UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from ___________ to ___________
Commission file number
________________________________________________________________________________
(Exact name of Registrant as specified in its charter)
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_______________________________
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes
As of July 29, 2022, JBG SMITH Properties had
JBG SMITH PROPERTIES
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2022
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | |||
Page | |||
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2022 and December 31, 2021 | 3 | ||
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6 | |||
8 | |||
Notes to Condensed Consolidated Financial Statements (unaudited) | 10 | ||
Management's Discussion and Analysis of Financial Condition and Results of Operations | 30 | ||
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2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
JBG SMITH PROPERTIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value amounts)
| June 30, 2022 |
| December 31, 2021 | |||
ASSETS |
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Real estate, at cost: |
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Land and improvements | $ | | $ | | ||
Buildings and improvements |
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Construction in progress, including land |
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Less: accumulated depreciation |
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Real estate, net |
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Cash and cash equivalents |
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Restricted cash |
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Tenant and other receivables |
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Deferred rent receivable |
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Investments in unconsolidated real estate ventures |
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Intangible assets, net | | | ||||
Other assets, net |
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Assets held for sale |
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TOTAL ASSETS | $ | | $ | | ||
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY |
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Liabilities: |
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Mortgages payable, net | $ | | $ | | ||
Revolving credit facility |
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Unsecured term loans, net |
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Accounts payable and accrued expenses |
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Other liabilities, net |
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Total liabilities |
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Commitments and contingencies |
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Redeemable noncontrolling interests |
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Shareholders' equity: |
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Preferred shares, $ |
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Common shares, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive income (loss) |
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Total shareholders' equity of JBG SMITH Properties |
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Noncontrolling interests |
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Total equity |
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TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | $ | | $ | | ||
See accompanying notes to the condensed consolidated financial statements (unaudited).
3
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
REVENUE |
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Property rental | $ | | $ | | $ | | $ | | ||||
Third-party real estate services, including reimbursements |
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Other revenue |
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Total revenue |
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EXPENSES |
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Depreciation and amortization |
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Property operating |
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Real estate taxes |
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General and administrative: |
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Corporate and other |
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Third-party real estate services |
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Share-based compensation related to Formation Transaction and special equity awards |
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Transaction and other costs |
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Total expenses |
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OTHER INCOME (EXPENSE) |
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Income (loss) from unconsolidated real estate ventures, net |
| ( |
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Interest and other income (loss), net |
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Interest expense |
| ( |
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Gain on the sale of real estate, net |
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Loss on the extinguishment of debt |
| ( |
| — |
| ( |
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Total other income (expense) |
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| ( |
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INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT |
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Income tax (expense) benefit |
| ( |
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NET INCOME (LOSS) |
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Net (income) loss attributable to redeemable noncontrolling interests |
| ( |
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| ( |
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Net loss attributable to noncontrolling interests |
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| — |
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NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | | $ | ( | $ | | $ | ( | ||||
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED | | ( | | ( | ||||||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED |
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See accompanying notes to the condensed consolidated financial statements (unaudited).
4
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
NET INCOME (LOSS) | $ | | $ | ( | $ | | $ | ( | ||||
OTHER COMPREHENSIVE INCOME: |
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Change in fair value of derivative financial instruments |
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Reclassification of net loss on derivative financial instruments from accumulated other comprehensive income (loss) into interest expense |
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Total other comprehensive income |
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COMPREHENSIVE INCOME (LOSS) |
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| ( |
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Net (income) loss attributable to redeemable noncontrolling interests |
| ( |
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| ( |
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Net loss attributable to noncontrolling interests | | — | | | ||||||||
Other comprehensive income attributable to redeemable noncontrolling interests |
| ( |
| ( |
| ( |
| ( | ||||
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO JBG SMITH PROPERTIES | $ | | $ | ( | $ | | $ | ( | ||||
See accompanying notes to the condensed consolidated financial statements (unaudited).
5
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Equity
(Unaudited)
(In thousands)
Accumulated | ||||||||||||||||||||
Other | ||||||||||||||||||||
Additional | Comprehensive | |||||||||||||||||||
Common Shares | Paid-In | Accumulated |
| Income | Noncontrolling | Total | ||||||||||||||
Shares | Amount | Capital | Deficit |
| (Loss) | Interests | Equity | |||||||||||||
BALANCE AS OF MARCH 31, 2022 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
Net income (loss) attributable to common shareholders and noncontrolling interests |
| — |
| — |
| — |
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| — |
| ( |
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Conversion of common limited partnership units (OP Units) to common shares |
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| — |
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Common shares repurchased | ( | ( | ( | — | — | — | ( | |||||||||||||
Common shares issued pursuant to employee incentive compensation plan and Employee Share Purchase Plan (ESPP) | | — | | — | — | — | | |||||||||||||
Dividends declared on common shares | — | — | — | ( | — | — | ( | |||||||||||||
Contributions from noncontrolling interests, net |
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| — |
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Redeemable noncontrolling interests redemption value adjustment and total other comprehensive income allocation |
| — |
| — |
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| ( |
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Total other comprehensive income |
| — |
| — |
| — |
| — |
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| — |
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BALANCE AS OF JUNE 30, 2022 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
BALANCE AS OF MARCH 31, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||
Net loss attributable to common shareholders and noncontrolling interests |
| — |
| — |
| — |
| ( |
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| ( | ||||||
Conversion of OP Units to common shares |
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Common shares issued pursuant to employee incentive compensation plan and ESPP | | — | | — | — | — | | |||||||||||||
Dividends declared on common shares | — | — | — | ( | — | — | ( | |||||||||||||
Contributions from noncontrolling interests, net |
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Redeemable noncontrolling interests redemption value adjustment and total other comprehensive income allocation |
| — |
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| ( |
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Total other comprehensive income |
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BALANCE AS OF JUNE 30, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||
See accompanying notes to the condensed consolidated financial statements (unaudited).
6
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Equity
(Unaudited)
(In thousands)
| Accumulated | |||||||||||||||||||
Other | ||||||||||||||||||||
Additional | Comprehensive | |||||||||||||||||||
Common Shares | Paid-In | Accumulated |
| Income | Noncontrolling | Total | ||||||||||||||
Shares | Amount | Capital | Deficit |
| (Loss) | Interests | Equity | |||||||||||||
BALANCE AS OF DECEMBER 31, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||
Net income (loss) attributable to common shareholders and noncontrolling interests |
| — |
| — |
| — |
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| ( |
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Conversion of OP Units to common shares |
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Common shares repurchased | ( | ( | ( | — | — | — | ( | |||||||||||||
Common shares issued pursuant to employee incentive compensation plan and ESPP | | — | | — | — | — | | |||||||||||||
Dividends declared on common shares | — | — | — | ( | — | — | ( | |||||||||||||
Contributions from noncontrolling interests, net |
| — |
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Redeemable noncontrolling interests redemption value adjustment and total other comprehensive income allocation |
| — |
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| ( |
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Total other comprehensive income |
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BALANCE AS OF JUNE 30, 2022 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
BALANCE AS OF DECEMBER 31, 2020 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||
Net loss attributable to common shareholders and noncontrolling interests |
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| ( |
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| ( |
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Conversion of OP Units to common shares |
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Common shares repurchased | ( | ( | ( | — | — | — | ( | |||||||||||||
Common shares issued pursuant to employee incentive compensation plan and ESPP | | — | | — | — | — | | |||||||||||||
Dividends declared on common shares | — | — | — | ( | — | — | ( | |||||||||||||
Contributions from noncontrolling interests, net |
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Redeemable noncontrolling interests redemption value adjustment and total other comprehensive income allocation |
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Total other comprehensive income |
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BALANCE AS OF JUNE 30, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||
See accompanying notes to the condensed consolidated financial statements (unaudited).
7
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
OPERATING ACTIVITIES: |
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Net income (loss) | $ | | $ | ( | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Share-based compensation expense |
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Depreciation and amortization, including amortization of deferred financing costs |
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Deferred rent |
| ( |
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Income from unconsolidated real estate ventures, net |
| ( |
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Amortization of market lease intangibles, net |
| ( |
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Amortization of lease incentives |
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Loss on extinguishment of debt |
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Gain on the sale of real estate, net |
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Loss on operating lease and other receivables |
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Income from investments, net | ( | — | ||||
Return on capital from unconsolidated real estate ventures |
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Other non-cash items |
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Changes in operating assets and liabilities: |
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Tenant and other receivables |
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Other assets, net |
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Accounts payable and accrued expenses |
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Other liabilities, net |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES: |
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Development costs, construction in progress and real estate additions |
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Proceeds from the sale of real estate |
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Proceeds from the sale of investments | | — | ||||
Distributions of capital from unconsolidated real estate ventures |
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Investments in unconsolidated real estate ventures and other investments |
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Net cash provided by (used in) investing activities |
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FINANCING ACTIVITIES: |
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Repayments of mortgages payable |
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Repayments of revolving credit facility |
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Debt issuance costs |
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Proceeds from common shares issued pursuant to ESPP |
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Common shares repurchased | ( | ( | ||||
Dividends paid to common shareholders |
| ( |
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Distributions to redeemable noncontrolling interests |
| ( |
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Distributions to noncontrolling interests | ( | ( | ||||
Contributions from noncontrolling interests | | | ||||
Net cash used in financing activities |
| ( |
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Net increase (decrease) in cash and cash equivalents, and restricted cash |
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Cash and cash equivalents, and restricted cash, beginning of period |
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Cash and cash equivalents, and restricted cash, end of period | $ | | $ | | ||
See accompanying notes to the condensed consolidated financial statements (unaudited).
8
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
CASH AND CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD: |
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Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
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Cash and cash equivalents, and restricted cash | $ | | $ | | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION: |
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Cash paid for interest (net of capitalized interest of $ | $ | | $ | | ||
Accrued capital expenditures included in accounts payable and accrued expenses |
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Write-off of fully depreciated assets |
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Deconsolidation of real estate asset |
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Conversion of OP Units to common shares |
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Cash paid for amounts included in the measurement of lease liabilities for operating leases |
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See accompanying notes to the condensed consolidated financial statements (unaudited).
9
JBG SMITH PROPERTIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.Organization and Basis of Presentation
Organization
JBG SMITH Properties (JBG SMITH), a Maryland real estate investment trust (REIT), owns and operates a portfolio of commercial and multifamily assets amenitized with ancillary retail. JBG SMITH's portfolio reflects its longstanding strategy of owning and operating assets within Metro-served submarkets in the Washington, D.C. metropolitan area with high barriers to entry and vibrant urban amenities. Approximately of our portfolio is in National Landing in Northern Virginia, where we serve as the developer for Amazon.com, Inc.'s (Amazon) new headquarters and where Virginia Tech's $
We were organized for the purpose of receiving, via the spin-off on July 17, 2017 (the Separation), substantially all of the assets and liabilities of Vornado Realty Trust's (Vornado) Washington, D.C. segment. On July 18, 2017, we acquired the management business, and certain assets and liabilities of JBG (the Combination). The Separation and the Combination are collectively referred to as the Formation Transaction.
As of June 30, 2022, our Operating Portfolio consisted of
We derive our revenue primarily from leases with commercial and multifamily tenants, which include fixed and percentage rents, and reimbursements from tenants for certain expenses such as real estate taxes, property operating expenses, and repairs and maintenance. In addition, our third-party asset management and real estate services business provides fee-based real estate services.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not contain certain information required in annual financial statements and notes as required under GAAP. In our opinion, all adjustments considered necessary for a fair presentation have been included, and all such adjustments are of a normal recurring nature. All intercompany transactions and balances have been eliminated. The results of operations
10
for the three and six months ended June 30, 2022 and 2021 are not necessarily indicative of the results that may be expected for a full year. These condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 22, 2022 (Annual Report).
The accompanying condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries and consolidated variable interest entities (VIEs), including JBG SMITH LP. See Note 5 for additional information on our VIEs. The portions of the equity and net income (loss) of consolidated entities that are not attributable to us are presented separately as amounts attributable to noncontrolling interests in our condensed consolidated financial statements.
References to our financial statements refer to our unaudited condensed consolidated financial statements as of June 30, 2022 and December 31, 2021, and for the three and six months ended June 30, 2022 and 2021. References to our balance sheets refer to our condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021. References to our statements of operations refer to our condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021. References to our statements of comprehensive income (loss) refer to our condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021.
Income Taxes
We have elected to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the Code). Under those sections, a REIT which distributes at least 90% of its REIT taxable income as dividends to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We currently adhere and intend to continue to adhere to these requirements and to maintain our REIT status in future periods. We also participate in the activities conducted by our subsidiary entities that have elected to be treated as taxable REIT subsidiaries under the Code. As such, we are subject to federal, state and local taxes on the income from those activities.
Reclassification
Intangible assets totaling $
2.Summary of Significant Accounting Policies
Significant Accounting Policies
There were no material changes to our significant accounting policies disclosed in our Annual Report.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The most significant of these estimates include: (i) the underlying cash flows and holding periods used in assessing impairment of our real estate assets; (ii) the determination of useful lives for tangible and intangible assets; and (iii) the assessment of the collectability of receivables, including deferred rent receivables. Longer estimated holding periods for real estate assets directly reduce the likelihood of recording an impairment loss. If there is a change in the strategy for an asset or if market conditions dictate an earlier sale date, an impairment loss may be recognized, and such loss could be material.
