolver availability, or total liquidity of $653.7 million.
- Dividends declared were $0.17 per share in Q3 2022, versus $0.17 in Q3 2021; nine-month dividends were $0.51 per share versus $0.77.
Material changes and notable items
- Revenue and NOI growth reflected 2021–2022 apartment acquisitions, Trove’s lease-up and higher same-store rents. During the 2022 period, Elme acquired three Georgia communities totaling 1,079 homes for a contract price of $283.2 million.
- GAAP results worsened versus 2021 largely because the prior-year periods included income from discontinued operations and $46.4 million of net gains on sales of office and retail portfolios. Those portfolios were sold in 2021 as part of the shift toward residential assets.
- Q3 included a $4.9 million loss on extinguishment of debt after defeasance of mortgages assumed with two acquisitions. The company also recognized $6.6 million in transformation costs during the first nine months.
- Nine-month operating cash flow declined 22.5% year over year. Investing cash flow was affected by the 2021 portfolio-sale proceeds and 2022 acquisitions. Cash and cash equivalents fell from $233.6 million at December 31, 2021 to $8.4 million at September 30, 2022.
Outlook, risks and contingencies
- Management stated it expects adequate liquidity to meet obligations, capital needs and dividends. It expects approximately $3–$4 million of additional 2022 transformation costs; operating-model redesign implementation is expected to finish in 2023, with community onboarding in phases beginning October 2022.
- For full-year 2022, anticipated capital requirements included $25–$30 million for existing operating assets and $0.7–$1.0 million for development and redevelopment, in addition to dividends and potential acquisitions. The Riverside-adjacent development was paused because of macroeconomic uncertainty.
- Management intends to continue dividends at or about current levels but will reassess quarterly; future payments are at the board’s discretion. The filing does not provide earnings or FFO guidance.
- Key stated risks include inflation and rising interest rates, economic slowdown, real estate operating and leasing conditions, acquisition execution and performance, access to financing, debt refinancing, and successful completion of the strategic and operating-model transition. Debt covenants were reported in compliance; no material change to previously disclosed risk factors, legal proceedings, or material off-balance-sheet arrangements was reported.
Important facts for investors to verify
- Whether same-store rent growth and occupancy remain resilient, particularly as economic conditions and housing demand change.
- Whether recent Georgia acquisitions perform at expected levels and contribute sufficient NOI relative to acquisition and financing costs.
- Progress, remaining cost and expected benefits of the operating-model redesign and transformation.
- Liquidity, variable-rate borrowing costs, the July 2023 $100 million term-loan maturity, and the company’s ability to refinance or repay debt on acceptable terms.
- Dividend sustainability relative to operating cash flow, capital spending and NAREIT FFO; FFO is a non-GAAP measure and may not be comparable across REITs.