ELME Elme Communities

Elme Communities (the “Company”) (NYSE: ELME), a multifamily REIT with communities in the Washington DC metro area and the Atlanta metro area, reported financial and operating results today for the quarter ended September 30, 2023:

Financial Results

• Net loss was $43.6 million, or $0.50 per diluted share, including a $41.9 million non-cash impairment charge as described below
• NAREIT FFO was $20.1 million, or $0.23 per diluted share
• Core FFO was $21.4 million, or $0.24 per diluted share, up over 4% from the prior year period primarily driven by rental rate growth
• Net Operating Income (NOI) was $36.9 million, up over 5% from the prior year period primarily driven by rental rate growth

Operational Highlights

• Same-store multifamily NOI increased by 7.3% compared to the prior year period
• Effective blended Lease Rate Growth was 3.0% during the quarter for our Same-store Portfolio, comprised of effective new Lease Rate Growth of 0.1% and effective renewal Lease Rate Growth of 5.1%
• Average Effective Monthly Rent per home increased 4.9% compared to the prior year period for our Same-store Portfolio
• Same-store Retention was 61% while achieving strong renewal lease rate growth
• Same-store multifamily Average Occupancy was 95.6% during the quarter, up 0.2% compared to the prior year period
• Same-store multifamily Ending Occupancy was 95.7% as of September 30, 2023, up 0.4% compared to the prior year period

Acquisitions

• Completed the acquisition of Elme Druid Hills in Atlanta, GA for $108.0 million on September 29, 2023
• Elme Druid Hills is a high-quality value-add community with extensive renovation potential in a submarket that is expected to continue to benefit from growing demand as a result of recent healthcare and medical facility investments. This acquisition brings our total home count in the Atlanta metropolitan area to approximately 2,300 homes, allowing us to capitalize on our new operating platform and further optimize our regional operating costs.
• Transitioned Elme Druid Hills to our operating platform and retained 100% of the community team, providing continuity for existing residents

Liquidity Position

• Available liquidity was approximately $560 million as of September 30, 2023, consisting of availability under the Company's revolving credit facility and cash on hand
• Annualized third quarter net debt to adjusted EBITDA was 5.7x, due to the acquisition of Elme Druid Hills, which occurred at the end of the quarter. Annualized net debt to adjusted EBITDA ratio is expected to trend to the mid-5's by year end.
• The Company has no debt maturities until 2025 and no secured debt

Other Updates

• Our net loss during the quarter ended September 30, 2023 includes a $41.9 million non-cash impairment charge to reduce the carrying value of Watergate 600 to its estimated fair value, reflecting changes in market conditions in the Washington DC metro region office market.

"We are pleased to announce the acquisition of Elme Druid Hills, which aligns with our Class B value-add strategy and strengthens our Atlanta footprint," said Paul T. McDermott, President and CEO. "This property offers renovation potential for all 500 homes and sits on nearly 50 acres of land, which is a rare find in an affluent inside-the-perimeter location in Atlanta. At a price that represents a discount to replacement cost of over 30%, we believe that this acquisition will perform very well and drive long-term shareholder value."

Third Quarter Operating Results

• Multifamily same-store NOI - Same-store NOI increased 7.3% compared to the corresponding prior year period driven primarily by higher base rent. Average occupancy for the quarter increased 20 basis points from the prior year period to 95.6%.
• Other same-store NOI - The Other same-store portfolio is comprised of one asset, Watergate 600. Other same-store NOI decreased by 3.9% compared to the corresponding prior year period due to lower occupancy. Watergate 600 was 87.8% occupied and leased at quarter end and we expect occupancy to remain flat through year end.

2023 Guidance

"We reported a solid third quarter and our results and forward-looking trends align with our current Core FFO outlook for the year," said Steven Freishtat, Executive Vice President and CFO. "We remain confident in our outlook for high single digit same-store multifamily NOI growth this year, which represents very strong performance during a year of transition. With the execution risk related to our transition to Elme management fully behind us, we are focused on realizing the full benefits of our new multifamily platform and delivering operational upside through 2025 and beyond."

