Elme Communities — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Elme is a REIT focused primarily on apartment communities in the Washington, D.C. metro and Sunbelt regions. At quarter-end, it reported approximately 9,400 apartment homes and approximately 300,000 square feet of commercial space, including its remaining office property, Watergate 600. All dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Rental revenue | $56.7 | $54.6 | $169.1 | $153.8 |
| Net loss | $(43.6) | $(10.7) | $(49.9) | $(27.3) |
| Net loss per share | $(0.50) | $(0.12) | $(0.57) | $(0.32) |
| NOI (non-GAAP) | $36.9 | $35.0 | $109.5 | $98.5 |
| NAREIT FFO (non-GAAP) | $20.1 | $12.9 | $56.8 | $42.5 |
| Operating cash flow | — | — | $61.8 | $51.5 |
Q3 residential same-store NOI increased 7.3%, and same-store occupancy was 95.6%, versus 95.4% a year earlier. Residential property expenses were 35.4% of residential revenue in Q3, compared with 36.5%; for the nine-month periods, the ratio was 35.9% versus 36.8%. Nine-month cash used in investing was $130.3 million, including $107.6 million for real estate acquisitions and $22.3 million of property capital improvements. Dividends paid were $48.5 million for the period; dividends declared were $0.18 per share for Q3 and $0.54 year to date.
Balance sheet, debt and liquidity
At September 30, total assets were $1.91 billion, total equity was $1.17 billion, and cash and restricted cash totaled $10.2 million. Notes payable, net, were $522.2 million and revolver borrowings were $149.0 million, or $671.2 million of total debt principal and carrying amounts before presentation adjustments. The $700 million revolving facility had $551 million unused and available at quarter-end. Management reported $3.0 million of cash and $539 million of revolver capacity as of October 24, for stated total liquidity of $542 million.
The $125 million unsecured term loan matures in January 2025, with two one-year extension options; swaps fixed its interest rate at 4.73% through maturity. The revolving facility matures in August 2025, with two six-month extension options. Management reported no scheduled debt maturities before 2025, a 4.8-year weighted-average debt maturity, and compliance with debt covenants at quarter-end. The filing identifies interest-rate exposure, particularly from variable-rate debt and refinancing, as a material market risk.
Material changes, outlook and risks
- Q3 net loss widened primarily because of a $41.9 million impairment charge on Watergate 600 and higher interest expense. The impairment reflected weaker Washington, D.C. metro office-market conditions; fair value was estimated using a Level 3 discounted-cash-flow model, including 80.5% average economic occupancy and a 7.5% terminal capitalization rate.
- Rental revenue rose 3.7% in Q3 and 9.9% for the first nine months. Nine-month NOI increased 11.2%; nine-month NAREIT FFO increased 33.6%. FFO excludes the impairment and real estate depreciation and amortization, so it does not reflect those items in the same way as GAAP net loss.
- Elme acquired the 500-home Elme Druid Hills community in Atlanta on September 29 for a $108.0 million contract price; quarter-end occupancy was 93.4%. The acquisition was funded with cash and revolver borrowings.
- Management said it believes liquidity is adequate for the next 12 months and intends to maintain dividends at or about current levels, subject to quarterly review by the board. It estimated 2023 portfolio investment needs of $35–$40 million, including $22–$27 million of major capital expenditures, and less than $1 million for development and redevelopment. These are expectations, not guaranteed outcomes; the filing provides no earnings or NOI forecast.
- All residential communities had transitioned to Elme management by September 30. Management said it does not anticipate additional transformation costs and expects operational benefits from the transition. Development next to Riverside Apartments remains paused amid macroeconomic uncertainty.
- On October 26, after quarter-end, the board authorized a share repurchase program of up to $50 million through October 25, 2025. It is discretionary, subject to debt restrictions, and no repurchases had been made as of the filing.
- Management cited risks from interest rates, refinancing and access to capital, economic conditions in its Washington, D.C. and Sunbelt markets, tenant demand, property values and execution of its residential strategy. It reported no material change to previously disclosed risk factors, no legal proceedings, and no material off-balance-sheet arrangements.
Investor verification points
- Review the Watergate 600 impairment assumptions and potential for further impairment, particularly given limited observable comparable office-property transactions.
- Track debt refinancing plans and borrowing costs ahead of the January and August 2025 maturities, the revolver’s actual utilization, and compliance with debt covenants.
- Reconcile liquidity at September 30 with the lower cash balance reported as of October 24, and monitor operating cash flow against capital spending and dividends.
- Assess whether same-store rent growth, occupancy and expense trends persist, and whether the Druid Hills acquisition meets operating expectations.
- Confirm dividend sustainability and any share repurchases against capital requirements, FFO and available liquidity; the filing states that future dividends remain at the board’s discretion.