Executive Summary / Key Takeaways

• Elme Communities, a multifamily REIT, is undertaking a strategic liquidation to maximize shareholder value, following a decade-long transformation that ultimately faced challenges in accretive scaling.
• The company has entered a definitive agreement to sell 19 multifamily properties to Cortland for $1.6 billion, with a plan to sell its remaining 9 multifamily assets and Watergate 600 by June 30, 2026.
• Shareholders are expected to receive total aggregate distributions of $17.58 to $18.50 per share, comprising an initial special distribution of $14.50 to $14.82 per share and additional liquidating distributions.
• Operational initiatives, particularly the managed Wi-Fi program and renovations, have demonstrated strong returns and contributed to Net Operating Income (NOI) growth, enhancing asset value prior to disposition.
• Key risks include the timely completion of asset sales, potential for higher-than-estimated transaction costs and liabilities, and ongoing shareholder litigation.

The Strategic Pivot: From Transformation to Value Realization

Elme Communities, a Maryland real estate investment trust with roots tracing back to 1960, has embarked on a decisive path to unlock shareholder value through a comprehensive liquidation. For over a decade, Elme underwent a significant strategic transformation, streamlining its portfolio from four diverse asset classes to a focused multifamily platform, notably divesting its office and retail portfolios in 2021. This strategic evolution aimed to build a scalable operating model, internalize multifamily operations, and enhance profitability to reduce its cost of capital and support accretive growth.

Despite these efforts and the successful transformation into a focused multifamily platform with robust operating capabilities, Elme's shares continued to trade at a discount to its estimated private market value. The prevailing market environment also presented difficulties in lowering its cost of capital to enable accretive scaling. This challenge prompted the Board of Trustees to initiate a formal evaluation of strategic alternatives in February 2025. After an extensive review process involving over 80 potential counterparties, the Board unanimously determined that a combination of a portfolio sale and a plan of liquidation offered the greatest value for shareholders.

Operational Excellence and Technological Edge

Elme's operational strategy has consistently focused on enhancing the resident experience and driving efficiency, particularly within its mid-market rent segment. The company's value proposition is built on providing a higher level of quality, service, and experience for middle-income renters in its core Washington, D.C. metro and Sunbelt regions.

A key technological differentiator for Elme has been its managed Wi-Fi program. This initiative, alongside smart home technology, is designed to improve resident satisfaction and generate additional revenue. The managed Wi-Fi program is ramping up faster than anticipated, with expectations to capture $600,000 to $800,000 of additional NOI in 2025 from its initial two phases. Once fully integrated by mid-2026, these phases are projected to generate $1.5 million to $2 million of additional NOI annually. This technology not only enhances the competitive moat by offering a superior amenity but also directly contributes to financial performance through increased fee income.

Beyond technology, Elme has consistently executed a value-add renovation program. In 2024, the company completed approximately 500 full renovations at an average cost of $17,000 per unit, achieving an average return on investment (ROI) of approximately 17%. The company plans to complete another 500 full renovations in 2025 with a similar targeted ROI, leveraging its pipeline of nearly 3,000 homes. These renovations directly enhance asset value and rental income, a critical factor in maximizing proceeds during the current liquidation phase. Furthermore, the successful launch of Elme Resident Services in 2024 streamlined resident account management, collections, and renewal processes, improving operating efficiency and contributing to NOI growth.

Market Dynamics and Financial Performance

Elme's portfolio performance has been influenced by distinct dynamics in its primary markets. The Washington, D.C. Metro area has demonstrated resilience, with monthly effective rent growth outpacing the national average and ranking sixth in transaction volume during the second quarter of 2025. Northern Virginia, where nearly 75% of Elme's Washington Metro homes are located, has shown strong private sector employment growth, mitigating concerns about federal workforce reductions. Supply dynamics in the Washington Metro are favorable, with annual net inventory growth projected to decline steeply to 1.1% by Q4 2026, the lowest level since 2012.

In Atlanta, while net inventory ratios remained elevated at 4% during Q3 2024, a gradual improvement in supply dynamics is anticipated, with significant declines in units under construction pointing to very low supply in 2026 and 2027. Elme has prioritized occupancy over rate growth in Atlanta to maximize NOI in the current competitive environment and has seen improvements in bad debt performance due to process changes and technology enhancements, which are expected to be a larger contributor to revenue growth in 2025.

For the nine months ended September 30, 2025, Elme reported a net loss of $131.76 million, a substantial increase from $10.09 million in the prior year period. This was predominantly driven by a significant real estate impairment charge of $111.70 million recognized in the third quarter of 2025, related to properties not included in the portfolio sale. Real estate rental revenue from same-store residential properties increased by 3.3% to $172.38 million for the nine months ended September 30, 2025, reflecting higher rental income, lower vacancy, and improved ancillary income. However, residential expenses from same-store properties increased by 4.5% to $64.58 million, primarily due to higher repairs and maintenance, personnel compensation, and contract services. General and administrative expenses also rose by $12.30 million, largely due to $10 million in professional fees associated with the Proposed Transactions.