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Recent Accounting Pronouncements
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848). Topic 848 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in Topic 848 is optional and may be elected over the period of March 12, 2020 through December 31, 2022 as reference rate reform activities occur. During the six months ended June 30, 2022, we elected to apply the hedge accounting expedient that allows us to continue to amortize previously deferred gains and losses in accumulated other comprehensive income (loss) related to terminated hedges into earnings in accordance with the underlying hedged forecasted transactions. We have elected to apply the hedge accounting expedients related to (i) the assertion that our hedged forecasted transactions remain probable and (ii) the assessments of effectiveness for future London Interbank Offered Rate (LIBOR) indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the past presentation of our derivatives. We will continue to evaluate the impact of the guidance and may apply other elections, as applicable.
3.Dispositions and Assets Held for Sale
Dispositions
The following is a summary of activity for the six months ended June 30, 2022:
Gain (Loss) | |||||||||||||||||
Total | Gross | Cash | on the Sale | ||||||||||||||
Square | Sales | Proceeds | of Real | ||||||||||||||
Date Disposed |
| Assets |
| Segment |
| Location |
| Feet |
| Price |
| from Sale |
| Estate | |||
(In thousands) | |||||||||||||||||
March 28, 2022 | Development Parcel | Other | Arlington, Virginia | — | $ | | $ | | $ | ( | |||||||
April 1, 2022 | Universal Buildings (1) | Commercial | Washington, D.C. | | | | | ||||||||||
April 13, 2022 |
| 7200 Wisconsin Avenue, 1730 M Street, RTC-West and Courthouse Plaza 1 and 2 (2) |
| Commercial/ |
| Bethesda, Maryland, Washington, D.C., Reston, Virginia, Arlington, Virginia |
| | |
| | ( | |||||
May 25, 2022 | Pen Place (3) | Other | Arlington, Virginia | | | | | ||||||||||
| | $ | | $ | | $ | | ||||||||||
| (1) | Cash proceeds from sale excludes a lease termination fee of $ |
| (2) | Assets were sold to an unconsolidated real estate venture. See Note 4 for additional information. RTC-West refers to RTC-West, RTC-West Trophy Office and RTC-West Land. Total square feet include |
| (3) | Total square feet represent estimated or approved potential development density. |
During the six months ended June 30, 2022, our unconsolidated real estate ventures sold several assets. See Note 4 for additional information.
Assets Held for Sale
There were
Total | Assets Held | ||||||||
Assets |
| Segment |
| Location |
| Square Feet |
| for Sale | |
(In thousands) | |||||||||
Pen Place (1) | Other | Arlington, Virginia | | $ | | ||||
12
| (1) | Sold to Amazon in May 2022. Total square feet represent estimated or approved potential development density. |
4.Investments in Unconsolidated Real Estate Ventures
The following is a summary of our investments in unconsolidated real estate ventures:
Effective | ||||||||
Ownership | ||||||||
Real Estate Venture Partners |
| Interest (1) |
| June 30, 2022 |
| December 31, 2021 | ||
(In thousands) | ||||||||
Prudential Global Investment Management |
| $ | | $ | | |||
Landmark Partners (Landmark) |
|
| |
| | |||
CBREI Venture (2) |
|
| |
| | |||
Canadian Pension Plan Investment Board (CPPIB) |
|
| |
| | |||
J.P. Morgan Global Alternatives (J.P. Morgan) (3) | | | ||||||
Berkshire Group |
|
| | | ||||
Brandywine Realty Trust |
|
| |
| | |||
Other |
|
| | | ||||
Total investments in unconsolidated real estate ventures (4) | $ | | $ | | ||||
| (1) | Reflects our effective ownership interests in the underlying real estate as of June 30, 2022. We have multiple investments with certain venture partners with varying ownership interests in the underlying real estate. |
| (2) | On August 1, 2022, we acquired the remaining |
| (3) | J.P. Morgan is the advisor for an institutional investor. |
| (4) | As of June 30, 2022 and December 31, 2021, our total investments in unconsolidated real estate ventures were greater than our share of the net book value of the underlying assets by $ |
On April 13, 2022, we formed an unconsolidated real estate venture with affiliates of Fortress Investment Group LLC (Fortress) to recapitalize a
We provide leasing, property management and other real estate services to our unconsolidated real estate ventures. We recognized revenue, including expense reimbursements, of $
We evaluate reconsideration events as we become aware of them. Reconsideration events include amendments to real estate venture agreements or changes in our partner's ability to make contributions to the venture. Under certain circumstances, we may purchase our partner's interest. A reconsideration event could cause us to consolidate an unconsolidated real estate venture in the future or deconsolidate a consolidated entity.
13
The following is a summary of disposition activity by our unconsolidated real estate ventures for the six months ended June 30, 2022:
Mortgages | Proportionate | ||||||||||||||
Real Estate | Gross | Payable | Share of | ||||||||||||
Venture | Ownership | Sales | Repaid by | Aggregate | |||||||||||
Date Disposed |
| Partner | Assets | Percentage |
| Price | Venture | Gain (1) | |||||||
(In thousands) | |||||||||||||||
January 27, 2022 |
| Landmark | The Alaire, The Terano and |
| $ | | $ | | $ | | |||||
May 10, 2022 | Landmark | Galvan | | | | ||||||||||
June 1, 2022 | CPPIB | 1900 N Street | | | | ||||||||||
$ | | ||||||||||||||
| (1) | Included in Income (loss) from unconsolidated real estate ventures, net in our statements of operations. |
The following is a summary of the debt of our unconsolidated real estate ventures:
Weighted | ||||||||
Average Effective | ||||||||
| Interest Rate (1) |
| June 30, 2022 |
| December 31, 2021 | |||
(In thousands) | ||||||||
Variable rate (2) |
| $ | | $ | | |||
Fixed rate (3) |
|
| |
| | |||
Mortgages payable (4) |
| |
| | ||||
Unamortized deferred financing costs |
| ( |
| ( | ||||
Mortgages payable, net (4) (5) | $ | | $ | | ||||
| (1) | Weighted average effective interest rate as of June 30, 2022. |
| (2) | Includes variable rate mortgages payable with interest rate cap agreements. |
| (3) | Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements. |
| (4) | Excludes mortgages payable related to the unconsolidated real estate venture with Fortress. |
| (5) | See Note 17 for additional information on guarantees of the debt of certain of our unconsolidated real estate ventures. |
The following is a summary of financial information for our unconsolidated real estate ventures:
| June 30, 2022 |
| December 31, 2021 | |||
| (In thousands) | |||||
Combined balance sheet information: (1) | ||||||
Real estate, net | $ | | $ | | ||
Other assets, net |
| |
| | ||
Total assets | $ | | $ | | ||
Mortgages payable, net | $ | | $ | | ||
Other liabilities, net |
| |
| | ||
Total liabilities |
| |
| | ||
Total equity |
| |
| | ||
Total liabilities and equity | $ | | $ | | ||
14
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | X | 2022 |
| 2021 | |||||
| (In thousands) | |||||||||||
Combined income statement information: (1) | ||||||||||||
Total revenue | $ | | $ | | $ | | $ | | ||||
Operating income (2) | | |
| |
| | ||||||
Net income (2) | | |
| |
| | ||||||
| (1) | Excludes amounts related to the unconsolidated real estate venture with Fortress. |
| (2) | Includes the gain on the sale of various assets totaling $ |
5.Variable Interest Entities
We hold various interests in entities deemed to be VIEs, which we evaluate at acquisition, formation, after a change in the ownership agreement, after a change in the entity's economics or after any other reconsideration event to determine if the VIE should be consolidated in our financial statements or should no longer be considered a VIE. An entity is a VIE because it is in the development stage and/or does not hold sufficient equity at risk, or conducts substantially all its operations on behalf of an investor with disproportionately few voting rights. We will consolidate a VIE if we are the primary beneficiary of the VIE, which entails having the power to direct the activities that most significantly impact the VIE’s economic performance. Certain criteria we assess in determining whether we are the primary beneficiary of the VIE include our influence over significant business activities, our voting rights and any noncontrolling interest kick-out or participating rights.
Unconsolidated VIEs
As of June 30, 2022 and December 31, 2021, we had interests in entities deemed to be VIEs. Although we are engaged to act as the managing partner in charge of day-to-day operations of these entities, we are not the primary beneficiary of these VIEs, as we do not hold unilateral power over activities that, when taken together, most significantly impact the respective VIE's economic performance. We account for our investment in these entities under the equity method. As of June 30, 2022 and December 31, 2021, the net carrying amounts of our investment in these entities was $
Consolidated VIEs
JBG SMITH LP is our most significant consolidated VIE. We hold
In conjunction with the acquisition of The Batley in November 2021, we entered into an agreement with a qualified intermediary to facilitate a like-kind exchange. As a result, the qualified intermediary was the legal owner of the entity that owned this property as of December 31, 2021. We determined that the entity that owned the Batley was a VIE, and we were the primary beneficiary of the VIE. We consolidated the property and its operations as of the acquisition date. Legal ownership of this entity was transferred to us by the qualified intermediary when the like-kind exchange agreement was completed with the sale of Pen Place in May 2022, and therefore, is not a VIE as of June 30, 2022.
15
As of June 30, 2022, excluding JBG SMITH LP, we consolidated
6.Other Assets, Net
The following is a summary of other assets, net:
| June 30, 2022 |
| December 31, 2021 | |||
(In thousands) | ||||||
Prepaid expenses | $ | | $ | | ||
Derivative agreements, at fair value | | | ||||
Deferred financing costs, net |
| |
| | ||
Deposits |
| |
| | ||
Operating lease right-of-use assets | | | ||||
Finance lease right-of-use assets (1) | — | | ||||
Other (2) (3) |
| |
| | ||
Total other assets, net | $ | | $ | | ||
| (1) | Represents assets related to finance ground leases at 1730 M Street and Courthouse Plaza 1 and 2, which were sold to an unconsolidated real estate venture in April 2022. |
| (2) | As of June 30, 2022 and December 31, 2021, included $ |
| (3) | As of June 30, 2022 and December 31, 2021, included $ |
7.Debt
Mortgages Payable
The following is a summary of mortgages payable:
Weighted Average | ||||||||
Effective | ||||||||
| Interest Rate (1) |
| June 30, 2022 |
| December 31, 2021 | |||
(In thousands) | ||||||||
Variable rate (2) |
| $ | | $ | | |||
Fixed rate (3) |
|
| |
| | |||
Mortgages payable |
| |
| | ||||
Unamortized deferred financing costs and premium / discount, net (4) |
| ( |
| ( | ||||
Mortgages payable, net | $ | | $ | | ||||
| (1) | Weighted average effective interest rate as of June 30, 2022. |
| (2) | Includes variable rate mortgages payable with interest rate cap agreements. |
| (3) | Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements. |
| (4) | As of June 30, 2022 and December 31, 2021, excludes $ |
As of June 30, 2022 and December 31, 2021, the net carrying value of real estate collateralizing our mortgages payable, totaled $
16
maintenance upon repayment prior to maturity. Certain mortgages payable are recourse to us. See Note 17 for additional information.
