Elme Communities Q2 FY2025 earnings call

• Announced entering into a definitive agreement to sell a portfolio of 19 assets to Cortland for $1.6 billion in cash, expected to close in the fourth quarter subject to shareholder approval and other conditions. • Board approved a plan of sale and liquidation to sell remaining assets, including all multifamily assets and Watergate 600, subject to shareholder approval. • Over a decade ago, launched a strategic transformation to streamline portfolio from 4 asset classes to 1, internalized multifamily operations. • Current market environment made it difficult to lower cost of capital, leading to the sale decision after thorough review. • Intends to return net proceeds from Cortland transaction and other asset sales to shareholders, with initial special distribution estimated between $14.50 and $14.82 per share and additional distributions from remaining assets sale estimated between $2.90 and $3.50 per share. • Washington Metro area monthly effective rent growth outpaces national average, and defense spending projection exceeding prior estimates could offset federal workforce reductions in the region.

In the second quarter, Elme had solid results. The multifamily NOI grew year-over-year by 4.5%, driven primarily by higher rental revenue and strong growth in fee income from operational initiatives. In terms of revenue contribution, the multifamily segment is the key focus as the company has streamlined its portfolio to focus on multifamily.

• Expect to close the sale of 19 assets to Cortland in the fourth quarter. • Intend to sell remaining all multifamily assets and Watergate 600, with marketing process kicking off in the third quarter and aiming to complete sales over the next 12 months. • Initial special distribution following Cortland transaction estimated between $14.50 and $14.82 per share. • Aggregate distributions from remaining asset sales expected between $2.90 and $3.50 per share, totaling between $17.58 and $18.50 per share.

• Current market environment makes it difficult to lower cost of capital to support scaling accretively. • Transaction is subject to shareholder approval, which brings uncertainty. • Pricing and other terms of remaining asset sales may be uncertain. • Remaining asset sales may be affected by processes like TOPA in DC and HSE requirements in Montgomery County which may take time.

Q: Could you provide more color on the building blocks to get to the $320 million midpoint in distributions expected from the sale of the remaining portfolio?

A: Steven M. Freishtat responded that the company's current estimates of the net proceeds of the remaining assets is based on a number of estimates and assumptions including estimated expenses and payments of liabilities, and more information will be in the proxy on the estimates and assumptions.

Q: Your next question is coming from Anthony Paolone from JPMorgan. I know, you may be constrained on what all you could say. But -- to the extent you can, maybe Paul, can you take us a bit into the process and just what liquidity looked like as you brought the company and the portfolios out to market in terms of were there limitations on liquidity as the deal size got bigger or certain quality cuts of assets that had more demand versus others?

A: Paul T. McDermott responded that the Board with the assistance from its dedicated transaction committee conducted a thorough evaluation of all potential strategic alternatives, contacted over 80 potential counterparties including various types of entities, and the Board determined the proposed transaction was advisable for maximizing shareholder value.

Q: Michael Robert Lewis from Truist Securities asked assuming Cortland closes, that leaves us with the 10 assets to talk about. Is there any reason you could give why Cortland left these assets out? Was there a theme?

A: Paul T. McDermott responded that additional information regarding all the alternatives that were evaluated are going to be in our upcoming proxy statement, and the Board determined the combination of this portfolio sale to Cortland plus the individual sales of the remaining assets was the right path to maximize value for shareholders.

Q: John Joseph Pawlowski from Green Street asked about timing of the liquidation. First, on the remaining multifamily assets. Could you put brackets around like fastest and slowest you think you can get or the next buyer could close on the D.C. and Maryland assets that need to go through or potentially need to go through a right of first refusal process?

A: Tiffany M. Butcher responded that Elme tends to begin the process of marketing our assets, the 9 multifamily assets and Watergate starting in the third quarter with the view towards completing all of the asset sales within the next 12 months, and they plan to work with tenant associations to progress the sale process in a timely manner.

Q: Jamie Feldman following up asked about the Washington market leasing volumes across different submarkets and transfer taxes by different submarkets as we think about the sale.

A: Steven M. Freishtat responded that the information will be in the proxy, and Jamie Feldman's other questions regarding management incentives were also responded that additional details on transaction costs will be in the proxy.