Welcome to the Elme Communities Second Quarter 2025 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Amy Hopkins, Vice President and Investor Relations. Amy, please go ahead.

Good morning, and thank you for joining our second quarter earnings call. Today's call will be available for replay on the Investors section of our website. Statements made during this call may constitute forward-looking statements that involve known and unknown risks and uncertainties, which may cause actual results to differ materially, and we undertake no duty to update them as actual events unfold. We refer to certain of these risks in our SEC filings. Reconciliations of the GAAP and non-GAAP financial measures discussed on this call are available in our most recent earnings press release and financial supplement, which was distributed yesterday and can be found on the Investors page of our website. Presenting on the call today will be Paul McDermott, our CEO; Steve Freishtat, our CFO; Tiffany Butcher, our COO; and Drew Hammond, our CFO and Treasurer. And with that, I will turn the call over to Paul.

Thanks, Amy. Welcome, everyone, and thank you for joining us this morning. We're pleased to report another solid quarter for Elme, reflecting both the stability of our portfolio and the continued execution of our operating strategy. Our second quarter results are detailed in our earnings release and associated filings. And in addition to discussing our results, I want to spend time today discussing the announcement regarding our strategic alternatives review process. Steve will provide additional financial details about the proposed portfolio sale transaction and future asset sales, and Tiffany will cover our operating trends and initiatives. On Monday, we announced that our Board of Trustees completed the formal evaluation of strategic alternatives that it announced back in February. After an extensive evaluation, we have entered into a definitive agreement to sell a portfolio of 19 assets to Cortland, an Atlanta-based multifamily real estate investment, development, and management company. At closing, which we currently expect to occur in the fourth quarter following receipt of shareholder approval and satisfaction of other customary closing conditions, Elme will receive from Cortland $1.6 billion in cash, subject to certain adjustments. Along with the sale to Cortland, the Board has also approved a plan of sale and liquidation to sell our remaining assets. As such, we will be looking for buyers of all Elme's remaining multifamily assets as well as Watergate 600. This plan of sale and liquidation is also subject to shareholder approval. I want to take a moment to provide some history leading up to this transaction. Over a decade ago, we launched a strategic transformation that streamlined our portfolio from four asset classes into one, including the sale of our office and retail portfolios in 2021. We designed and built a scalable operating platform, internalized multifamily operations, and executed platform initiatives to improve our performance and profitability with the goal of reducing our cost of capital in order to scale our portfolio and further maximize shareholder value. Despite the success we've had in transforming our company into a focused multifamily platform with strong operating capabilities, the current market environment has made it difficult to lower our cost of capital in a way that supports our ability to scale accretively. Our agreement with Cortland and the decision to sell our remaining assets came after a thoughtful and deliberate review process. Taking into account the work the company has already undertaken to scale and geographically diversify our portfolio. The review process by our Board and advisers was robust. More than 80 potential counterparties were contacted, including pension funds, insurance companies, institutional advisers, financial sponsors, multifamily managers, sovereign wealth funds, family offices, and other public REITs, underpinning its unanimous determination that the combination of the sale of these assets to Cortland and a plan of sale and liquidation is expected to result in the greatest value for shareholders. Importantly, for Elme, we anticipate a seamless transition of ownership to Cortland, enabling continuity of operations for both our residents and community team members and continuing our strong legacy of customer service excellence. We expect to prepare and file a preliminary proxy as soon as reasonably practical that will more fully describe the proposed Cortland sale transaction and the proposed plan of sale and liquidation. We intend to convene a special meeting this fall to approve these transactions. The Elme Communities Board has determined that these proposed transactions are in the best interest of our shareholders and unanimously recommends to our shareholders that they approve them. As noted in our announcement, we intend to commence the marketing and sale of our remaining assets in the near future with a view toward completing these asset sales over the next 12 months. This marketing process should kick off in the third quarter and certain of these asset sales are likely to move forward regardless of the outcome of the shareholder votes on the Cortland transaction and plan and sale of liquidation, subject to the acceptability of pricing and other terms. Our goal, as always, is to maximize value for Elme shareholders. And with that, I'll turn it over to Steve to provide more detail around the shareholder benefits of this transaction and the subsequent sales.