Management is tightening the range of its 2023 Core FFO guidance and maintaining its midpoint at $0.98 per fully diluted share. Core FFO for 2023 is now expected to range from $0.97 to $0.99 per fully diluted share. The following assumptions are included in the Core FFO guidance for 2023:

Full Year 2023 Outlook on Key Assumptions and Metrics

• Same-store multifamily NOI growth is expected to range from 8.0% to 9.0%
• Non-same-store multifamily NOI is now expected to range from $13.0 million to $13.75 million, adjusted to include the acquisition of Elme Druid Hills
• Other same-store NOI is now expected to range from $12.75 million to $13.25 million
• Interest expense is now expected to range from $30.25 million to $30.75 million, adjusted to include the acquisition of Elme Druid Hills
• Reflects internal transformation costs for 2023 ($6.3 million). The internalization of community-level operations are now complete and no additional transformation costs are expected.
• No additional acquisitions are assumed in 2023.

Full Year 2023	Prior	Current
Core FFO per diluted share	$0.96 - $1.00	$0.97 - $0.99
Net Operating Income Assumptions
Same-store multifamily NOI growth	8.0% - 9.0%	8.0% - 9.0%
Non-same-store multifamily NOI (a)	$12.0 million - $12.75 million	$13.0 million - $13.75 million
Non-residential NOI (b)	~$0.8 million	~$0.8 million
Other same-store NOI (c)	$12.5 million - $13.25 million	$12.75 million - $13.25 million
Expense Assumptions
Property management expense	$8.0 million - $8.5 million	$8.0 million - $8.25 million
G&A, net of core adjustments	$24.5 million - $25.5 million	$24.75 million - $25.25 million
Interest expense	$28.0 million - $28.75 million	$30.25 million - $30.75 million
(a) Includes Elme Sandy Springs, Elme Cumberland, Elme Marietta, Elme Druid Hills and Riverside Development. Guidance does not contemplate any additional acquisitions or dispositions.
(b) Includes revenues and expenses from retail operations at multifamily communities
(c) Consists of Watergate 600

Elme Communities' 2023 Core FFO guidance and outlook are based on a number of factors, many of which are outside the Company's control and all of which are subject to change. Elme Communities may change the guidance provided during the year as actual and anticipated results vary from these assumptions, but Elme Communities undertakes no obligation to do so.

2023 Guidance Reconciliation Table

A reconciliation of projected net loss per diluted share to projected Core FFO per diluted share for the full year ending December 31, 2023 is as follows:

	Low			High
Net loss per diluted share	$	(0.15	)	$	(0.13	)
Real estate depreciation and amortization		1.03			1.03
NAREIT FFO per diluted share		0.88			0.90
Core adjustments		0.09			0.09
Core FFO per diluted share	$	0.97		$	0.99

Dividends

On October 4, 2023, Elme Communities paid a quarterly dividend of $0.18 per share.

Elme Communities announced today that its Board of Trustees has declared a quarterly dividend of $0.18 per share to be paid on January 4, 2024 to shareholders of record on December 21, 2023.

Stock Repurchase Program

On October 26, 2023, the Board authorized and approved a share repurchase program of up to $50 million of the Company’s common shares of beneficial interest, which runs through October 25, 2025, unless extended by the Board. Under the share repurchase program, the Company can repurchase shares through open market purchases, including through Rule 10b5-1 trading programs, in privately negotiated transactions, or in such other manner that would comply with applicable securities laws and subject to compliance with existing debt agreements. The Company will evaluate the timing of share repurchases and the number of shares to be repurchased based on opportunities to enhance shareholder value by purchasing shares at times when the Company believes its shares are trading at a discount to net asset value per share as part of its broader capital allocation strategy, which includes preserving the strength of the balance sheet, and continuing to scale its portfolio.

Presentation Webcast and Conference Call Information

The Third Quarter 2023 Earnings Call is scheduled for Friday, October 27, 2023 at 10:00 A.M. Eastern Time. Conference Call access information is as follows:

USA Toll Free Number:	1-888-506-0062
International Toll Number:	1-973-528-0011
Conference ID:	592356

The instant replay of the Earnings Call will be available until Friday, November 10, 2023. Instant replay access information is as follows:

USA Toll Free Number:	1-877-481-4010
International Toll Number:	1-919-882-2331
Conference ID:	49067

The live on-demand webcast of the Conference Call with presentation slides will be available on the Investor section of Elme Communities' website at www.elmecommunities.com. Online playback of the webcast and presentation slides will be available following the Conference Call.