The Liquidation Strategy and Shareholder Returns

The core of Elme's current investment thesis lies in its strategic liquidation. On August 1, 2025, the company entered into a definitive agreement to sell 19 multifamily properties to Cortland for an aggregate purchase price of $1.60 billion. Concurrently, the Board approved a Plan of Sale and Liquidation for the company's remaining assets, which include 9 additional multifamily properties and its single office property, Watergate 600. The company aims to complete the sale of these remaining assets by June 30, 2026.

This strategy is expected to yield significant returns for shareholders. An initial special distribution of $14.50 to $14.82 per share is anticipated following the closing of the Cortland transaction, after accounting for existing debt repayment, new debt financing, and estimated transaction costs. Subsequent liquidating distributions from the sale of the remaining assets are estimated to be between $2.90 and $3.50 per share. In total, shareholders are expected to receive aggregate distributions ranging from $17.58 to $18.50 per share. The company suspended its dividend reinvestment program in September 2025 and will suspend regular quarterly distributions after the October 3, 2025 payment.

To facilitate the liquidation, Elme secured a commitment for new debt financing of $520 million to $565 million, which will be secured by the assets remaining after the Cortland sale. This loan has an initial term of one year with a one-year extension option, providing necessary liquidity during the wind-down process.

As of October 21, 2025, Elme's total liquidity stood at $302.20 million, comprising cash and available capacity on its revolving credit facility.

Competitive Positioning and Outlook

Elme Communities has carved out a strong regional market position in the Washington Metro area, leveraging its deep local expertise to foster stronger tenant relationships and efficient property management. This localized strategy provides a competitive edge against larger, more diversified national players like AvalonBay Communities (AVB) and Equity Residential (EQR), whose broader presence might dilute their focus on specific regional nuances. Elme's diversified portfolio, encompassing multifamily, office, and retail assets (prior to the liquidation), offered a balanced revenue stream, potentially providing greater resilience against sector-specific downturns compared to more specialized REITs like Vornado Realty Trust (VNO) in commercial or Federal Realty Investment Trust (FRT) in retail.

However, Elme's market concentration in the Washington Metro and Sunbelt regions, coupled with its comparatively smaller scale, presented vulnerabilities. Larger competitors benefit from economies of scale, potentially leading to greater operational efficiency and more robust financial performance metrics such as profitability and cash flow generation. While Elme's Class B apartments have historically outperformed Class A during economic volatility, and its submarkets generally face less supply pressure than national averages, the challenge of achieving accretive scaling ultimately drove the liquidation decision. The company's managed Wi-Fi and renovation programs, with their strong ROIs, have enhanced the value of its assets, making them more attractive in the current market. The broader industry trend of capital flowing into the living sector, coupled with strong demand drivers like wage growth and in-migration in its markets, provides a favorable backdrop for the asset dispositions.

Risks and Considerations

The strategic liquidation, while aiming to maximize shareholder value, is not without risks. The successful completion of the Portfolio Sale Transaction with Cortland and the subsequent sale of the Remaining Company Assets are subject to shareholder approval and customary closing conditions. There is no assurance that these transactions will be completed on the anticipated timeline or at expected prices, which could impact the amount and timing of liquidating distributions.

Transaction-related expenses, including legal, accounting, and advisory fees, are substantial and could be higher than estimated, potentially reducing net proceeds. The company also faces the risk of unforeseen liabilities, including potential litigation, which could further diminish distributions. Indeed, shareholder litigation has already been initiated, alleging misrepresentation in the proxy statement. The Plan of Sale and Liquidation also carries risks such as challenges in retaining key personnel, the need for additional capital, and the eventual delisting of Elme's common shares from the NYSE. Furthermore, the sale of properties could incur a 100% penalty tax if deemed a "prohibited transaction" under the Internal Revenue Code, or gains could be taxed at corporate rates if sold through a taxable REIT subsidiary, thereby reducing shareholder distributions.

Conclusion

Elme Communities is at a pivotal juncture, executing a strategic liquidation designed to unlock the inherent value of its transformed portfolio for shareholders. The decision to sell its assets, including a significant multifamily portfolio to Cortland and its remaining properties, represents a decisive response to market conditions that hindered its ability to scale accretively as a standalone entity. While the process entails inherent risks related to transaction completion, costs, and potential liabilities, the projected aggregate distributions of $17.58 to $18.50 per share underscore the potential for substantial shareholder returns. The company's historical operational improvements, including its successful renovation program and the implementation of value-enhancing technologies like managed Wi-Fi, have positioned its assets favorably for disposition. Investors should closely monitor the progress of the asset sales, the management of associated costs and liabilities, and the resolution of any legal challenges, as these factors will be critical in determining the ultimate value realized from this strategic pivot.