Thanks, Paul. As noted in our press release on Monday, Elme intends to return net proceeds from the Cortland transaction and other asset sales to shareholders. Following the closing of the Cortland transaction, the company intends to declare an initial special distribution to shareholders, funded by the net proceeds from the Cortland transaction and a portion of the proceeds from the new debt we expect to place on Elme's remaining assets. We estimate that the amount of this initial special distribution will be between $14.50 and $14.82 per share after considering, among other factors, repayment of all of our existing corporate debt, the anticipated amount of new debt financing, and the company's estimated transaction costs in connection with the portfolio sale transaction. After this, subject to shareholder approval of the plan of sale and liquidation and depending on the timing and outcome of asset sales, we expect to make additional distributions to our shareholders. Our current estimate of the aggregate amount of additional distributions to shareholders from the sale of Elme's nine remaining assets and Watergate 600 is between $2.90 and $3.50 per share, accounting for, among other factors, estimated transaction expenses, payment of liabilities, and the establishment of necessary reserves to satisfy outstanding liabilities, obligations, and expenses associated with the final dissolution activities. In total, the aggregate amount of distributions is expected to be between $17.58 and $18.50 per share. These figures include the company's quarterly dividend distribution of $0.18 per share, which has been declared and is to be paid on October 3, 2025. The tax treatment of the distributions we make following asset sales may vary depending on each shareholder's particular situation. But assuming the Cortland transaction closes and the plan of sale and liquidation is approved by shareholders, the initial special distribution following the Cortland transaction and all subsequent liquidating distributions by Elme in connection with remaining asset sales generally should be treated as a return of capital to shareholders to the extent of their basis in their Elme shares, with any excess treated as capital gain. To the extent that the liquidating distributions are less than a shareholder's tax basis in its Elme shares, that shareholder generally would recognize a capital loss on their Elme shares. Additional information on both the Cortland transaction and the plan of sale and liquidation, as well as a more complete summary of the potential tax considerations and consequences, will be available in the preliminary proxy that Paul mentioned earlier. Looking ahead, the Elme team expects to report more material developments relating to the sale of our remaining assets through quarterly SEC filings as appropriate. That wraps up the overview of key financial details related to the transactions. I'll turn it over to Tiffany for an update on operating results for the second quarter.

Thanks, Steve. As Paul stated, we are pleased to have delivered a solid quarter with year-over-year multifamily NOI growth of 4.5%, driven primarily by higher rental revenue and strong growth in fee income from our operational initiatives. Our operating initiatives have driven strong growth and, combined with our strategic approach to asset management and our ongoing focus on enhancing customer service, have led to consistent improvements in our operating performance over time. I want to take a moment to recognize and thank our dedicated team members, whose efforts over the past several years have been instrumental in executing our long-term plan to enhance the value of the living experience for our residents. We believe the foundation we've built positions us to realize significant value through the announced Cortland sale, as well as through the sales of our remaining portfolio. Turning to the near-term macro environment, monthly effective rent growth for the Washington Metro area continues to outpace the national average according to data from RealPage, and the Washington Metro ranked sixth in the nation in terms of transaction volume during the second quarter. Defense spending is now projected to exceed prior estimates, which could meaningfully offset broader federal workforce reductions in the region. Looking ahead, we remain confident in the strength of our portfolio and our ability to achieve favorable executions as we sell our remaining assets. And with that, I'll turn it back to Paul for some closing remarks.

Thanks, Tiffany. I want to take a moment to reiterate Tiffany's thanks to our entire team, both past and present, for their incredible hard work and dedication over the years. Their efforts have been instrumental in driving a successful outcome for our shareholders. Through periods of change, our teams continue to uphold and advance our brand values, delivering excellent customer experiences that distinguished us in the market and redefine what customers can expect at value-driven price points. I'd also like to extend my appreciation to our Board of Trustees for their support and for their thoughtful deliberation and careful selection of the path they believe offers the best outcome and greatest value. With that, I'll hand the call over to the operator to begin Q&A.

Your first question is coming from Cooper Clark from Wells Fargo.

I'm wondering if you could provide more color on the building blocks to get to the $320 million midpoint in distributions expected from the sale of the remaining portfolio. If you could break out sort of what's coming from expected pricing on the assets and kind of the offset from any expected leakage or liabilities and reserves that Steve spoke to earlier on the call? Just trying to get a better sense on what the pricing expectation is embedded in that $320 million?