About Elme CommunitiesElme Communities is committed to elevating what home can be for middle-income renters by providing a higher level of quality, service, and experience. The Company is a multifamily real estate investment trust that owns and operates approximately 9,400 apartment homes in the Washington, DC metro and the Sunbelt, and owns approximately 300,000 square feet of commercial space. Focused on providing quality, affordable homes to a deep, solid, and underserved base of mid-market demand, Elme Communities is building long-term value for shareholders.

Note: Elme Communities' press releases and supplemental financial information are available on the Company website at www.elmecommunities.com or by contacting Investor Relations at (202) 774-3200.

Forward Looking StatementsCertain statements in our earnings release and on our conference call are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Elme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional factors which may cause the actual results, performance, or achievements of Elme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to: risks associated with our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of apartment homes in the Sunbelt markets and our ability to realize any anticipated operational benefits from our internalization of community management functions; the risks associated with ownership of real estate in general and our real estate assets in particular; the economic health of the areas in which our properties are located, particularly with respect to greater Washington, DC metro region and the larger Sunbelt region; the risk of failure to enter into and/or complete contemplated acquisitions and dispositions, within the price ranges anticipated and on the terms and timing anticipated, or at all; changes in the composition of our portfolio; risks related to changes in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers; the economic health of our residents; the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts); compliance with applicable laws and corporate social responsibility goals, including those concerning the environment and access by persons with disabilities; the risks related to not having adequate insurance to cover potential losses; changes in the market value of securities; terrorist attacks or actions and/or cyber-attacks; whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced; the availability and terms of financing and capital and the general volatility of securities markets; the risks related to our organizational structure and limitations of share ownership; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; whether our estimated transformation costs for 2023 will be correct; whether we will achieve the expected operational upside of our multifamily platform through 2025 and beyond; whether we achieve our targeted range of net debt to adjusted EBITDA; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2022 Form 10-K filed on February 17, 2023. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.

This Earnings Release also includes certain forward-looking non-GAAP information. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income (loss) as a measure of our operating performance. Please see the following pages for the corresponding definitions and reconciliations of such non-GAAP financial measures.

CONTACT:		7550 Wisconsin Ave, Suite 900
Amy Hopkins		Bethesda, MD 20814
Vice President, Investor Relations		Tel 202-774-3198
E-Mail: ahopkins@elmecommunities.com		Fax 301-984-9610
		www.elmecommunities.com

ELME COMMUNITIES AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
(Unaudited)
	Three Months Ended September 30,								Nine Months Ended September 30,
OPERATING RESULTS		2023				2022				2023				2022
Revenue
Real estate rental revenue	$	56,651			$	54,603			$	169,059			$	153,787
Expenses
Property operating and maintenance		12,747				13,092				38,510				35,404
Real estate taxes and insurance		7,050				6,469				21,066				19,893
Property management		1,935				1,916				5,882				5,462
General and administrative		6,370				6,403				19,891				20,998
Transformation costs		985				2,399				6,339				6,645
Depreciation and amortization		21,904				23,632				64,855				69,871
Real estate impairment		41,860				—				41,860				—
		92,851				53,911				198,403				158,273
Real estate operating income (loss)		(36,200	)			692				(29,344	)			(4,486	)
Other income (expense)
Interest expense		(7,418	)			(6,582	)			(21,043	)			(18,388	)
Loss on extinguishment of debt		—				(4,917	)			(54	)			(4,917	)
Other income		—				68				569				454
		(7,418	)			(11,431	)			(20,528	)			(22,851	)
Net loss	$	(43,618	)		$	(10,739	)		$	(49,872	)		$	(27,337	)
Net loss	$	(43,618	)		$	(10,739	)		$	(49,872	)		$	(27,337	)
Depreciation and amortization		21,904				23,632				64,855				69,871
Real estate impairment		41,860				—				41,860				—
NAREIT funds from operations	$	20,146			$	12,893			$	56,843			$	42,534
Non-cash loss on extinguishment of debt	$	—			$	4,873			$	54			$	4,873
Tenant improvements and incentives, net of reimbursements		—				—				(10	)			(1,025	)
Leasing commissions capitalized		—				—				(56	)			—
Recurring capital improvements		(1,490	)			(2,404	)			(5,950	)			(5,026	)
Straight-line rents, net		(74	)			(112	)			(160	)			(437	)
Non-cash fair value interest expense		—				105				—				210
Non-real estate depreciation & amortization of debt costs		1,348				1,158				3,891				3,517
Amortization of lease intangibles, net		(155	)			(227	)			(570	)			(608	)
Amortization and expensing of restricted share and unit compensation		1,432				1,917				3,966				6,157
Adjusted funds from operations	$	21,207			$	18,203			$	58,008			$	50,195