As of June 30, 2022 and December 31, 2021, we had various interest rate swap and cap agreements on certain mortgages payable with an aggregate notional value of $
Credit Facility
As of June 30, 2022, our $
Effective | |||||||||
| Interest Rate (1) |
| June 30, 2022 |
| December 31, 2021 | ||||
(In thousands) | |||||||||
Revolving credit facility (2) (3) (4) |
| $ | — | $ | | ||||
Tranche A-1 Term Loan (5) |
| $ | | $ | | ||||
Tranche A-2 Term Loan (5) |
|
| |
| | ||||
Unsecured term loans |
|
|
| |
| | |||
Unamortized deferred financing costs, net |
|
|
| ( |
| ( | |||
Unsecured term loans, net |
|
| $ | | $ | | |||
| (1) | Effective interest rate as of June 30, 2022. The interest rate for our revolving credit facility excludes a |
| (2) | As of June 30, 2022 and December 31, 2021, letters of credit with an aggregate face amount of $ |
| (3) | As of June 30, 2022 and December 31, 2021, excludes $ |
| (4) | In July 2022, we borrowed $ |
| (5) | As of June 30, 2022 and December 31, 2021, the outstanding balance was fixed by interest rate swap agreements. As of June 30, 2022, the interest rate swaps mature in July 2024, fix SOFR at a weighted average interest rate of |
In July 2022, the Tranche A-2 Term Loan was amended to increase its borrowing capacity by $
17
8.Other Liabilities, Net
The following is a summary of other liabilities, net:
| June 30, 2022 |
| December 31, 2021 | |||
(In thousands) | ||||||
Lease intangible liabilities, net | | | ||||
Lease assumption liabilities |
| |
| | ||
Lease incentive liabilities |
| |
| | ||
| |
| | |||
Liabilities related to finance lease right-of-use assets (1) |
| — |
| | ||
Prepaid rent |
| |
| | ||
Security deposits |
| |
| | ||
Environmental liabilities |
| |
| | ||
Deferred tax liability, net |
| |
| | ||
Dividends payable |
| — |
| | ||
Derivative agreements, at fair value |
| — |
| | ||
Deferred purchase price related to the acquisition of a future development parcel | | | ||||
Other |
| |
| | ||
Total other liabilities, net | $ | | $ | | ||
| (1) | Represents liabilities related to finance ground leases at 1730 M Street and Courthouse Plaza 1 and 2, which were sold to an unconsolidated real estate venture in April 2022. |
9.Redeemable Noncontrolling Interests
JBG SMITH LP
OP Units held by persons other than JBG SMITH are redeemable for cash or, at our election, our common shares, subject to certain limitations. Vested LTIP Units are convertible into OP Units and, in turn redeemable into cash or, at our election, our common shares, subject to certain limitations. During the six months ended June 30, 2022 and 2021, unitholders redeemed
Consolidated Real Estate Venture
We are a partner in a consolidated real estate venture that owns a multifamily asset, The Wren located in Washington, D.C. Pursuant to the terms of the real estate venture agreement, we are obligated to fund all capital contributions until our ownership interest reaches a maximum of
18
The following is a summary of the activity of redeemable noncontrolling interests:
Three Months Ended June 30, | ||||||||||||||||||
2022 | 2021 | |||||||||||||||||
Consolidated | Consolidated | |||||||||||||||||
JBG | Real Estate | JBG | Real Estate | |||||||||||||||
| SMITH LP |
| Venture |
| Total |
| SMITH LP |
| Venture |
| Total | |||||||
| (In thousands) | |||||||||||||||||
Balance, beginning of period | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
OP Unit redemptions |
| ( |
| — |
| ( |
| ( |
| — |
| ( | ||||||
LTIP Units issued in lieu of cash bonuses (1) |
| |
| — |
| |
| |
| — |
| | ||||||
Net income (loss) |
| |
| |
| |
| ( |
| ( |
| ( | ||||||
Other comprehensive income |
| |
| — |
| |
| |
| — |
| | ||||||
Distributions |
| ( |
| ( |
| ( |
| ( |
| — |
| ( | ||||||
Share-based compensation expense |
| |
| — |
| |
| |
| — |
| | ||||||
Adjustment to redemption value |
| ( |
| ( |
| ( |
| ( |
| |
| ( | ||||||
Balance, end of period | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Six Months Ended June 30, | ||||||||||||||||||
2022 | 2021 | |||||||||||||||||
Consolidated | Consolidated | |||||||||||||||||
JBG | Real Estate | JBG | Real Estate | |||||||||||||||
| SMITH LP |
| Venture |
| Total |
| SMITH LP |
| Venture |
| Total | |||||||
| (In thousands) | |||||||||||||||||
Balance, beginning of period | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
OP Unit redemptions |
| ( |
| — |
| ( |
| ( |
| — |
| ( | ||||||
LTIP Units issued in lieu of cash bonuses (1) |
| |
| — |
| |
| |
| — |
| | ||||||
Net income (loss) |
| |
| |
| |
| ( |
| ( |
| ( | ||||||
Other comprehensive income |
| |
| — |
| |
| |
| — |
| | ||||||
Distributions |
| ( |
| ( |
| ( |
| ( |
| — |
| ( | ||||||
Share-based compensation expense |
| |
| — |
| |
| |
| — |
| | ||||||
Adjustment to redemption value |
| ( |
| ( |
| ( |
| |
| |
| | ||||||
Balance, end of period | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
| (1) | See Note 11 for additional information. |
10.Property Rental Revenue
The following is a summary of property rental revenue from our non-cancellable leases:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | X | 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Fixed | $ | | $ | | $ | | $ | | ||||
Variable | | | | | ||||||||
Property rental revenue | $ | | $ | | $ | | $ | | ||||
11.Share-Based Payments
LTIP Units and Time-Based LTIP Units
In January 2022, we granted to certain employees
19
In February 2022, we granted
In April 2022, as part of their annual compensation, we granted to non-employee trustees a total of
The aggregate grant-date fair value of the Time-Based LTIP Units and the LTIP Units granted during the six months ended June 30, 2022 was $
Expected volatility |
| |
Risk-free interest rate |
| |
Post-grant restriction periods |
|
Appreciation-Only LTIP Units (AO LTIP Units)
In January 2022, we granted to certain employees
The aggregate grant-date fair value of the AO LTIP Units granted during the six months ended June 30, 2022 was $
Expected volatility |
| |
Dividend yield |
| |
Risk-free interest rate |
|
Performance-Based LTIP Units
In January 2022,
ESPP
Pursuant to the ESPP, employees purchased
Expected volatility |
| |
Dividend yield |
| |
Risk-free interest rate |
| |
Expected life |
20
Share-Based Compensation Expense
The following is a summary of share-based compensation expense:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | X | 2022 |
| 2021 | |||||
| (In thousands) | |||||||||||
Time-Based LTIP Units | $ | | $ | | $ | | $ | | ||||
AO LTIP Units and Performance-Based LTIP Units |
| |
| |
| |
| | ||||
LTIP Units |
| |
| |
| |
| | ||||
Other equity awards (1) |
| |
| |
| |
| | ||||
Share-based compensation expense - other |
| |
| |
| |
| | ||||
Formation Awards |
| |
| |
| |
| | ||||
OP Units and LTIP Units (2) |
| |
| |
| |
| | ||||
Special Time-Based LTIP Units and Special Performance-Based LTIP Units (3) |
| |
| |
| |
| | ||||
Share-based compensation related to Formation Transaction and special equity awards (4) |
| |
| |
| |
| | ||||
Total share-based compensation expense |
| |
| |
| |
| | ||||
Less: amount capitalized |
| ( |
| ( |
| ( |
| ( | ||||
Share-based compensation expense | $ | | $ | | $ | | $ | | ||||
| (1) | Primarily comprised of compensation expense for: (i) fully vested LTIP Units issued to certain employees in lieu of all or a portion of any cash bonuses earned, (ii) restricted share units (RSUs) and (iii) shares issued under our ESPP. |
| (2) | Represents share-based compensation expense for LTIP Units and OP Units issued in the Formation Transaction, which fully vested in July 2022. |
| (3) | Represents equity awards issued related to our successful pursuit of Amazon's additional headquarters in National Landing. |
| (4) | Included in General and administrative expense: Share-based compensation related to Formation Transaction and special equity awards in the accompanying statements of operations. |
As of June 30, 2022, we had $
12.Transaction and Other Costs
The following is a summary of transaction and other costs:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | X | 2022 |
| 2021 | |||||
| (In thousands) | |||||||||||
Demolition costs | $ | | $ | | $ | | $ | | ||||
Integration and severance costs |
| |
| |
| |
| | ||||
Completed, potential and pursued transaction expenses (1) |
| |
| |
| |
| | ||||
Transaction and other costs | $ | | $ | | $ | | $ | | ||||
| (1) | Primarily consists of legal and dead deal costs related to pursued transactions. |
21
13.Interest Expense
The following is a summary of interest expense:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | X | 2022 |
| 2021 | |||||
| (In thousands) | |||||||||||
Interest expense before capitalized interest | $ | | $ | | $ | | $ | | ||||
Amortization of deferred financing costs |
| |
| |
| |
| | ||||
Interest expense related to finance lease right-of-use assets | | | | | ||||||||
Net unrealized (gain) loss on derivative financial instruments designated as ineffective hedges |
| ( |
| |
| ( |
| ( | ||||
Capitalized interest |
| ( |
| ( |
| ( |
| ( | ||||
Interest expense | $ | | $ | | $ | | $ | | ||||
14.Shareholders' Equity and Earnings (Loss) Per Common Share
Common Shares Repurchased
In March 2020, our Board of Trustees authorized the repurchase of up to $
In July 2022, we repurchased and retired
Earnings (Loss) Per Common Share
The following is a summary of the calculation of basic and diluted earnings (loss) per common share and a reconciliation of the amounts of net income (loss) available to common shareholders used in calculating basic and diluted earnings (loss) per common share to net income (loss):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2022 |
| 2021 | X | 2022 |
| 2021 | ||||||
(In thousands, except per share amounts) | ||||||||||||
Net income (loss) | $ | | $ | ( | $ | | $ | ( | ||||
Net (income) loss attributable to redeemable noncontrolling interests | ( |
| |
| ( |
| | |||||
Net loss attributable to noncontrolling interests | |
| — |
| |
| | |||||
Net income (loss) attributable to common shareholders | | ( | | ( | ||||||||
Distributions to participating securities | ( | ( |
| ( |
| ( | ||||||
Net income (loss) available to common shareholders - basic and diluted | | ( | | ( | ||||||||
Weighted average number of common shares outstanding - basic and diluted | | |
| |
| | ||||||
Earnings (loss) per common share - basic and diluted | | ( | | ( | ||||||||
22
The effect of the redemption of OP Units, Time-Based LTIP Units, fully vested LTIP Units and Special Time-Based LTIP Units that were outstanding as of June 30, 2022 and 2021 is excluded in the computation of diluted earnings (loss) per common share as the assumed exchange of such units for common shares on a one-for-one basis was antidilutive (the assumed redemption of these units would have no impact on the determination of diluted earnings (loss) per share). Since OP Units, Time-Based LTIP Units, LTIP Units and Special Time-Based LTIP Units, which are held by noncontrolling interests, are attributed gains at an identical proportion to the common shareholders, the gains attributable and their equivalent weighted average impact are excluded from net income (loss) available to common shareholders and from the weighted average number of common shares outstanding in calculating diluted earnings (loss) per common share. AO LTIP Units, Performance-Based LTIP Units, Formation Awards and RSUs, which totaled
Dividends Declared in July 2022
On July 29, 2022, our Board of Trustees declared a quarterly dividend of $
15.Fair Value Measurements
Fair Value Measurements on a Recurring Basis
To manage or hedge our exposure to interest rate risk, we follow established risk management policies and procedures, including the use of a variety of derivative financial instruments. We do not enter into derivative financial instruments for speculative purposes.
As of June 30, 2022 and December 31, 2021, we had various derivative financial instruments consisting of interest rate swap and cap agreements that are measured at fair value on a recurring basis. The net unrealized gain (loss) on our derivative financial instruments designated as effective hedges was $
Accounting Standards Codification 820 (Topic 820), Fair Value Measurement and Disclosures, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels:
Level 1 — quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities;
Level 2 — observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and
Level 3 — unobservable inputs that are used when little or no market data is available.
The fair values of the derivative financial instruments are based on the estimated amounts we would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and observable inputs. The derivative financial instruments are classified within Level 2 of the valuation hierarchy.
23
The following is a summary of assets and liabilities measured at fair value on a recurring basis:
Fair Value Measurements | ||||||||||||
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
(In thousands) | ||||||||||||
June 30, 2022 |
| |||||||||||
Derivative financial instruments designated as effective hedges: |
|
|
|
|
|
|
|
| ||||
Classified as assets in Other assets, net | $ | | — | $ | | — | ||||||
Derivative financial instruments designated as ineffective hedges: |
|
|
|
|
|
|
|
| ||||
Classified as assets in Other assets, net |
| |
| — |
| |
| — | ||||
December 31, 2021 |
|
|
|
|
|
|
|
| ||||
Derivative financial instruments designated as effective hedges: |
|
|
|
|
|
|
|
| ||||
Classified as assets in Other assets, net | $ | | — | $ | | — | ||||||
Classified as liabilities in Other liabilities, net | |
| — | |
| — | ||||||
Derivative financial instruments designated as ineffective hedges: |
|
|
|
|
|
|
|
| ||||
Classified as assets in Other assets, net |
| |
| — |
| |
| — | ||||
The fair values of our derivative financial instruments were determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the derivative financial instrument. This analysis reflected the contractual terms of the derivative, including the period to maturity, and used observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While it was determined that the majority of the inputs used to value the derivatives fall within Level 2 of the fair value hierarchy under authoritative accounting guidance, the credit valuation adjustments associated with the derivatives also utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of June 30, 2022 and December 31, 2021, the significance of the impact of the credit valuation adjustments on the overall valuation of the derivative financial instruments was assessed, and it was determined that these adjustments were not significant to the overall valuation of the derivative financial instruments. As a result, it was determined that the derivative financial instruments in their entirety should be classified in Level 2 of the fair value hierarchy. The net unrealized gains and losses included in Other comprehensive income in our statements of comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021 were attributable to the net change in unrealized gains or losses related to the interest rate swaps that were outstanding during those periods, none of which were reported in our statements of operations as the interest rate swaps were documented and qualified as hedging instruments.
Financial Assets and Liabilities Not Measured at Fair Value
As of June 30, 2022 and December 31, 2021, all financial assets and liabilities were reflected in our balance sheets at amounts which, in our estimation, reasonably approximated their fair values, except for the following:
June 30, 2022 | December 31, 2021 | |||||||||||
| Carrying |
|
| Carrying |
| |||||||
Amount (1) | Fair Value | Amount (1) | Fair Value | |||||||||
| (In thousands) | |||||||||||
Financial liabilities: |
|
|
|
|
|
|
|
| ||||
Mortgages payable | $ | | $ | | $ | | $ | | ||||
Revolving credit facility |
| — |
| — |
| |
| | ||||
Unsecured term loans |
| |
| |
| |
| | ||||
| (1) | The carrying amount consists of principal only. |
The fair values of the mortgages payable, revolving credit facility and unsecured term loans were determined using Level 2 inputs of the fair value hierarchy. The fair value of our mortgages payable is estimated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit profiles based on market sources. The fair value of our revolving credit facility and unsecured term loans is calculated based on the net present value of payments over the term of the facilities using estimated market rates for similar notes and remaining terms.
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16.Segment Information
We review operating and financial data for each property on an individual basis; therefore, each of our individual properties is a separate operating segment. We define our reportable segments to be aligned with our method of internal reporting and the way our Chief Executive Officer, who is also our Chief Operating Decision Maker (CODM), makes key operating decisions, evaluates financial results, allocates resources and manages our business. Accordingly, we aggregate our operating segments into
The CODM measures and evaluates the performance of our operating segments, with the exception of the third-party asset management and real estate services business, based on the net operating income (NOI) of properties within each segment. NOI includes property rental revenue and parking revenue, and deducts property operating expenses and real estate taxes.