Yes, Cooper, this is Steve. And to the extent that I can get to the information right now, the company's current estimates of the net proceeds, as you mentioned, of the remaining assets is based on a number of estimates and assumptions, which includes estimated expenses and payments of liabilities. As far as additional information, there will be more in the proxy on the estimates and assumptions that will be more fully described when the proxy is filed in connection with these proposed transactions.

Okay. I guess just zooming in on a few of the specific assets in the remaining portfolio. If we could just quickly talk about both Watergate and Riverside and sort of how to think about those assets and the sale. I guess on Watergate, could you just sort of talk about any potential office to residential conversion for a potential buyer? And what's the right way to think about the sale on Watergate? I appreciate that you bought it in 2Q, '17 for $135 million. And then also Riverside, given the density and the development upside, is that fair to assume a higher cap rate on that versus some of the D.C. and Maryland and Atlanta portfolio just given that it will take a specific buyer?

Cooper, it's Paul. Let's start with the Watergate. As you know, we have not formally initiated a sales process for the Watergate. Our primary focus has been on its operations and leasing. We are eager to observe the market pricing, although we understand that D.C. remains a challenging market, ranking sixth in the nation for transaction volume, as Tiffany mentioned. We plan to put these assets on the market in the third quarter, aiming to complete the sales over the next year. Regarding Riverside, it's a larger asset, and we are encouraged by the trends we've noticed in the market. Concerning the additional FAR we discussed, we will monitor how others approach the transaction, particularly in distinguishing between income and additional FAR. We expect to have clearer insights on this in the coming months.

Great. And then on the Maryland portfolio, just curious how much potential policy risk comes into play? And what's the right way to think about some of the puts and takes related to Maryland specifically? And then also a question for Tiffany, if you could just sort of talk about the RemainCo portfolio and some of the trends year-to-date versus the kind of legacy portfolio average, whether it's revenue growth or blended rent growth?

Sure. So Cooper, let's start with your question on the Maryland assets. As you know, rent control was put in place in Montgomery County, and I think that has now been baked into how investors are underwriting assets. I think it's a pretty understandable process in Montgomery County. We continue to see transaction volume in Montgomery County, so we are excited to launch the marketing process for those assets. And as we stated in our prepared remarks, we are confident in our ability to ultimately execute successfully on the sale of those communities. In terms of your question on RemainCo, I would refer you to our supplement, where we provide asset-level detail starting on Page 22 of our supplement. But if you were just kind of asking about big picture trends, I would be more than happy to kind of talk about the trends we're seeing in our various markets. As I mentioned in my prepared remarks, Northern Virginia continues to be a very strong market for growth in the area. We continue to see both strong new lease rate growth as well as renewal rent growth. Maryland, also, we've seen positive blended lease rate growth year-to-date, really driven by very strong renewals there. And D.C. has tended to be a little bit more flat in terms of blended lease rate growth year-to-date, driven by strong renewals that are covering some of the softness in new lease rate growth in the D.C. market.

Your next question is coming from Anthony Paolone from JPMorgan.

Congratulations on successfully navigating your process. I understand there may be some limitations on what you can share. However, if possible, could you provide insights into the process and what liquidity looked like as you presented the company and portfolios to the market? Were there any restrictions on liquidity as deal sizes increased or for certain high-demand asset quality segments? Any context you can provide regarding the liquidity available during this process would be appreciated.

Sure, Tony. The Board, with the assistance from its dedicated transaction committee, which was comprised of all independent trustees, really conducted a thorough evaluation of all the potential strategic alternatives, including keeping Elme under its current business strategy. But the goal, obviously, when we started this front, we announced this process in February was making an informed determination that the Board believed would be the best opportunity for maximizing value for our shareholders. As I think you know, we engaged financial advisers to assist with this process. And those advisers contacted everyone from, as I said earlier, pension funds, insurance companies, institutional advisers, financial sponsors, multifamily managers, sovereign wealth funds, family offices, and other public REITs. I think the Board and the transaction committee recognized our goals prior to the strategic process of being our efforts to undertake to scale the portfolio and reduce its cost of capital. As we looked at operators, the management team and Board really tried to scale the business, grow the operations effectively, and make accretive acquisitions. The process did not produce a viable offer on an entity level basis at a price that the transaction committee and the Board considered more attractive than the combination of the portfolio sale to Cortland and the liquidating distributions that the company would make with our plan of sale and liquidation. I think the Board unanimously determined that what we've proposed is advisable and in the best interest of the shareholders, Tony.