		Three Months Ended September 30,								Nine Months Ended September 30,
Per share data:			2023				2022				2023				2022
Net loss	(Basic)	$	(0.50	)		$	(0.12	)		$	(0.57	)		$	(0.32	)
	(Diluted)	$	(0.50	)		$	(0.12	)		$	(0.57	)		$	(0.32	)
NAREIT FFO	(Basic)	$	0.23			$	0.15			$	0.65			$	0.48
	(Diluted)	$	0.23			$	0.15			$	0.64			$	0.48
Dividends paid		$	0.18			$	0.17			$	0.54			$	0.51
Weighted average shares outstanding - basic			87,759				87,453				87,717				87,354
Weighted average shares outstanding - diluted			87,759				87,453				87,717				87,354
Weighted average shares outstanding - diluted (for NAREIT FFO)			87,799				87,564				87,809				87,447

ELME COMMUNITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
	September 30, 2023				December 31, 2022
Assets
Land	$	384,097			$	373,171
Income producing property		1,941,663				1,897,835
		2,325,760				2,271,006
Accumulated depreciation and amortization		(506,298	)			(481,588	)
Net income producing property		1,819,462				1,789,418
Properties under development or held for future development		31,095				31,260
Total real estate held for investment, net		1,850,557				1,820,678
Cash and cash equivalents		8,079				8,389
Restricted cash		2,104				1,463
Rents and other receivables		15,300				16,346
Prepaid expenses and other assets		34,233				25,730
Total assets	$	1,910,273			$	1,872,606
Liabilities
Notes payable, net	$	522,150			$	497,359
Line of credit		149,000				55,000
Accounts payable and other liabilities		40,666				34,386
Dividend payable		15,868				14,934
Advance rents		3,365				1,578
Tenant security deposits		6,171				5,563
Total liabilities		737,220				608,820
Equity
Shareholders' equity
Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued or outstanding		—				—
Shares of beneficial interest, $0.01 par value; 150,000 shares authorized: 87,832 and 87,534 shares issued and outstanding, as of September 30, 2023 and December 31, 2022, respectively		878				875
Additional paid in capital		1,734,657				1,729,854
Distributions in excess of net income		(550,442	)			(453,008	)
Accumulated other comprehensive loss		(12,332	)			(14,233	)
Total shareholders' equity		1,172,761				1,263,488
Noncontrolling interests in subsidiaries		292				298
Total equity		1,173,053				1,263,786
Total liabilities and equity	$	1,910,273			$	1,872,606

The following tables contain reconciliations of net loss to NOI and same-store NOI for the periods presented (in thousands):
	Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
Net loss	$	(43,618	)		$	(10,739	)		$	(49,872	)		$	(27,337	)
Adjustments:
Property management expense		1,935				1,916				5,882				5,462
General and administrative expense		6,370				6,403				19,891				20,998
Transformation costs		985				2,399				6,339				6,645
Real estate depreciation and amortization		21,904				23,632				64,855				69,871
Real estate impairment		41,860				—				41,860				—
Interest expense		7,418				6,582				21,043				18,388
Loss on extinguishment of debt, net		—				4,917				54				4,917
Other income		—				(68	)			(569	)			(454	)
Total Net Operating Income (NOI)	$	36,854			$	35,042			$	109,483			$	98,490
Multifamily NOI:
Same-store Portfolio	$	30,336			$	28,264			$	89,903			$	82,012
Acquisitions		3,165				3,291				9,172				5,924
Development		(56	)			(52	)			(168	)			(71	)
Non-residential		189				188				620				593
Total		33,634				31,691				99,527				88,458
Other NOI (Watergate 600)		3,220				3,351				9,956				10,032
Total NOI	$	36,854			$	35,042			$	109,483			$	98,490

