Guest Pitch: Elme Communities (ELME)

Liquidation: 15% Upside (at $2.16)

This idea was shared by Jimo.

Elme Communities is a multifamily REIT that is winding down. The company has just completed the sale of the bulk of its portfolio (19 multifamily assets) and paid a large special dividend of $14.67/share. This leaves investors with a clean, low-risk play for the final phase of the company’s dissolution.

The yet-unsold real estate portfolio consists of 9 multifamily properties and 1 office building. The assets have been on the market since Q3 2025, with transactions expected to materialize soon. Last week, the company announced sale agreements for three multifamily properties. Management expects to sell three more multifamily assets plus the office building in Q1 or early Q2, and to sign contracts for the final three by mid-May. Management has just signed retention agreements for executives running until the earlier of November 13 or 45 days after all assets are sold.

ELME expects to distribute an additional $2.35 to $2.80/share in liquidation proceeds. The stock now trades at $2.16/share, implying an 9%-30% spread depending on the final outcome. The risk of loss appears low. I view this primarily as a free option that final distributions will land within management’s guidance. We are probably looking at a Q3 or Q4 2026 timeline for further distributions, thus, a base case IRR of ~30% seems feasible.

Management did not share the calculations for how they arrived at the $2.35-$2.80/share distribution figures, but there are reasons to trust this estimate.

The key one is that the distribution range has already been adjusted once: from the initial $2.90 to $3.50/share down to the current range. Estimate cuts never look good, but in this case I think it significantly lowers the odds of further amendments. Management has been marketing the remaining properties since Q3 2025. The distribution estimate cut was “largely a function of information obtained during the marketing and sale process” with regards to three assets. One of these is Riverside, ELME’s largest community with 1,200 units compared to a 300-unit average for all the other assets. The property has turned out to be more difficult to sell than initially expected, and the pricing adjustment there probably had an outsized impact on the final figures. To a lesser extent, the estimates were also lowered due to two properties located in D.C., citing softening market conditions. These three properties, Riverside + D.C. assets, are expected to be the last to be sold, with agreements targeted by mid-May.

The latest distribution guidance includes fresh market data and should properly reflect the realizable value of these assets. Moreover, with this revision update, management has outlined a full list of components embedded in the distribution estimate (unfortunately without specifying the actual dollar amounts). It seems to cover all potential expenses until the full wind-down, which is positive. I think that further negative surprises are unlikely.

The distributions guidance cut is partly why the current opportunity exists, as prior to the revision, the stock traded closer to the midpoint of the old guidance range. And now the stock sits below the low end of the revised-guidance. In other words, market mood shifted from neutral to negative on already more conservative estimates from management.

Other than the guidance cut, management has been running the process smoothly so far and collectively owns 1.2m shares.

As an exercise, I have done some directional sense checking of the likely distributions, and the guided range appears to be reasonable.

 

Cross-checking management’s estimates

Matthews Real Estate outlines that in 2025 Class A multifamily properties typically traded around 5%, while Class B and C assets were closer to 7%. This is consistent with the valuation achieved on ELME’s 19-asset portfolio already sold, which cleared at a 6% cap rate. Roughly a quarter of these were Class A properties, while the rest were Class B or Class B value add. The sold portfolio also had an average build year of 1990 and average occupancy of 96%. In comparison, the remaining nine assets are entirely Class B or Class B value-add, with an average build year of 1974 and current occupancy of 94%. So the sold portfolio was of a slightly higher quality than what remains.

Nonetheless, the three multifamily properties sold this month also transacted at a 6% cap rate. The remaining six assets, however, are very likely to sell at a higher cap rate.

The office asset, Watergate 600, is a Class A property with 300,000 square feet. Occupancy stands at 82%, though it is gradually trending lower. The property has a five-year weighted average lease term. According to Cushman & Wakefield reports, Class A office buildings in WA have traded this year at roughly $200 to $500 per square foot.

In the calculations below, I have assumed an average 7.5% cap rate for the remaining 6 multifamily assets and a $300 price per square foot or a 13% cap rate for the office building.

The company guided for 1.5%-3.5% multifamily NOI growth in 2025. For the remaining 6 unsold properties, I arrive at a 2025 NOI of $39.3m. Watergate’s NOI was guided at $11.5-$12.25m (for the rough breakdown of the individual property NOI see page 22-24 here).

This is how liquidation scenario roughly adds up:

• $155m gross sale value of the recently signed three multifamily assets;
• $524m for the remaining six multifamily properties;
• $90m for the office;
• $50m rent income generated from the remaining assets for three quarters until mid-2026. This is a 30% reduction from the 9M 2025 rate as most will be sold before mid-2026;
• $32m in other net working capital items (cash, receivables, payables, etc);
• Less $45m operational expenses for three quarters. This assumes the same 30% cut from the 9M 2025 rate.
• Less $520m repayment of the Goldman loan;
• Less $10m transaction expenses for all asset sales (at 1.2%, which is in line with the costs for the portfolio already sold);
• Less $40m for any additional cash burn and liquidation expenses past mid-2026.

This results in $236m equity value or $2.68/share. That is middle of the guided range.

 

Background & remaining properties to be sold

ELME is a self-managed REIT, and the liquidation was proposed by management last year following a strategic review. The key argument was that at prevailing interest rates, the business had been generating unsatisfactory returns and offered no credible path to growth.

During the strategic review, which lasted six months, 80 potential counterparties were contacted. One of the bids received was for a full acquisition of the company at $19/share from the unnamed founder of a private multifamily owner-operator. That bidder ultimately walked away, but the price would have fully supported the upper end of management’s guidance for the remaining distributions. However, other bids for a full sale of the company were reportedly in the $15-$17/share range, so it’s hard to draw any firm conclusions here.

Under contract already (3 properties):

• Elme Marietta – 1113 Powers Ferry Place, Marietta, GA
• Elme Sandy Springs – 501 North River Parkway, Sandy Springs, GA
• Elme Watkins Mill – 180 Watkins Station Circle, Gaithersburg, MD

Expected to sell Q1 or early Q2 (4 properties):

• Elme Bethesda – 5114 Dudley Lane, Bethesda, MD
• Elme Germantown – 2 Observation Court, Germantown, MD
• Elme Conyers – 50 Greenleaf Road, Conyers, GA
• Watergate 600 – 600 New Hampshire Avenue NW, Washington, DC (office)

Expected to sell by mid-May (3 properties):

• Kenmore Apartments – 5415 Connecticut Avenue, Washington, DC
• 3801 Connecticut Avenue – 3801 Connecticut Avenue NW, Washington, DC
• Riverside Apartments – 5860 Cameron Run Terrace, Alexandria, VA (largest asset: 1,200 units; relaunching marketing process this month)