With respect to the third-party asset management and real estate services business, the CODM reviews revenue streams generated by this segment (Third-party real estate services, including reimbursements), as well as the expenses attributable to the segment (General and administrative: third-party real estate services), which are both disclosed separately in our statements of operations. The following represents the components of revenue from our third-party asset management and real estate services business:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | X | 2022 |
| 2021 | |||||
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Property management fees | $ | | $ | | $ | | $ | | ||||
Asset management fees |
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Development fees (1) |
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Leasing fees |
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Construction management fees |
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Other service revenue |
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Third-party real estate services revenue, excluding reimbursements |
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Reimbursement revenue (2) |
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Third-party real estate services revenue, including reimbursements | | | | | ||||||||
Third-party real estate services expenses | | | | | ||||||||
Third-party real estate services revenue less expenses | $ | ( | $ | | $ | ( | $ | | ||||
| (1) | As of June 30, 2022, we had estimated unrecognized development fee revenue totaling $ |
| (2) | Represents reimbursement of expenses incurred by us on behalf of third parties, including allocated payroll costs and amounts paid to third-party contractors for construction management projects. |
Management company assets primarily consist of management and leasing contracts with a net book value of $
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The following is the reconciliation of net income (loss) attributable to common shareholders to consolidated NOI:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | X | 2022 |
| 2021 | |||||
| (In thousands) | |||||||||||
Net income (loss) attributable to common shareholders | $ | | $ | ( | $ | | $ | ( | ||||
Add: |
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Depreciation and amortization expense |
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General and administrative expense: |
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Corporate and other |
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Third-party real estate services |
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Share-based compensation related to Formation Transaction and special equity awards |
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Transaction and other costs |
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Interest expense |
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Loss on the extinguishment of debt |
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Income tax expense (benefit) |
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Net income (loss) attributable to redeemable noncontrolling interests |
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Net loss attributable to noncontrolling interests | ( | — | ( | ( | ||||||||
Less: |
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Third-party real estate services, including reimbursements revenue |
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Other revenue |
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Income (loss) from unconsolidated real estate ventures, net |
| ( |
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Interest and other income (loss), net |
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Gain on the sale of real estate, net |
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Consolidated NOI | $ | | $ | | $ | | $ | | ||||
The following is a summary of NOI by segment. Items classified in the Other column include future development assets, assets ground leased to third parties, corporate entities and the elimination of inter-segment activity.
Three Months Ended June 30, 2022 | ||||||||||||
| Commercial |
| Multifamily |
| Other |
| Total | |||||
| (In thousands) | |||||||||||
Property rental revenue | $ | | $ | | $ | | $ | | ||||
Parking revenue |
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Total property revenue |
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Property expense: |
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Property operating |
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Real estate taxes |
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Total property expense |
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Consolidated NOI | $ | | $ | | $ | | $ | | ||||
Three Months Ended June 30, 2021 | ||||||||||||
| Commercial |
| Multifamily |
| Other |
| Total | |||||
| (In thousands) | |||||||||||
Property rental revenue | $ | | $ | | $ | | $ | | ||||
Parking revenue |
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Total property revenue |
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Property expense: |
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Property operating |
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Real estate taxes |
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Total property expense |
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Consolidated NOI | $ | | $ | | $ | | $ | | ||||
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Six Months Ended June 30, 2022 | ||||||||||||
| Commercial |
| Multifamily |
| Other |
| Total | |||||
| (In thousands) | |||||||||||
Property rental revenue | $ | | $ | | $ | | $ | | ||||
Parking revenue |
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Total property revenue |
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Property expense: |
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Property operating |
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Real estate taxes |
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Total property expense |
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Consolidated NOI | $ | | $ | | $ | | $ | | ||||
Six Months Ended June 30, 2021 | ||||||||||||
| Commercial |
| Multifamily |
| Other |
| Total | |||||
(In thousands) | ||||||||||||
Property rental revenue | $ | | $ | | $ | | $ | | ||||
Parking revenue |
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Total property revenue |
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Property expense: |
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Property operating |
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Real estate taxes |
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Total property expense |
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Consolidated NOI | $ | | $ | | $ | | $ | | ||||
The following is a summary of certain balance sheet data by segment:
| Commercial |
| Multifamily |
| Other |
| Total | |||||
(In thousands) | ||||||||||||
June 30, 2022 | ||||||||||||
Real estate, at cost | $ | | $ | | $ | | $ | | ||||
Investments in unconsolidated real estate ventures |
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Total assets |
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December 31, 2021 |
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Real estate, at cost | $ | | $ | | $ | | $ | | ||||
Investments in unconsolidated real estate ventures |
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Total assets |
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17.Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $
We will continue to monitor the state of the insurance market, and the scope and costs of coverage for acts of terrorism. We cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for deductibles and losses in excess of the insurance coverage, which could be material.
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Our debt, consisting of mortgages payable secured by our properties, a revolving credit facility and unsecured term loans, contains customary covenants requiring adequate insurance coverage. Although we believe that we currently have adequate insurance coverage, we may not be able to obtain an equivalent amount of coverage at a reasonable cost in the future. If lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance or refinance our properties.
Construction Commitments
As of June 30, 2022, we had assets under construction that will, based on our current plans and estimates, require an additional $
Environmental Matters
Most of our assets have been subject, at some point, to environmental assessments that are intended to evaluate the environmental condition of the assets. The environmental assessments did not reveal any material environmental contamination that we believe would have a material adverse effect on our overall business, financial condition or results of operations, or that have not been anticipated and remediated during site redevelopment as required by law. Nevertheless, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites or changes in cleanup requirements would not result in significant cost to us. Environmental liabilities totaled $
Other
As of June 30, 2022, we had committed tenant-related obligations totaling $
There are various legal actions against us in the ordinary course of business. In our opinion, the outcome of such matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
From time to time, we (or ventures in which we have an ownership interest) have agreed, and may in the future agree with respect to unconsolidated real estate ventures, to (i) guarantee portions of the principal, interest and other amounts in connection with borrowings, (ii) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) in connection with borrowings or (iii) provide guarantees to lenders and other third parties for the completion of development projects. We customarily have agreements with our outside venture partners whereby the partners agree to reimburse the real estate venture or us for their share of any payments made under certain of these guarantees. At times, we also have agreements with certain of our outside venture partners whereby we agree to either indemnify the partners and/or the associated ventures with respect to certain contingent liabilities associated with operating assets or to reimburse our partner for its share of any payments made by them under certain guarantees. Guarantees (excluding environmental) customarily terminate either upon the satisfaction of specified circumstances or repayment of the underlying debt. Amounts that we may be required to pay in future periods in relation to guarantees associated with budget overruns or operating losses are not estimable.
As of June 30, 2022, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures and other investments totaling $
Additionally, with respect to borrowings of our consolidated entities, we have agreed, and may in the future agree, to (i) guarantee portions of the principal, interest and other amounts, (ii) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) or (iii) provide guarantees to
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lenders, tenants and other third parties for the completion of development projects. As of June 30, 2022, the aggregate amount of principal payment guarantees was $
In connection with the Formation Transaction, we have an agreement with Vornado regarding tax matters (the Tax Matters Agreement) that provides special rules that allocate tax liabilities if the distribution of JBG SMITH shares by Vornado, together with certain related transactions, is determined not to be tax-free. Under the Tax Matters Agreement, we may be required to indemnify Vornado against any taxes and related amounts and costs resulting from a violation by us of the Tax Matters Agreement.
18.Transactions with Related Parties
Our third-party asset management and real estate services business provides fee-based real estate services to the WHI, the JBG Legacy Funds and other third parties, including Amazon. In connection with the contribution to us of certain assets formerly owned by the JBG Legacy Funds as part of the Formation Transaction, the general partner and managing member interests in the JBG Legacy Funds that were held by certain former JBG executives (and who became members of our management team and/or Board of Trustees) were not transferred to us and remain under the control of these individuals. In addition, certain members of our senior management team and Board of Trustees have ownership interests in the JBG Legacy Funds, and own carried interests in each fund and in certain of our real estate ventures that entitle them to receive cash payments if the fund or real estate venture achieves certain return thresholds.
We launched the WHI with the Federal City Council in June 2018 as a scalable market-driven model that uses private capital to help address the scarcity of housing for middle income families. We are the manager for the WHI Impact Pool, which is the social impact debt financing vehicle of the WHI. As of June 30, 2022, the WHI Impact Pool had completed closings of capital commitments totaling $
The third-party real estate services revenue, including expense reimbursements, from the JBG Legacy Funds and the WHI Impact Pool was $
We rented our former corporate offices from an unconsolidated real estate venture and made payments totaling $
We have agreements with Building Maintenance Services (BMS), an entity in which we have a minor preferred interest, to supervise cleaning, engineering and security services at our properties. We paid BMS $
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as approximates, believes, expects, anticipates, estimates, intends, plans, would, may or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see Risk Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on February 22, 2022 (Annual Report) and Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q and our Annual Report.
For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
Organization and Basis of Presentation
JBG SMITH Properties (JBG SMITH), a Maryland real estate investment trust (REIT), owns and operates a portfolio of commercial and multifamily assets amenitized with ancillary retail. JBG SMITH's portfolio reflects its longstanding strategy of owning and operating assets within Metro-served submarkets in the Washington, D.C. metropolitan area with high barriers to entry and vibrant urban amenities. Approximately two-thirds of our portfolio is in National Landing in Northern Virginia where we serve as the developer for Amazon.com, Inc.'s (Amazon) new headquarters and where Virginia Tech's $1 billion Innovation Campus is under construction. In addition, our third-party asset management and real estate services business provides fee-based real estate services to Amazon, the Washington Housing Initiative (WHI) Impact Pool, the legacy funds formerly organized by The JBG Companies (JBG) (the JBG Legacy Funds) and other third parties. Substantially all our assets are held by, and our operations are conducted through, JBG SMITH Properties LP (JBG SMITH LP), our operating partnership. JBG SMITH is referred to as we, us, our or other similar terms. References to our share refer to our ownership percentage of consolidated and unconsolidated assets in real estate ventures, but exclude our 10% subordinated interest in one commercial building and our 33.5% subordinated interest in four commercial buildings, as well as the associated non-recourse mortgages payable, held through unconsolidated real estate ventures as our investment in each real estate venture is zero, we do not anticipate receiving any near-term cash flow distributions from the real estate ventures and have not guaranteed their obligations or otherwise committed to providing financial support.
We were organized for the purpose of receiving, via the spin-off on July 17, 2017 (the Separation), substantially all of the assets and liabilities of Vornado Realty Trust's (Vornado) Washington, D.C. segment. On July 18, 2017, we acquired the management business, and certain assets and liabilities of JBG (the Combination). The Separation and the Combination are collectively referred to as the Formation Transaction.
References to our financial statements refer to our unaudited condensed consolidated financial statements as of June 30, 2022 and December 31, 2021, and for the three and six months ended June 30, 2022 and 2021. References to our balance sheets refer to our condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021. References to our statements of operations refer to our condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021. References to our statements of cash flows refer to our condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021.
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The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
We have elected to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the Code). Under those sections, a REIT which distributes at least 90% of its REIT taxable income as dividends to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We currently adhere and intend to continue to adhere to these requirements and to maintain our REIT status in future periods. We also participate in the activities conducted by our subsidiary entities that have elected to be treated as taxable REIT subsidiaries under the Code. As such, we are subject to federal, state and local taxes on the income from those activities.
We aggregate our operating segments into three reportable segments (commercial, multifamily, and third-party asset management and real estate services) based on the economic characteristics and nature of our assets and services.
Our revenues and expenses are, to some extent, subject to seasonality during the year, which impacts quarterly net earnings, cash flows and funds from operations that affects the sequential comparison of our results in individual quarters over time. For instance, we have historically experienced higher utility costs in the first and third quarters of the year.
We compete with many property owners and developers. Our success depends upon, among other factors, trends affecting national and local economies, the financial condition and operating results of current and prospective tenants, the availability and cost of capital, interest rates, construction and renovation costs, taxes, governmental regulations and legislation, population trends, zoning laws, and our ability to lease, sublease or sell our assets at profitable levels. Our success is also subject to our ability to refinance existing debt on acceptable terms as it comes due.
Overview
As of June 30, 2022, our Operating Portfolio consisted of 56 operating assets comprising 35 commercial assets totaling 10.5 million square feet (8.9 million square feet at our share), 19 multifamily assets totaling 7,359 units (6,496 units at our share) and two wholly owned land assets for which we are the ground lessor. Additionally, we have: (i) two under-construction multifamily assets with 1,583 units (1,583 units at our share); (ii) eight near-term development assets totaling 3.7 million square feet (3.5 million square feet at our share) of estimated potential development density; and (iii) 16 future development assets totaling 8.8 million square feet (6.3 million square feet at our share) of estimated potential development density.
We continue to implement our comprehensive plan to reposition our holdings in National Landing in Northern Virginia by executing a broad array of Placemaking strategies. Our Placemaking includes the delivery of new multifamily and office developments, locally sourced amenity retail, and thoughtful improvements to the streetscape, sidewalks, parks and other outdoor gathering spaces. In keeping with our dedication to Placemaking, each new project is intended to contribute to authentic and distinct neighborhoods by creating a vibrant street environment with robust retail offerings and other amenities, including improved public spaces. Additionally, the cutting-edge digital infrastructure investments we are making, including our ownership of Citizens Broadband Radio Service wireless spectrum in National Landing and an agreement with ATT, are advancing our efforts to make National Landing among the first 5G-operable submarkets in the nation.