The following table contains a reconciliation of net loss to core funds from operations for the periods presented (in thousands, except per share data):
		Three Months Ended September 30,								Nine Months Ended September 30,
			2023				2022				2023				2022
Net loss		$	(43,618	)		$	(10,739	)		$	(49,872	)		$	(27,337	)
Add:
Real estate depreciation and amortization			21,904				23,632				64,855				69,871
Real estate impairment			41,860				—				41,860				—
NAREIT funds from operations			20,146				12,893				56,843				42,534
Add:
Structuring expenses			—				121				60				1,101
Loss on extinguishment of debt, net			—				4,917				54				4,917
Severance expense			—				—				394				474
Transformation costs			985				2,399				6,339				6,645
Write-off of pursuit costs			—				174				49				174
Relocation expense			306				—				626				—
Core funds from operations		$	21,437			$	20,504			$	64,365			$	55,845
		Three Months Ended September 30,								Nine Months Ended September 30,
Per share data:			2023				2022				2023				2022
NAREIT FFO	(Basic)	$	0.23			$	0.15			$	0.65			$	0.48
	(Diluted)	$	0.23			$	0.15			$	0.64			$	0.48
Core FFO	(Basic)	$	0.24			$	0.23			$	0.73			$	0.64
	(Diluted)	$	0.24			$	0.23			$	0.73			$	0.64
Weighted average shares outstanding - basic			87,759				87,453				87,717				87,354
Weighted average shares outstanding - diluted (for NAREIT and Core FFO)			87,799				87,564				87,809				87,447

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (in thousands):
	Three Months Ended September 30,								Nine Months Ended September 30,
		2023				2022				2023				2022
Net loss	$	(43,618	)		$	(10,739	)		$	(49,872	)		$	(27,337	)
Add/(deduct):
Interest expense		7,418				6,582				21,043				18,388
Real estate depreciation and amortization		21,904				23,632				64,855				69,871
Real estate impairment		41,860				—				41,860				—
Non-real estate depreciation		291				189				728				644
Severance expense		—				—				394				474
Transformation costs		985				2,399				6,339				6,645
Relocation expense		306				—				626				—
Structuring expenses		—				121				60				1,101
Loss on extinguishment of debt		—				4,917				54				4,917
Adjusted EBITDA	$	29,146			$	27,101			$	86,087			$	74,703

Non-GAAP Financial Measures

Adjusted EBITDA is earnings before interest expense, taxes, depreciation, amortization, gain/loss on sale of real estate, casualty gain/loss, real estate impairment, gain/loss on extinguishment of debt, gain/loss on interest rate derivatives, severance expense, acquisition expenses and gain from non-disposal activities and transformation costs. Adjusted EBITDA is included herein because we believe it helps investors and lenders understand our ability to incur and service debt and to make capital expenditures. Adjusted EBITDA is a non-GAAP and non-standardized measure and may be calculated differently by other REITs.

Adjusted Funds From Operations (“AFFO”) is a non-GAAP measure. It is calculated by subtracting from FFO (1) recurring improvements, tenant improvements and leasing costs, that are capitalized and amortized and are necessary to maintain our properties and revenue stream (excluding items contemplated prior to acquisition or associated with development / redevelopment of a property) and (2) straight line rents, then adding (3) non-real estate depreciation and amortization, (4) non-cash fair value interest expense and (5) amortization of restricted share compensation, then adding or subtracting the (6) amortization of lease intangibles, (7) real estate impairment and (8) non-cash gain/loss on extinguishment of debt, as appropriate. AFFO is included herein, because we consider it to be a performance measure of a REIT’s ability to incur and service debt and to distribute dividends to its shareholders. AFFO is a non-GAAP and non-standardized measure, and may be calculated differently by other REITs.