Okay. Was there a dynamic where did the potential bidders want more value-add versus more core, or just the size got a little bit too big? Or was there anything to glean from that?

I think a lot of this will be addressed in the proxy statement that's going to be coming out. But I think you had a wide array of, as I said, we contacted over 80 capital sources, and you had a wide array of capital sources with different criteria.

Okay. I understand. And then just second question. Anything you can give us in terms of just total costs for the transaction, either advisers originating that piece of debt that you'll take on, just transfer taxes, anything of that nature that you could put brackets around?

Tony, I mean, in our estimates, those are factored in. But kind of similar to what Paul just mentioned, the additional information regarding the transaction costs will be in the proxy statement that will be filed in due course.

Your next question is coming from Michael Lewis from Truist Securities.

Great. So Paul, I appreciate your comments. I know it must be bittersweet to maximize value in this way after all the work you and the team have done. My question, 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? I realize Watergate is a unique asset. But among the remaining apartment assets, was there something about those that didn't meet their investment goals or their criteria or whatever it is, is there some reason that kind of runs through at why those assets are left out of the deal?

Michael, as I said earlier, it was a very thorough process that was conducted by our Board and with the transaction committee, and a number of strategic alternatives and combinations were considered. And as we all have said, additional information regarding all of the alternatives that were evaluated are going to be in our upcoming proxy statement. But our Board determined that the combination of this portfolio sale to Cortland, plus the individual sales of the remaining assets is the right path forward to maximize value for our shareholders.

Okay. Were there interested buyers for the remaining assets as you ran the process that maybe you could go back to? And do you think being a motivated seller impacts the value now as you liquidate those assets?

I'm sure from a macro level, Michael, I think that, obviously, when we look back at our process, you're going to have a wider pool of bidders on a one-off basis versus an entity-level basis. So we're looking forward to commencing our sales process and getting the maximum value allowable from the market for our shareholders.

Okay. And then just lastly for me. I assume you'll be making the additional distributions as you close deals. So it won't just be one at the end. And also as you run the operation forward now, however long this takes. How lean does the operation get in terms of overhead and kind of continuing to run the company now in the next few months?

Yes, Michael, as far as the distributions, obviously, we'll suspend our quarterly distribution after the $0.18 distribution that we have that I mentioned in my prepared remarks in October. But future liquidating distributions would be at the board's discretion following future sales. As far as you kind of talked about expenses, we expect some changes will be made to expenses. As we conduct the sales of the remaining assets and begin to reduce the size of the company. Those estimates are in the numbers that we have talked about.

Your next question is coming from John Pawlowski from Green Street.

I know you can't quantify the expected frictional costs, but I'm just confirming that the distributions you laid out to shareholders in the press release are net of all expected costs and there aren't any additional costs that might drive a diminution of proceeds to shareholders, when all is said and done.

John, this is Steven. And you're correct that the estimates that we have include estimated expenses and payment of liabilities.

Okay. I wanted to ask a few questions regarding the timing of the liquidation. First, concerning the remaining multifamily assets, could you indicate the fastest and slowest timelines for a potential buyer to close on the D.C. and Maryland assets that may need to go through a right of first refusal process? What do you think is the quickest and the slowest these multifamily assets could sell?

I can start by saying that Elme usually begins marketing our nine multifamily assets and Watergate in the third quarter, aiming to complete all asset sales within the next 12 months. Regarding the D.C. and TOPA process, we have extensive experience in this market and are planning to sell the D.C. assets along with the Maryland assets sooner rather than later, considering the time required for both the TOPA process in D.C. and HSE requirements in Montgomery County. We will collaborate with any tenant associations or prospective buyers to ensure the sale process moves forward efficiently. We believe that our timelines for completing the sales within the next 12 months are realistic, factoring in these processes.