In November 2018, Amazon announced it had selected sites in National Landing as the location of its new headquarters. We currently have leases with Amazon totaling 1.0 million square feet at six office buildings in National Landing. We have sold to Amazon two of our National Landing development sites, Metropolitan Park and Pen Place. We are currently constructing two new office buildings for Amazon on Metropolitan Park, totaling 2.1 million square feet, inclusive of over 50,000 square feet of street-level retail with new shops and restaurants. We are the developer, property manager and retail leasing agent for Amazon's new headquarters at National Landing.
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2022 Outlook
A fundamental component of our strategy to maximize long-term net asset value (NAV) per share is active capital allocation. We evaluate development, acquisition, disposition, share repurchase and other investment decisions based on how they may impact long-term NAV per share. We intend to continue to opportunistically sell non-core office assets outside of National Landing as well as land sites where a ground lease or joint venture execution may represent the most attractive path to maximizing value. Successful execution of our capital allocation strategy enables us to source capital at NAV from the disposition of assets generating low cash yields and invest those proceeds in new acquisitions with higher cash yields and growth, as well as in development projects with significant yield spreads and profit potential. We view this strategy as a key tool to source capital and intend to continue disposing of assets where the disparity in public and private market valuations is greatest. Consequently, at any given time, we expect to be in various stages of discussions and negotiations with potential buyers, real estate venture partners, ground lessors and other counterparties with respect to sales, joint ventures and/or ground leases for certain of our assets, including portfolios thereof. These discussions and negotiations may or may not lead to definitive documentation or closed transactions. Redeploying the proceeds from these sales will not only help fund our planned growth, but will also further advance the strategic shift of our portfolio to majority multifamily.
Our office portfolio occupancy improved by 280 basis points in the second quarter as compared to March 31, 2022. Excluding assets that were sold during the quarter, our operating commercial operating occupancy increased by 40 basis points in the second quarter. New leasing has been slow to recover from the pandemic and will likely continue to lag due to delayed return-to-the office plans and decision-making related to future office utilization. We expect this lag to continue to impact our occupancy levels for the foreseeable future. We have seen an increase in the number of employees returning to the office, with parking revenue in our commercial portfolio at approximately 74% of pre-pandemic levels of approximately $25 million annually, at our share.
Our multifamily portfolio occupancy improved by 70 basis points in the second quarter as compared to March 31, 2022, as residents continued to return to urban environments and cities repopulated. Although asking rents in our portfolio ended the quarter above pre-pandemic levels, average in-place rents ended the quarter approximately 10.9% below asking rents. For the second quarter lease expirations, we increased average renewal rates by approximately 8.6%. We expect in-place rents to increase as leases roll due to the expiration of several jurisdictional restrictions on rent increases.
Operating Results
Key highlights for the three and six months ended June 30, 2022 included:
| ● | net income attributable to common shareholders of $123.3 million, or $1.02 per diluted common share, for the three months ended June 30, 2022 compared to a net loss attributable to common shareholders of $3.0 million, or $0.03 per diluted common share, for the three months ended June 30, 2021. Net income attributable to common shareholders of $123.2 million, or $0.99 per diluted common share, for the six months ended June 30, 2022 compared to a net loss attributable to common shareholders of $23.7 million, or $0.19 per diluted common share, for the six months ended June 30, 2021; |
| ● | third-party real estate services revenue, including reimbursements, of $22.2 million and $46.1 million for the three and six months ended June 30, 2022 compared to $26.7 million and $64.9 million for the three and six months ended June 30, 2021; |
| ● | operating commercial portfolio leased and occupied percentages at our share of 87.3% and 86.1% as of June 30, 2022 compared to 85.2% and 83.3% as of March 31, 2022, and 85.9% and 84.4% as of June 30, 2021; |
| ● | operating multifamily portfolio leased and occupied percentages (1) at our share of 95.7% and 92.3% as of June 30, 2022 compared to 94.1% and 91.6% as of March 31, 2022, and 92.8% and 88.7% as of June 30, 2021. In-service operating multifamily portfolio leased and occupied percentages at our share of 96.6% and 93.1% as of June 30, 2022, compared to 95.5% and 92.9% as of March 31, 2022, and 96.4% and 92.7% as of June 30, 2021; |
| ● | the leasing of 326,000 square feet at our share, at an initial rent (2) of $40.34 per square foot and a GAAP-basis weighted average rent per square foot (3) of $38.43 for the three months ended June 30, 2022, and the leasing of 536,000 square feet at our share, at an initial rent (2) of $45.62 per square foot and a GAAP-basis weighted average rent per square foot(3) of $44.34 for the six months ended June 30, 2022; and |
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| ● | an increase in same store (4) NOI of 13.8% to $79.3 million for the three months ended June 30, 2022 compared to $69.7 million for the three months ended June 30, 2021, and an increase in same store (4) NOI of 13.9% to $155.4 million for the six months ended June 30, 2022 compared to $136.5 million for the six months ended June 30, 2021. |
| (1) | 2221 S. Clark Street - Residential and 900 W Street are excluded from leased and occupied percentages as they are operated as short-term rental properties |
| (2) | Represents the cash basis weighted average starting rent per square foot at our share, which excludes free rent and fixed escalations. |
| (3) | Represents the weighted average rent per square foot recognized over the term of the respective leases, including the effect of free rent and fixed escalations. |
| (4) | Includes the results of the properties that are owned, operated and in-service for the entirety of both periods being compared except for properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared. |
Additionally, investing and financing activity during the six months ended June 30, 2022 included:
| ● | the sale of the Universal Buildings, Pen Place and a development parcel for an aggregate gross sales price of $429.3 million. See Note 3 to the financial statements for additional information; |
| ● | the formation of an unconsolidated real estate venture with affiliates of Fortress Investment Group LLC to recapitalize a 1.6 million square foot office portfolio and land parcels for a gross sales price of $580.0 million comprising four wholly owned commercial assets. See Note 4 to the financial statements for additional information; |
| ● | recognition of an aggregate gain of $6.2 million from the sale of various assets by our unconsolidated real estate ventures. See Note 4 to the financial statements for additional information; |
| ● | the sale of investments in equity securities during the first quarter of 2022, which had been carried at cost, resulting in a realized gain of $13.9 million; |
| ● | the amendment of a $200.0 million unsecured term loan, originally maturing in January 2023, to extend the maturity date to January 2025 with two one-year extension options, and to amend the interest rate to Secured Overnight Financing Rate (SOFR) plus 1.15% to SOFR plus 1.75%, varying based on a ratio of our total outstanding indebtedness to a valuation of certain real property and assets; |
| ● | the repayment of the outstanding balance on our revolving credit facility totaling $300.0 million; |
| ● | the payment of dividends totaling $56.3 million and distributions to our redeemable noncontrolling interests of $8.2 million; |
| ● | the repurchase and retirement of 11.8 million of our common shares for $307.0 million, a weighted average purchase price per share of $25.91; and |
| ● | the investment of $128.1 million in development, construction in progress and real estate additions. |
Activity subsequent to June 30, 2022 included:
| ● | the borrowing of $100.0 million under our revolving credit facility, and the amendment of the interest rate to SOFR plus 1.15% to SOFR plus 1.60%, varying based on a ratio of our total outstanding indebtedness to a valuation of certain real property and assets; |
| ● | the amendment of a $200.0 million unsecured term loan to increase its borrowing capacity by $200.0 million. The incremental $200.0 million includes a one-year delayed draw feature, which was undrawn as of the date of this filing. The amendment extends the maturity date of the term loan from July 2024 to January 2028 and amends the interest rate to SOFR plus 1.25% to SOFR plus 1.80% per annum, varying based on a ratio of our total outstanding indebtedness to a valuation of certain real property and assets. We also entered into two forward-starting interest rate swaps with an effective date of July 2024 and a total notional value of $200.0 million, which will effectively fix SOFR at a weighted average interest rate of 2.25% through the maturity date; |
| ● | the acquisition of the remaining 36.0% ownership interest in Atlantic Plumbing, a multifamily asset owned by an unconsolidated real estate venture, for $19.7 million; |
| ● | the repurchase and retirement of 1.5 million common shares for $36.0 million, a weighted average purchase price per share of $23.92, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended; and |
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| ● | the declaration of a quarterly dividend of $0.225 per common share, payable on August 26, 2022 to shareholders of record as of August 12, 2022. |
Critical Accounting Estimates
Our Annual Report contains a description of our critical accounting estimates, including asset acquisitions, real estate, investments in real estate ventures and revenue recognition. There have been no significant changes to our policies during the six months ended June 30, 2022.
Recent Accounting Pronouncements
See Note 2 to the financial statements for a description of recent accounting pronouncements.
Results of Operations
During the six months ended June 30, 2022, we sold the Universal Buildings and Pen Place, and sold 7200 Wisconsin Avenue, 1730 M Street, RTC-West/RTC-West Trophy Office/RTC-West Land (RTC-West) and Courthouse Plaza 1 and 2 to an unconsolidated real estate venture. We collectively refer to these assets as the Disposed Properties in the discussion below. In November 2021, we acquired The Batley.
Comparison of the Three Months Ended June 30, 2022 to 2021
The following summarizes certain line items from our statements of operations that we believe are important in understanding our operations and/or those items which significantly changed in the three months ended June 30, 2022 compared to the same period in 2021:
Three Months Ended June 30, |
| ||||||||
| 2022 |
| 2021 |
| % Change |
| |||
(Dollars in thousands) |
| ||||||||
Property rental revenue | $ | 117,036 | $ | 122,819 |
| (4.7) | % | ||
Third-party real estate services revenue, including reimbursements |
| 22,157 |
| 26,745 |
| (17.2) | % | ||
Depreciation and amortization expense |
| 49,479 |
| 56,678 |
| (12.7) | % | ||
Property operating expense |
| 35,445 |
| 35,000 |
| 1.3 | % | ||
Real estate taxes expense |
| 14,946 |
| 18,558 |
| (19.5) | % | ||
General and administrative expense: | |||||||||
Corporate and other |
| 14,782 |
| 13,895 |
| 6.4 | % | ||
Third-party real estate services |
| 24,143 |
| 25,557 |
| (5.5) | % | ||
Share-based compensation related to Formation Transaction and special equity awards |
| 1,577 |
| 4,441 |
| (64.5) | % | ||
Transaction and other costs |
| 1,987 |
| 2,270 |
| (12.5) | % | ||
Income (loss) from unconsolidated real estate ventures, net |
| (2,107) |
| 3,953 |
| (153.3) | % | ||
Interest expense |
| 16,041 |
| 16,773 |
| (4.4) | % | ||
Gain on the sale of real estate, net |
| 158,767 |
| 11,290 |
| * | |||
* Not meaningful.
Property rental revenue decreased by approximately $5.8 million, or 4.7%, to $117.0 million in 2022 from $122.8 million in 2021. The decrease was primarily due to a $16.8 million decrease related to the Disposed Properties and a $1.3 million decrease related to 2451 Crystal Drive due to construction management services provided to tenants in 2021. The decrease in property rental revenue was partially offset by (i) a $4.6 million increase related to higher occupancy at several recently developed properties (4747 Bethesda Avenue, West Half, The Wren, 900 W Street and 901 W Street), (ii) a $2.8 million increase related to The Batley, (iii) a $1.8 million increase at RiverHouse and The Bartlett due to higher occupancy, (iv) a $1.4 million increase related to Crystal City Marriott due to increased occupancy, (v) a $1.3 million increase due to cash basis tenants paying previously deferred rent in 2022 and to a decrease in uncollectible operating lease receivables, and (vi) an $808,000 increase related to the commencement of a lease with Amazon at 2100 Crystal Drive.
34
Third-party real estate services revenue, including reimbursements, decreased by approximately $4.6 million, or 17.2%, to $22.2 million in 2022 from $26.7 million in 2021. The decrease was primarily due to (i) a $2.2 million decrease in development fees related to the timing of development projects, (ii) a $954,000 decrease in reimbursement revenue and (iii) a $716,000 decrease in asset management fees due to the sale of assets within the JBG Legacy Funds.
Depreciation and amortization expense decreased by approximately $7.2 million, or 12.7%, to $49.5 million in 2022 from $56.7 million in 2021. The decrease was primarily due to an $8.7 million decrease related to the Disposed Properties and a $1.7 million decrease related to 2345 Crystal Drive primarily due to the amortization and disposal of certain tenant improvements in 2021. The decrease in depreciation and amortization expense was partially offset by a $2.9 million increase related to The Batley.
Property operating expense increased by approximately $445,000, or 1.3%, to $35.4 million in 2022 from $35.0 million in 2021. The increase was primarily due to (i) a $2.8 million increase in property operating expenses across our portfolio, primarily utility, and repairs and maintenance expenses, (ii) an $875,000 increase related to The Batley, (iii) an $821,000 increase related to higher occupancy at several recently developed properties (4747 Bethesda Avenue, West Half, The Wren, 900 W Street and 901 W Street), (iv) a $772,000 increase at properties in our development pipeline due to an increase in marketing expenses and (v) a $552,000 increase related to technology initiatives in National Landing. The increase in property operating expense was partially offset by a $5.6 million decrease related to the Disposed Properties.