Core Adjusted Funds From Operations ("Core AFFO") is calculated by adjusting AFFO for the following items (which we believe are not indicative of the performance of Elme Communities' operating portfolio and affect the comparative measurement of Elme Communities' operating performance over time): (1) gains or losses on extinguishment of debt and gains or losses on interest rate derivatives, (2) expenses related to acquisition and structuring activities, (3) non-share-based executive transition costs, severance expenses and other expenses related to corporate restructuring and executive retirements or resignations, (4) property impairments, casualty gains and losses, and gains or losses on sale not already excluded from Core AFFO, as appropriate, (5) relocation expense, (6) transformation costs and (7) write-off of pursuit costs. These items can vary greatly from period to period, depending upon the volume of our acquisition activity and debt retirements, among other factors. We believe that by excluding these items, Core AFFO serves as a useful, supplementary performance measure of Elme Communities' ability to incur and service debt, and distribute dividends to its shareholders. Core AFFO is a non-GAAP and non-standardized measure, and may be calculated differently by other REITs.

Core Funds From Operations (“Core FFO”) is calculated by adjusting NAREIT FFO for the following items (which we believe are not indicative of the performance of Elme Communities' operating portfolio and affect the comparative measurement of Elme Communities' operating performance over time): (1) gains or losses on extinguishment of debt and gains or losses on interest rate derivatives, (2) expenses related to acquisition and structuring activities, (3) executive transition costs, severance expenses and other expenses related to corporate restructuring and executive retirements or resignations, (4) property impairments, casualty gains and losses, and gains or losses on sale not already excluded from NAREIT FFO, as appropriate, (5) relocation expense, (6) transformation costs and (7) write-off of pursuit costs. These items can vary greatly from period to period, depending upon the volume of our acquisition activity and debt retirements, among other factors. We believe that by excluding these items, Core FFO serves as a useful, supplementary measure of Elme Communities' ability to incur and service debt, and distribute dividends to its shareholders. Core FFO is a non-GAAP and non-standardized measure, and may be calculated differently by other REITs.

NAREIT Funds From Operations (“FFO”) is defined by the 2018 National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) FFO White Paper Restatement, as net income (computed in accordance with generally accepted accounting principles (“GAAP”) excluding gains (or losses) associated with sales of properties, impairments of depreciable real estate and real estate depreciation and amortization. We consider NAREIT FFO to be a standard supplemental measure for equity real estate investment trusts (“REITs”) because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that the value of real estate assets diminishes predictably over time. Since real estate values have instead historically risen or fallen with market conditions, we believe that NAREIT FFO more accurately provides investors an indication of our ability to incur and service debt, make capital expenditures and fund other needs. Our NAREIT FFO may not be comparable to FFO reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently. NAREIT FFO is a non-GAAP measure.

Net Debt to Adjusted EBITDA represents net debt as of period end divided by adjusted EBITDA for the period, as annualized (i.e. three months periods are multiplied by four) or on a trailing 12 month basis. We define net debt as the total outstanding debt reported as per our consolidated balance sheets less cash and cash equivalents at the end of the period.

Net Operating Income (“NOI”), defined as real estate rental revenue less direct real estate operating expenses, is a non-GAAP measure. NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations (including the gain or loss on sale, if any), plus interest expense, depreciation and amortization, lease origination expenses, general and administrative expenses, acquisition costs, real estate impairment, casualty gain and losses and gain or loss on extinguishment of debt. NOI does not include management expenses, which consist of corporate property management costs and property management fees paid to third parties. NOI is the primary performance measure we use to assess the results of our operations at the property level. We believe that NOI is a useful performance measure because, when compared across periods, it reflects the impact on operations of trends in occupancy rates, rental rates and operating costs on an unleveraged basis, providing perspective not immediately apparent from net income. NOI excludes certain components from net income in order to provide results more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. As a result of the foregoing, we provide NOI as a supplement to net income, calculated in accordance with GAAP. NOI does not represent net income or income from continuing operations calculated in accordance with GAAP. As such, NOI should not be considered an alternative to these measures as an indication of our operating performance.