I have a question about why it would take a full 12 months. Is that timeframe just meant to provide some cushion and possibly a dose of caution? Or do you genuinely believe that the TOPA process or a ROFR process in Maryland could actually take 12 months? I thought it would typically be more of a 4- to 6-month process in these markets, but I could be mistaken.

Yes, John, when we're talking about 12 months, we are talking about the entire RemainCo portfolio. We're not commenting on the specific timeline for any one asset. So we have laid out the view of trying to complete all of the asset sales within that 12-month period.

One more from me. Could you share some views on the lease roll at Watergate? I think it's 82% leased right now. Where is that leasing percentage likely to trend in the next 6 months? Based off of no move-outs and leasing progress you're doing right now?

Well, John, we're still in discussions with our largest tenant to determine their ultimate footprint, but your 82% number is accurate, which is where we hope to finish the end of 2025. We do recognize that we have almost 9% expiring in 2026, but we hope to be successful in some of our re-leasing efforts on that.

Okay. Sorry, one more, bear with me. I want to go back to the timing. Is there anything other than potential challenges of selling Watergate and the regulation hurdles for the multifamily? Is there anything idiosyncratic in this portfolio that would take 12 months to RemainCo to liquidate? Again, it strikes me as a long horizon.

No. I think we've laid out that there will be different timelines associated with each asset in the portfolio, but we are going to begin kicking them off starting in the third quarter, and we'll be working to execute the sale process as quickly as practically possible.

Your next question is coming from Cooper Clark from Wells Fargo.

This is Jamie Feldman following up. Stepping away from the transaction for a moment, you have had front-row seats to what has been one of the most controversial and intriguing apartment markets in the country this year with the Dose announcements and all the fluctuations in the market. Can you discuss the headlines, their timing, and how they have impacted leasing volumes in your markets and submarkets? We're all trying to grasp the real impact. Is the D.C. market surprisingly performing well so far? Is that over, or could there be a downturn once layoffs begin and people lose their payments? I'm interested in your thoughts on the different submarkets within D.C.

Jamie, it's Paul. I'll start, and then I'll ask Tiffany to follow up on our portfolio and what we've observed. I believe the concerns raised at the beginning of the year were somewhat exaggerated regarding our ability to maintain momentum. We aimed to clarify this in our guidance for 2025. We did notice a slowdown in the latter half of the year, which we have considered, and we accounted for various scenarios and outcomes that could affect both our occupancy and pricing power. However, I think that right now, the market, and Tiffany can elaborate on this, will experience some form of slowdown due to seasonality or other external factors. Nevertheless, when you examine Elme’s performance during the first six months of this year, we've consistently exceeded expectations, and we remain very positive about our portfolio and the assets moving forward. Tiffany?

Yes, just kind of adding on to that. As I mentioned in my prepared remarks, monthly effective rent growth for the Washington Metro area continues to outpace the national average. And we also see that federal defense spending that is projected to happen is now going to exceed prior estimates, which could meaningfully offset some of the broader potential federal workforce reductions that Paul mentioned. In terms of what we've been seeing actually in our portfolio year-to-date, occupancy has remained very strong in both the first and second quarter. Our occupancy in the DMV exceeded 96%. And as I mentioned in response to Cooper's earlier question, Year-to-date, we have had strong positive blended lease rate growth in our Virginia portfolio, and we've seen positive blended lease rate growth in our Maryland portfolio. D.C. properties remain a little bit flattish. But overall, the DMV has continued to perform well in terms of both occupancy and lease rate growth.

And then are you able to talk us through transfer taxes by your different submarkets as we think about the sale?

Jamie, I think that information will be in the proxy that we will, of course, be submitting in due course.

Okay. And then as we think about management incentives from a transaction, is that all baked into the fully diluted share count? Or are there going to be incremental incentives on a sale?

All of the transaction costs we are estimating will have additional details in the proxy. Everything we expect regarding transaction costs is reflected in the estimates we have provided.

Thank you, Jamie.

Thank you. That concludes our Q&A session. I will now hand the conference back to Paul McDermott, Chief Executive Officer, for closing remarks. Please go ahead.

Thank you, everyone, for joining us today, and we look forward to keeping you informed as we move forward with our plan to return capital to our shareholders.

Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.