Real estate tax expense decreased by approximately $3.6 million, or 19.5%, to $14.9 million in 2022 from $18.6 million in 2021. The decrease was primarily due to a $3.4 million decrease related to the Disposed Properties.
General and administrative expense: corporate and other increased by approximately $887,000, or 6.4%, to $14.8 million in 2022 from $13.9 million in 2021. The increase was primarily due to an increase in compensation expense.
General and administrative expense: third-party real estate services decreased by approximately $1.4 million, or 5.5%, to $24.1 million in 2022 from $25.6 million in 2021. The decrease was primarily due to a decrease in reimbursable expenses, partially offset by an increase in compensation expense.
General and administrative expense: share-based compensation related to Formation Transaction and special equity awards decreased by approximately $2.9 million, or 64.5%, to $1.6 million in 2022 from $4.4 million in 2021. The decrease was primarily due to the graded vesting of certain awards issued in prior years, which resulted in lower expense as portions of the awards vested.
Transaction and other costs of $2.0 million in 2022 included (i) $854,000 of expenses related to completed, potential and pursued transactions, (ii) $727,000 of integration and severance costs and (iii) $406,000 of demolition costs related to 223 23rd Street and 2250/2300 Crystal Drive. Transaction and other costs of $2.3 million in 2021 included (i) $1.6 million of expenses related to completed, potential and pursued transactions, (ii) $439,000 of demolition costs related to 2000/2001 South Bell Street and (iii) $222,000 of integration and severance costs.
Income (loss) from unconsolidated real estate ventures decreased by approximately $6.1 million, or 153.3%, to a loss of $2.1 million for 2022 from income of $4.0 million in 2021. The decrease was primarily due to a $4.3 million reduction in gains on sale of real estate related to various asset sales in 2022 compared to 2021 and a $1.8 million loss on the extinguishment of debt related to a property that was sold in 2022.
Interest expense decreased by approximately $732,000, or 4.4%, to $16.0 million in 2022 from $16.8 million in 2021. The decrease in interest expense was due to a $2.0 million increase in the fair value of our interest rate caps due to rising interest rates and a $1.0 million decrease related to the Disposed Properties. The decrease in interest expense was partially offset by (i) a $1.1 million increase due to new mortgage loans entered into in 2021 at 1225 S. Clark Street and 1215 S. Clark Street, (ii) a $445,000 increase related to a higher average outstanding balance on our revolving credit facility, (iii) a $276,000 increase at 4747 Bethesda due to rising interest rates and (iv) a $199,000 increase due to an increase in rates related to the Tranche A-1 Term Loan.
35
Gain on the sale of real estate of $158.8 million in 2022 was due to the disposition of the Disposed Properties. See Note 3 to the financial statements for additional information. Gain on the sale of real estate of $11.3 million in 2021 was based on the cash received and the remeasurement of our retained interest in the land we contributed to one of our unconsolidated real estate ventures.
Comparison of the Six Months Ended June 30, 2022 to 2021
The following summarizes certain line items from our statements of operations that we believe are important in understanding our operations and/or those items which significantly changed in the six months ended June 30, 2022 compared to the same period in 2021:
Six Months Ended June 30, | |||||||||
| 2022 |
| 2021 |
| % Change |
| |||
(Dollars in thousands) |
| ||||||||
Property rental revenue | $ | 248,634 | $ | 245,060 |
| 1.5 | % | ||
Third-party real estate services revenue, including reimbursements |
| 46,127 |
| 64,852 |
| (28.9) | % | ||
Depreciation and amortization expense |
| 107,541 |
| 121,404 |
| (11.4) | % | ||
Property operating expense |
| 76,089 |
| 69,731 |
| 9.1 | % | ||
Real estate taxes expense |
| 33,132 |
| 36,868 |
| (10.1) | % | ||
General and administrative expense: | |||||||||
Corporate and other |
| 30,597 |
| 26,370 |
| 16.0 | % | ||
Third-party real estate services |
| 51,192 |
| 54,493 |
| (6.1) | % | ||
Share-based compensation related to Formation Transaction and special equity awards |
| 3,821 |
| 9,386 |
| (59.3) | % | ||
Transaction and other costs |
| 2,886 |
| 5,960 |
| (51.6) | % | ||
Income from unconsolidated real estate ventures, net |
| 1,038 |
| 3,010 |
| 65.5 | % | ||
Interest and other income (loss), net |
| 15,918 |
| (29) |
| * | |||
Interest expense |
| 32,319 |
| 33,069 |
| (2.3) | % | ||
Gain on the sale of real estate, net |
| 158,631 |
| 11,290 |
| * | |||
* Not meaningful.
Property rental revenue increased by approximately $3.6 million, or 1.5%, to $248.6 million in 2022 from $245.1 million in 2021. The increase was primarily due to (i) a $9.1 million increase related to higher occupancy at several recently developed properties (4747 Bethesda Avenue, West Half, The Wren, 900 W Street and 901 W Street), (ii) a $5.6 million increase related to The Batley, (iii) a $3.7 million increase related to the commencement of a lease with Amazon at 2100 Crystal Drive, (iv) a $3.0 million increase at RiverHouse and The Bartlett due to higher occupancy and (v) a $1.4 million increase related to Crystal City Marriott due to increased occupancy. The increase in property rental revenue was partially offset by an $18.5 million decrease related to the Disposed Properties.
Third-party real estate services revenue, including reimbursements, decreased by approximately $18.7 million, or 28.9%, to $46.1 million in 2022 from $64.9 million in 2021. The decrease was primarily due to a $13.0 million decrease in development fees related to the timing of development projects and a $3.9 million decrease in reimbursement revenue due to the termination of a management agreement.
Depreciation and amortization expense decreased by approximately $13.9 million, or 11.4%, to $107.5 million in 2022 from $121.4 million in 2021. The decrease was primarily due to an $18.5 million decrease related to the Disposed Properties and a $3.6 million decrease related to 2345 Crystal Drive primarily due to the amortization and disposal of certain tenant improvements in 2021. The decrease in depreciation and amortization expense was partially offset by a $7.2 million increase related to The Batley and an $820,000 increase related to 1770 Crystal Drive due to new tenants taking occupancy.
Property operating expense increased by approximately $6.4 million, or 9.1%, to $76.1 million in 2022 from $69.7 million in 2021. The increase was primarily due to (i) a $4.2 million increase in property operating expenses across our portfolio, primarily utility, and repairs and maintenance expenses, (ii) a $2.3 million increase related to technology initiatives in National Landing, (iii) a $1.8 million increase related to The Batley, (iv) a $1.4 million increase related to higher occupancy at several recently developed properties (4747 Bethesda Avenue, West Half, The Wren, 900 W Street and 901 W Street), (v) a $1.0 million increase at properties in our development pipeline due to an increase in marketing expenses and (vi) a $902,000 increase related to 2221 S. Clark Street – Residential due to higher property management and other operating
36
expenses. The increase in property operating expense was partially offset by a $5.7 million decrease related to the Disposed Properties.
Real estate tax expense decreased by approximately $3.7 million, or 10.1%, to $33.1 million in 2022 from $36.9 million in 2021. The decrease was primarily due to a $3.8 million decrease related to the Disposed Properties.
General and administrative expense: corporate and other increased by approximately $4.2 million, or 16.0%, to $30.6 million in 2022 from $26.4 million in 2021. The increase was primarily due to an increase in compensation expense.
General and administrative expense: third-party real estate services decreased by approximately $3.3 million, or 6.1%, to $51.2 million in 2022 from $54.5 million in 2021. The decrease was primarily due to a decrease in reimbursable expenses, partially offset by an increase in compensation expense.
General and administrative expense: share-based compensation related to Formation Transaction and special equity awards decreased by approximately $5.6 million, or 59.3%, to $3.8 million in 2022 from $9.4 million in 2021. The decrease was primarily due to the graded vesting of certain awards issued in prior years, which resulted in lower expense as portions of the awards vested.
Transaction and other costs of $2.9 million in 2022 included (i) $1.6 million of expenses related to completed, potential and pursued transactions, (ii) $872,000 of integration and severance costs and (iii) $428,000 of demolition costs related to 223 23rd Street and 2250/2300 Crystal Drive. Transaction and other costs of $6.0 million in 2021 included (i) $4.1 million of expenses related to completed, potential and pursued transactions, (ii) $1.4 million of demolition costs related to 2000/2001 South Bell Street and (iii) $462,000 of integration and severance costs.
Income from unconsolidated real estate ventures decreased by approximately $2.0 million, or 65.5%, to $1.0 million for 2022 from $3.0 million in 2021. The decrease was primarily due to a $1.0 million reduction in gains on sale of real estate related to various asset sales in 2022 compared to 2021.
Interest and other income of $15.9 million in 2022 was primarily related to a realized gain of $13.9 million from the sale of investments in equity securities during the first quarter of 2022, which had been carried at cost, and a $1.2 million unrealized gain in 2022 related to equity investments carried at fair value.
Interest expense decreased by approximately $750,000, or 2.3%, to $32.3 million in 2022 from $33.1 million in 2021. The decrease in interest expense was due to a $5.4 million increase in the fair value of our interest rate caps due to rising interest rates and a $1.2 million decrease related to 1730 M Street and RTC-West, which were sold to an unconsolidated real estate venture in April 2022. The decrease in interest expense was partially offset by (i) a $2.0 million increase due to new mortgage loans entered into in 2021 at 1225 S. Clark Street and 1215 S. Clark Street, (ii) a $1.6 million increase at Courthouse Plaza 1 and 2 due to a ground lease amendment in December 2021, which resulted in the ground lease being treated as a finance lease until we sold the asset to an unconsolidated real estate venture in April 2022, (iii) a $1.3 million increase related to a higher average outstanding balance on our revolving credit facility, (iv) a $326,000 increase related to 4747 Bethesda Avenue due to rising interest rates and (v) a $244,000 increase due to an increase in rates related to the Tranche A-1 Term Loan.
Gain on the sale of real estate of $158.6 million in 2022 was primarily due to the sale of the Disposed Properties. See Note 3 to the financial statements for additional information. Gain on the sale of real estate of $11.3 million in 2021 was based on the cash received and the remeasurement of our retained interest in the land we contributed to one of our unconsolidated real estate ventures.
FFO
FFO is a non-GAAP financial measure computed in accordance with the definition established by the National Association of Real Estate Investment Trusts (Nareit) in the Nareit FFO White Paper - 2018 Restatement. Nareit defines FFO as net income (loss) (computed in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs
37
of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity, including our share of such adjustments for unconsolidated real estate ventures.
We believe FFO is a meaningful non-GAAP financial measure useful in comparing our levered operating performance from period-to-period and as compared to similar real estate companies because FFO excludes real estate depreciation and amortization expense and other non-comparable income and expenses, which implicitly assumes that the value of real estate diminishes predictably over time rather than fluctuating based on market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income (loss) (computed in accordance with GAAP), as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures used by other companies.
The following is the reconciliation of net income (loss) attributable to common shareholders, the most directly comparable GAAP measure, to FFO:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | X | 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Net income (loss) attributable to common shareholders | $ | 123,275 | $ | (2,973) | $ | 123,243 | $ | (23,704) | ||||
Net income (loss) attributable to redeemable noncontrolling interests |
| 18,248 |
| (345) |
| 18,258 |
| (2,575) | ||||
Net loss attributable to noncontrolling interests |
| (29) |
| — |
| (84) |
| (1,108) | ||||
Net income (loss) |
| 141,494 |
| (3,318) |
| 141,417 |
| (27,387) | ||||
Gain on the sale of real estate, net of tax |
| (155,642) |
| (11,290) |
| (155,506) |
| (11,290) | ||||
Gain on the sale of unconsolidated real estate assets |
| (936) |
| (5,189) |
| (6,179) |
| (5,189) | ||||
Real estate depreciation and amortization |
| 47,242 |
| 54,475 |
| 102,759 |
| 116,975 | ||||
Pro rata share of real estate depreciation and amortization from unconsolidated real estate ventures |
| 6,416 |
| 7,277 |
| 13,286 |
| 14,588 | ||||
FFO attributable to noncontrolling interests |
| (47) |
| (41) |
| (73) |
| 1,030 | ||||
FFO attributable to common limited partnership units (OP Units) |
| 38,527 |
| 41,914 |
| 95,704 |
| 88,727 | ||||
FFO attributable to redeemable noncontrolling interests |
| (4,966) |
| (4,054) |
| (10,843) |
| (8,539) | ||||
FFO attributable to common shareholders | $ | 33,561 | $ | 37,860 | $ | 84,861 | $ | 80,188 | ||||
NOI and Same Store NOI
NOI is a non-GAAP financial measure management uses to assess a segment's performance. The most directly comparable GAAP measure is net income (loss) attributable to common shareholders. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only property related revenue (which includes base rent, tenant reimbursements and other operating revenue, net of free rent and payments associated with assumed lease liabilities) less operating expenses and ground rent for operating leases, if applicable. NOI also excludes deferred rent, related party management fees, interest expense, and certain other non-cash adjustments, including the accretion of acquired below-market leases and the amortization of acquired above-market leases and below-market ground lease intangibles. Management uses NOI as a supplemental performance measure of our assets and believes it provides useful information to investors because it reflects only those revenue and expense items that are incurred at the asset level, excluding non-cash items. In addition, NOI is considered by many in the real estate industry to be a useful starting point for determining the value of a real estate asset or group of assets. However, because NOI excludes depreciation and amortization and captures neither the changes in the value of our assets that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our assets, all of which have real economic effect and could materially impact the financial performance of our assets, the utility of NOI as a measure of the operating performance of our assets is limited. NOI presented by us may not be comparable to NOI reported by other REITs that define these measures differently. We believe to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income (loss) attributable to common shareholders as presented in our consolidated financial statements. NOI should not be considered as an alternative to net income (loss) attributable to common shareholders as an indication of our performance or to cash flows as a measure of liquidity or our ability to make distributions.