Other Definitions

Average Effective Monthly Rent Per Home represents the average of effective rent (net of concessions) for in-place leases plus the market rent for vacant homes, divided by the total number of homes. We believe Average Effective Monthly Rent Per Home is a useful metric in evaluating the average pricing of our homes. It is a component of Residential Revenue, which is used to calculate our NOI. It does not represent actual rental revenue collected per unit.Average Occupancy is based on average daily occupied apartment homes as a percentage of total apartment homes.

Current Strategy represents the class of each community in our portfolio based on a set of criteria. Our strategies consist of the following subcategories: Class A, Class A-, Class B Value-Add and Class B. A community's class is dependent on a variety of factors, including its vintage, site location, amenities and services, rent growth drivers and rent relative to the market.

• Class A communities are recently-developed, well-located, have competitive amenities and services and command average rental rates well above market median rents.
• Class A- communities have been developed within the past 20 years and feature operational improvements and unit upgrades and command rents at or above median market rents.
• Class B Value-Add communities are over 20 years old but feature operational improvements and strong potential for unit renovations. These communities command average rental rates below median market rents for units that have not been renovated.
• Class B communities are over 20 years old, feature operational improvements and command average rental rates below median market rents.

Debt Service Coverage Ratio is computed by dividing earnings attributable to the controlling interest before interest expense, taxes, depreciation, amortization, real estate impairment, gain on sale of real estate, gain/loss on extinguishment of debt, severance expense, relocation expense, acquisition and structuring expenses and gain/loss from non-disposal activities by interest expense (including interest expense from discontinued operations) and principal amortization.

Debt to Total Market Capitalization is total debt divided by the sum of total debt plus the market value of shares outstanding at the end of the period.

Earnings to Fixed Charges Ratio is computed by dividing earnings attributable to the controlling interest by fixed charges. For this purpose, earnings consist of income from continuing operations (or net income if there are no discontinued operations) plus fixed charges, less capitalized interest. Fixed charges consist of interest expense (excluding interest expense from discontinued operations), including amortized costs of debt issuance, plus interest costs capitalized.

Ending Occupancy is calculated as occupied homes as a percentage of total homes as of the last day of that period.

Lease Rate Growth is defined as the average percentage change in either gross (excluding the impact of concessions) or effective rent (net of concessions) for a new or renewed multifamily lease compared to the prior lease based on the move-in date. The "blended" rate represents the weighted average of new and renewal lease rate growth achieved.

Recurring Capital Improvements represent non-accretive building improvements required to maintain a property's income and value. Recurring capital improvements do not include acquisition capital that was taken into consideration when underwriting the purchase of a building or which are incurred to bring a building up to "operating standard". This category includes improvements made as needed upon vacancy of an apartment. Aside from improvements related to apartment turnover, these improvements include facade repairs, installation of new heating and air conditioning equipment, asphalt replacement, permanent landscaping, new lighting and new finishes.

Retention represents the percentage of multifamily leases renewed that were set to expire in the period presented.

Relocation expenses represent costs associated with the relocation of the corporate headquarters to a new location in the DC metro region.

Same-store Portfolio includes properties that were owned for the entirety of the years being compared, and exclude properties under redevelopment or development and properties acquired, sold or classified as held for sale during the years being compared. We categorize our properties as "same-store" or "non-same-store" for purposes of evaluating comparative operating performance. We define development properties as those for which we have planned or ongoing major construction activities on existing or acquired land pursuant to an authorized development plan. Development properties are categorized as same-store when they have reached stabilized occupancy (90%) before the start of the prior year. We define redevelopment properties as those for which we have planned or ongoing significant development and construction activities on existing or acquired buildings pursuant to an authorized plan, which has an impact on current operating results, occupancy and the ability to lease space with the intended result of a higher economic return on the property. We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared. We currently have two same-store portfolios: "Same-store multifamily" which is comprised of our same-store apartment communities and "Other same-store" which is comprised of our Watergate 600 commercial property.

Transformation Costs include costs related to the strategic shift away from the commercial sector to the residential sector, including the allocation of internal costs, consulting, advisory and termination benefits.