38
Information provided on a same store basis includes the results of properties that are owned, operated and in-service for the entirety of both periods being compared, which excludes properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared. During the three months ended June 30, 2022, our same store pool decreased to 52 properties from 59 properties due to the exclusion of the Universal Buildings, 7200 Wisconsin Avenue, 1730 M Street, RTC-West, Courthouse Plaza 1 and 2, Galvan and 1900 N Street, which were sold during the period. During the six months ended June 30, 2022, our same store pool decreased to 52 properties from 55 properties due to the inclusion of West Half, 901 W Street, 900 W Street, 1770 Crystal Drive, and 4747 Bethesda Avenue, and the exclusion of The Alaire, The Terano, the Universal Buildings, 7200 Wisconsin Avenue, 1730 M Street, RTC-West, Courthouse Plaza 1 and 2, and Galvan, which were sold during the period. While there is judgment surrounding changes in designations, a property is removed from the same store pool when the property is considered to be under-construction because it is undergoing significant redevelopment or renovation pursuant to a formal plan or is being repositioned in the market and such renovation or repositioning is expected to have a significant impact on property NOI. A development property or under-construction property is moved to the same store pool once a substantial portion of the growth expected from the development or redevelopment is reflected in both the current and comparable prior year period. Acquisitions are moved into the same store pool once we have owned the property for the entirety of the comparable periods and the property is not under significant development or redevelopment.
Same store NOI increased $9.6 million, or 13.8%, to $79.3 million for the three months ended June 30, 2022 from $69.7 million for the same period in 2021. Same store NOI increased $18.9 million, or 13.9%, to $155.4 million for the six months ended June 30, 2022 from $136.5 million for the same period in 2021. The increase was substantially attributable to (i) higher occupancy and rents, and lower concessions and bad debt reserves in our multifamily portfolio, (ii) higher occupancy and average daily rates at the Crystal City Marriott, (iii) an increase in parking revenue in our commercial portfolio and (iv) the burn-off of rent abatement in our commercial portfolio.
39
The following is the reconciliation of net income (loss) attributable to common shareholders to NOI and same store NOI:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(Dollars in thousands) | ||||||||||||
Net income (loss) attributable to common shareholders | $ | 123,275 | $ | (2,973) | $ | 123,243 | $ | (23,704) | ||||
Add: | ||||||||||||
Depreciation and amortization expense |
| 49,479 |
| 56,678 |
| 107,541 |
| 121,404 | ||||
General and administrative expense: | ||||||||||||
Corporate and other |
| 14,782 |
| 13,895 |
| 30,597 |
| 26,370 | ||||
Third-party real estate services |
| 24,143 |
| 25,557 |
| 51,192 |
| 54,493 | ||||
Share-based compensation related to Formation Transaction and special equity awards |
| 1,577 |
| 4,441 |
| 3,821 |
| 9,386 | ||||
Transaction and other costs |
| 1,987 |
| 2,270 |
| 2,886 |
| 5,960 | ||||
Interest expense |
| 16,041 |
| 16,773 |
| 32,319 |
| 33,069 | ||||
Loss on the extinguishment of debt |
| 1,038 |
| — |
| 1,629 |
| — | ||||
Income tax expense (benefit) |
| 2,905 |
| (5) |
| 2,434 |
| 4,310 | ||||
Net income (loss) attributable to redeemable noncontrolling interests |
| 18,248 |
| (345) |
| 18,258 |
| (2,575) | ||||
Net loss attributable to noncontrolling interests | (29) | — | (84) | (1,108) | ||||||||
Less: | ||||||||||||
Third-party real estate services, including reimbursements revenue |
| 22,157 |
| 26,745 |
| 46,127 |
| 64,852 | ||||
Other revenue |
| 1,798 |
| 1,904 |
| 3,994 |
| 4,090 | ||||
Income (loss) from unconsolidated real estate ventures, net |
| (2,107) |
| 3,953 |
| 1,038 |
| 3,010 | ||||
Interest and other income (loss), net |
| 1,672 |
| (38) |
| 15,918 |
| (29) | ||||
Gain on the sale of real estate, net |
| 158,767 |
| 11,290 |
| 158,631 |
| 11,290 | ||||
Consolidated NOI |
| 71,159 |
| 72,437 |
| 148,128 |
| 144,392 | ||||
NOI attributable to unconsolidated real estate ventures at our share |
| 8,321 |
| 8,109 |
| 15,268 |
| 15,613 | ||||
Non-cash rent adjustments (1) |
| (1,978) |
| (4,088) |
| (3,769) |
| (8,853) | ||||
Other adjustments (2) |
| 5,695 |
| 5,191 |
| 14,443 |
| 9,933 | ||||
Total adjustments |
| 12,038 |
| 9,212 |
| 25,942 |
| 16,693 | ||||
NOI |
| 83,197 |
| 81,649 |
| 174,070 |
| 161,085 | ||||
Less: out-of-service NOI loss (3) |
| (2,046) |
| (1,329) |
| (3,498) |
| (2,619) | ||||
Operating Portfolio NOI |
| 85,243 |
| 82,978 |
| 177,568 |
| 163,704 | ||||
Non-same store NOI (4) |
| 5,915 |
| 13,257 |
| 22,152 |
| 27,226 | ||||
Same store NOI (5) | $ | 79,328 | $ | 69,721 | $ | 155,416 | $ | 136,478 | ||||
Change in same store NOI |
| 13.8% |
| 13.9% | ||||||||
Number of properties in same store pool |
| 52 |
| 52 | ||||||||
| (1) | Adjustment to exclude straight-line rent, above/below market lease amortization and lease incentive amortization. |
| (2) | Adjustment to include other revenue and payments associated with assumed lease liabilities related to operating properties and to exclude commercial lease termination revenue and allocated corporate general and administrative expenses to operating properties. |
| (3) | Includes the results of our under-construction assets, and near-term and future development pipelines. |
| (4) | Includes the results of properties that were not in-service for the entirety of both periods being compared and properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared. |
| (5) | Includes the results of the properties that are owned, operated and in-service for the entirety of both periods being compared. |
Reportable Segments
We review operating and financial data for each property on an individual basis; therefore, each of our individual properties is a separate operating segment. We define our reportable segments to be aligned with our method of internal reporting and the way our Chief Executive Officer, who is also our Chief Operating Decision Maker (CODM), makes key operating decisions, evaluates financial results, allocates resources and manages our business. Accordingly, we aggregate our operating segments into three reportable segments (commercial, multifamily, and third-party asset management and real estate services) based on the economic characteristics and nature of our assets and services.
The CODM measures and evaluates the performance of our operating segments, with the exception of the third-party asset management and real estate services business, based on the NOI of properties within each segment.
40
With respect to the third-party asset management and real estate services business, the CODM reviews revenue streams generated by this segment (Third-party real estate services, including reimbursements), as well as the expenses attributable to the segment (General and administrative: third-party real estate services), which are both disclosed separately in our statements of operations. The following represents the components of revenue from our third-party asset management and real estate services business:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | X | 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Property management fees | $ | 4,976 | $ | 4,776 | $ | 9,784 | $ | 9,718 | ||||
Asset management fees |
| 1,513 |
| 2,229 |
| 3,284 |
| 4,457 | ||||
Development fees (1) |
| 2,148 |
| 4,392 |
| 5,687 |
| 18,642 | ||||
Leasing fees |
| 1,038 |
| 1,424 |
| 2,877 |
| 2,284 | ||||
Construction management fees |
| 37 |
| 234 |
| 187 |
| 406 | ||||
Other service revenue |
| 1,499 |
| 1,790 |
| 2,315 |
| 3,488 | ||||
Third-party real estate services revenue, excluding reimbursements |
| 11,211 |
| 14,845 |
| 24,134 |
| 38,995 | ||||
Reimbursement revenue (2) |
| 10,946 |
| 11,900 |
| 21,993 |
| 25,857 | ||||
Third-party real estate services revenue, including reimbursements | 22,157 | 26,745 | 46,127 | 64,852 | ||||||||
Third-party real estate services expenses | 24,143 | 25,557 | 51,192 | 54,493 | ||||||||
Third-party real estate services revenue less expenses | $ | (1,986) | $ | 1,188 | $ | (5,065) | $ | 10,359 | ||||
| (1) | As of June 30, 2022, we had estimated unrecognized development fee revenue totaling $43.2 million, of which $7.1 million, $12.3 million and $6.6 million is expected to be recognized during the remainder of 2022, 2023 and 2024, and $17.2 million is expected to be recognized thereafter through 2027 as unsatisfied performance obligations are completed. |
| (2) | Represents reimbursements of expenses incurred by us on behalf of third parties, including allocated payroll costs and amounts paid to third-party contractors for construction management projects. |
See discussion of third-party real estate services revenue, including reimbursements, and third-party real estate services expenses for the three and six months ended June 30, 2022 in the preceding pages under Results of Operations.
Consistent with internal reporting presented to our CODM and our definition of NOI, the third-party asset management and real estate services operating results are excluded from the NOI data below. To conform to the current period presentation, we have reclassified the prior period segment financial data for 1700 M Street, for which we are the ground lessor, that had been classified as part of the commercial segment to other to better align with our internal reporting.
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Property revenue is calculated as property rental revenue plus parking revenue. Property expense is calculated as property operating expenses plus real estate taxes. Consolidated NOI is calculated as property revenue less property expense. See Note 16 to the financial statements for the reconciliation of net income (loss) attributable to common shareholders to consolidated NOI for the three and six months ended June 30, 2022 and 2021. The following is a summary of NOI by segment:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | X | 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Property revenue: |
|
|
|
|
|
|
| |||||
Commercial | $ | 76,090 | $ | 92,148 | $ | 167,723 | $ | 182,019 | ||||
Multifamily |
| 43,189 |
| 32,828 |
| 85,431 |
| 65,479 | ||||
Other (1) |
| 2,271 |
| 1,019 |
| 4,195 |
| 3,493 | ||||
Total property revenue |
| 121,550 |
| 125,995 |
| 257,349 |
| 250,991 | ||||
Property expense: |
|
|
|
|
|
|
|
| ||||
Commercial |
| 28,642 |
| 37,245 |
| 66,621 |
| 72,981 | ||||
Multifamily |
| 19,924 |
| 17,107 |
| 38,900 |
| 34,547 | ||||
Other (1) |
| 1,825 |
| (794) |
| 3,700 |
| (929) | ||||
Total property expense |
| 50,391 |
| 53,558 |
| 109,221 |
| 106,599 | ||||
Consolidated NOI: |
|
|
|
|
|
|
|
| ||||
Commercial |
| 47,448 |
| 54,903 |
| 101,102 |
| 109,038 | ||||
Multifamily |
| 23,265 |
| 15,721 |
| 46,531 |
| 30,932 | ||||
Other (1) |
| 446 |
| 1,813 |
| 495 |
| 4,422 | ||||
Consolidated NOI | $ | 71,159 | $ | 72,437 | $ | 148,128 | $ | 144,392 | ||||
| (1) | Includes activity related to future development assets, ground leases in which we are the lessor, corporate entities and the elimination of inter-segment activity. |
Comparison of the Three Months Ended June 30, 2022 to 2021
Commercial: Property rental revenue decreased by $16.1 million, or 17.4%, to $76.1 million in 2022 from $92.1 million in 2021. Consolidated NOI decreased by $7.5 million, or 13.6%, to $47.4 million in 2022 from $54.9 million in 2021. The decreases in property revenue and consolidated NOI were due to the Disposed Properties, which were partially offset by an increase at the Crystal City Marriott due to higher occupancy, an increase in parking revenue driven by an increase in both contract and transient parking, and an increase at 2100 Crystal Drive due to the commencement of a lease with Amazon.
Multifamily: Property rental revenue increased by $10.4 million, or 31.6%, to $43.2 million in 2022 from $32.8 million in 2021. Consolidated NOI increased by $7.5 million, or 48.0%, to $23.3 million in 2022 from $15.7 million in 2021. The increases in property revenue and consolidated NOI were due to the acquisition of The Batley in November 2021, higher occupancy and rental rates, and lower bad debt reserves across the portfolio. The increase in property rental revenue and consolidated NOI were partially offset by an increase in operating costs.
Comparison of the Six Months Ended June 30, 2022 to 2021
Commercial: Property rental revenue decreased by $14.3 million, or 7.9%, to $167.7 million in 2022 from $182.0 million in 2021. Consolidated NOI decreased by $7.9 million, or 7.3%, to $101.1 million in 2022 from $109.0 million in 2021. The decreases in property revenue and consolidated NOI were due to the Disposed Properties, which were partially offset by an increase at the Crystal City Marriott due to higher occupancy, an increase in parking revenue driven by an increase in both contract and transient parking, and an increase at 2100 Crystal Drive due to the commencement of a lease with Amazon.
Multifamily: Property rental revenue increased by $20.0 million, or 30.5%, to $85.4 million in 2022 from $65.5 million in 2021. Consolidated NOI increased by $15.6 million, or 50.4%, to $46.5 million in 2022 from $30.9 million in 2021. The increases in property revenue and consolidated NOI were due to the acquisition of The Batley in November 2021, higher
42
occupancy and rental rates, and lower bad debt reserves across the portfolio. The increase in property rental revenue and consolidated NOI were partially offset by an increase in operating costs.
Liquidity and Capital Resources
Property rental income is our primary source of operating cash flow and depends on many factors including occupancy levels and rental rates, as well as our tenants' ability to pay rent. In addition, our third-party asset management and real estate services business provides fee-based real estate services to Amazon, the WHI Impact Pool, the JBG Legacy Funds and other third parties. Our assets provide a relatively consistent level of cash flow that enables us to pay operating expenses, debt service, recurring capital expenditures, dividends to shareholders and distributions to holders of OP Units and long-term incentive partnership units (LTIP Units). Other sources of liquidity to fund cash requirements include proceeds from financings, recapitalizations, asset sales and the issuance and sale of securities. We anticipate that cash flows from continuing operations and proceeds from financings, asset sales and recapitalizations, together with existing cash balances, will be adequate to fund our business operations, debt amortization, capital expenditures, any dividends to shareholders and distributions to holders of OP Units and LTIP Units over the next 12 months.
Financing Activities
The following is a summary of mortgages payable:
Weighted Average | ||||||||
Effective |
| |||||||
| Interest Rate (1) |
| June 30, 2022 |
| December 31, 2021 | |||
(In thousands) | ||||||||
Variable rate (2) |
| 3.68% | $ | 857,446 | $ | 867,246 | ||
Fixed rate (3) |
| 4.45% |
| 763,681 |
| 921,013 | ||
Mortgages payable |
|
| 1,621,127 |
| 1,788,259 | |||
Unamortized deferred financing costs and premium/discount, net (4) |
|
| (8,958) |
| (10,560) | |||
Mortgages payable, net | $ | 1,612,169 | $ | 1,777,699 | ||||
| (1) | Weighted average effective interest rate as of June 30, 2022. |
| (2) | Includes variable rate mortgages payable with interest rate cap agreements. |
| (3) | Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements. |
| (4) | As of June 30, 2022 and December 31, 2021, excludes $5.7 million and $6.4 million of net deferred financing costs related to unfunded mortgage loans that were included in Other assets, net. |
As of June 30, 2022 and December 31, 2021, the net carrying value of real estate collateralizing our mortgages payable, totaled $1.6 billion and $1.8 billion. Our mortgages payable contain covenants that limit our ability to incur additional indebtedness on these properties and, in certain circumstances, require lender approval of tenant leases and/or yield maintenance upon repayment prior to maturity. Certain mortgages payable are recourse to us. See Note 17 to the financial statements for additional information.
As of June 30, 2022 and December 31, 2021, we had various interest rate swap and cap agreements on certain mortgages payable with an aggregate notional value of $1.2 billion and $1.3 billion. See Note 15 to the financial statements for additional information.
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Credit Facility
As of June 30, 2022, our $1.4 billion credit facility consisted of a $1.0 billion revolving credit facility maturing in January 2025, a $200.0 million unsecured term loan (Tranche A-1 Term Loan) maturing in January 2025 and a $200.0 million unsecured term loan (Tranche A-2 Term Loan) maturing in July 2024. In January 2022, the Tranche A-1 Term Loan was amended to extend the maturity date to January 2025 with two one-year extension options, and to amend the interest rate to SOFR plus 1.15% to SOFR plus 1.75%, varying based on a ratio of our total outstanding indebtedness to a valuation of certain real property and assets. In connection with the loan amendment, we amended the related interest rate swaps, extending the maturity to July 2024 and converting the hedged rate from one-month LIBOR to one-month SOFR. The following is a summary of amounts outstanding under the credit facility:
Effective | ||||||||
| Interest Rate (1) |
| June 30, 2022 |
| December 31, 2021 | |||
(In thousands) | ||||||||
Revolving credit facility (2) (3) (4) |
| 2.84% | $ | — | $ | 300,000 | ||
Tranche A-1 Term Loan (5) |
| 2.61% | $ | 200,000 | $ | 200,000 | ||
Tranche A-2 Term Loan (5) |
| 2.49% |
| 200,000 |
| 200,000 | ||
Unsecured term loans |
|
| 400,000 |
| 400,000 | |||
Unamortized deferred financing costs, net |
|
| (1,500) |
| (1,336) | |||
Unsecured term loans, net | $ | 398,500 | $ | 398,664 | ||||
| (1) | Effective interest rate as of June 30, 2022. The interest rate for our revolving credit facility excludes a 0.15% facility fee. |
| (2) | As of June 30, 2022 and December 31, 2021, letters of credit with an aggregate face amount of $467,000 and $911,000 were outstanding under our revolving credit facility. |
| (3) | As of June 30, 2022 and December 31, 2021, excludes $4.2 million and $5.0 million of net deferred financing costs related to our revolving credit facility that were included in Other assets, net. |
| (4) | In July 2022, we borrowed $100.0 million under our revolving credit facility. |
| (5) | As of June 30, 2022 and December 31, 2021, the outstanding balance was fixed by interest rate swap agreements. As of June 30, 2022, the interest rate swaps mature in July 2024, fix SOFR at a weighted average interest rate of 1.46% for the Tranche A-1 Term Loan, and fix LIBOR at a weighted average interest rate of 1.34% for the Tranche A-2 Term Loan. |
In July 2022, the Tranche A-2 Term Loan was amended to increase its borrowing capacity by $200.0 million. The incremental $200.0 million includes a one-year delayed draw feature, which was undrawn as of the date of this filing. The amendment extends the maturity date of the term loan from July 2024 to January 2028 and amends the interest rate to SOFR plus 1.25% to SOFR plus 1.80% per annum, varying based on a ratio of our total outstanding indebtedness to a valuation of certain real property and assets. We also entered into two forward-starting interest rate swaps with an effective date of July 2024 and a total notional value of $200.0 million, which will effectively fix SOFR at a weighted average interest rate of 2.25% through the maturity date. Additionally, we amended the interest rate of the revolving credit facility to SOFR plus 1.15% to SOFR plus 1.60%, varying based on a ratio of our total outstanding indebtedness to a valuation of certain real property and assets.
As of June 30, 2022, we had floating rate debt with a principal balance totaling $1.1 billion and hedging arrangements with a notional value totaling $1.2 billion that use LIBOR as a reference rate. On November 30, 2020, the United Kingdom regulator announced its intentions, subject to confirmation following an early December consultation, to cease the publication of the one-week and two-month USD-LIBOR immediately following the December 31, 2021 publications, and the remaining USD-LIBOR tenors immediately following the June 30, 2023 publications. Though an alternative reference rate for LIBOR, SOFR, exists, significant uncertainties still remain. We can provide no assurance regarding the future of LIBOR and when our LIBOR-based instruments will transition from LIBOR as a reference rate to SOFR or another reference rate. The discontinuation of a benchmark rate or other financial metric, changes in a benchmark rate or other financial metric, or changes in market perceptions of the acceptability of a benchmark rate or other financial metric, including LIBOR, could, among other things, result in increased interest payments, changes to our risk exposures, or require renegotiation of previous transactions. In addition, any such discontinuation or changes, whether actual or anticipated, could result in market volatility, adverse tax or accounting effects, increased compliance, legal and operational costs, and risks associated with contract negotiations.
44
Common Shares Repurchased
In March 2020, our Board of Trustees authorized the repurchase of up to $500.0 million of our outstanding common shares and in June 2022, increased the authorized repurchase amount by $500.0 million to an aggregate of $1.0 billion. During the three and six months ended June 30, 2022, we repurchased and retired 8.5 million and 11.8 million common shares for $213.9 million and $307.0 million, a weighted average purchase price per share of $25.15 and $25.91. During the six months ended June 30, 2021, we repurchased and retired 619,749 common shares for $19.2 million, a weighted average purchase price per share of $30.96. Since we began the share repurchase program, we have repurchased and retired 21.0 million common shares for $569.5 million, a weighted average purchase price per share of $27.12.
In July 2022, we repurchased and retired 1.5 million common shares for $36.0 million, a weighted average purchase price per share of $23.92, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.
Purchases under the program are made either in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will be subject to economic and market conditions, share price, applicable legal requirements and other factors. The program may be suspended or discontinued at our discretion without prior notice.
Material Cash Requirements
Our material cash requirements for the next 12 months and beyond include:
| ● | normal recurring expenses; |
| ● | debt service and principal repayment obligations, including balloon payments on maturing debt — As of June 30, 2022, we had no mortgages payable on a consolidated basis and $86.6 million at our share scheduled to mature in 2022; |
| ● | capital expenditures, including major renovations, tenant improvements and leasing costs — As of June 30, 2022, we had committed tenant-related obligations totaling $74.3 million ($68.8 million related to our consolidated entities and $5.5 million related to our unconsolidated real estate ventures at our share); |
| ● | development expenditures — As of June 30, 2022, we had assets under construction that will, based on our current plans and estimates, require an additional $528.5 million to complete, which we anticipate will be primarily expended over the next two to three years; |
| ● | dividends to shareholders and distributions to holders of OP Units and LTIP Units — On July 29, 2022, our Board of Trustees declared a quarterly dividend of $0.225 per common share; |
| ● | possible common share repurchases — In July 2022, we repurchased and retired 1.5 million common shares for $36.0 million and we are authorized to repurchase an additional $394.5 million under our current common share repurchase program; and |
| ● | possible acquisitions of properties, either directly or indirectly through the acquisition of equity interests therein — On August 1, 2022, we acquired the remaining 36.0% ownership interest in Atlantic Plumbing, a multifamily asset owned by an unconsolidated real estate venture, for $19.7 million. |
We expect to satisfy these needs using one or more of the following:
| ● | cash and cash equivalents — As of June 30, 2022, we had cash and cash equivalents of $162.3 million and had restricted cash of $187.4 million held by a qualified intermediary to facilitate a potential like-kind exchange transaction; |
| ● | cash flows from operations; |
| ● | distributions from real estate ventures; |
| ● | borrowing capacity under our current credit facility — As of June 30, 2022, we had $999.5 million of availability under our credit facility. In July 2022, we borrowed $100.0 million under our revolving credit facility and amended our Tranche A‑2 Term Loan to increase its borrowing capacity by $200.0 million. The incremental $200.0 million includes a one-year delayed draw feature, which was undrawn as of the date of this filing; and |
| ● | proceeds from financings, asset sales and recapitalizations. |
45
While we do not expect the need to do so during the next 12 months, we also can issue securities to raise funds.
During the six months ended June 30, 2022, there were no significant changes to the material cash requirements information presented in Item 7 of Part II of our Annual Report, except for a $1.4 billion decrease in future finance lease payments related to the Disposed Properties, a $300.0 million decrease in the principal amount due on our revolving credit facility and a $164.8 million decrease in the principal amount due on mortgages payable related to the Disposed Properties.
See additional information in the following pages under Commitments and Contingencies.
Summary of Cash Flows
The following summary discussion of our cash flows is based on our statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows:
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
(In thousands) | ||||||
Net cash provided by operating activities | $ | 107,649 | $ | 123,556 | ||
Net cash provided by (used in) investing activities |
| 785,304 |
| (70,445) | ||
Net cash used in financing activities |
| (819,930) |
| (77,754) | ||
Cash Flows for the Six Months Ended June 30, 2022
Cash and cash equivalents, and restricted cash increased $73.0 million to $375.1 million as of June 30, 2022, compared to $302.1 million as of December 31, 2021. This increase resulted from $785.3 million of net cash provided by investing activities and $107.6 million of net cash provided by operating activities, partially offset by $819.9 million of net cash used in financing activities. Our outstanding debt was $2.0 billion and $2.5 billion as of June 30, 2022 and December 31, 2021.
Net cash provided by operating activities of $107.6 million primarily comprised: (i) $95.6 million of net income (before $112.8 million of non-cash items and a $158.6 million gain on the sale of real estate), (ii) $6.0 million of return on capital from unconsolidated real estate ventures and (iii) $6.1 million of net change in operating assets and liabilities. Non-cash income adjustments of $112.8 million primarily include depreciation and amortization expense, share-based compensation expense, net income from investments, deferred rent, amortization of lease incentives and other non-cash items.
Net cash provided by investing activities of $785.3 million comprised: (i) $923.1 million of proceeds from the sale of real estate, (ii) $52.5 million of distributions of capital from unconsolidated real estate ventures and (iii) $19.0 million of proceeds from the sale of investments, partially offset by (iv) $128.1 million of development costs, construction in progress and real estate additions and (v) $81.2 million of investments in unconsolidated real estate ventures and other investments.
Net cash used in financing activities of $819.9 million primarily comprised: (i) $300.0 million of repayments of our revolving credit facility, (ii) $297.0 million of common shares repurchased, (iii) $167.1 million of repayments of mortgages payable, (iv) $56.3 million of dividends paid to common shareholders and (v) $8.2 million of distributions to our redeemable noncontrolling interests, partially offset by (vi) $9.2 million of contributions from noncontrolling interests.
Unconsolidated Real Estate Ventures
We consolidate entities in which we have a controlling interest or are the primary beneficiary in a variable interest entity. From time to time, we may have off-balance-sheet unconsolidated real estate ventures and other unconsolidated arrangements with varying structures.
As of June 30, 2022, we had investments in unconsolidated real estate ventures totaling $414.3 million. For these investments, we exercise significant influence over but do not control these entities and, therefore, account for these investments using the equity method of accounting. For a more complete description of our real estate ventures, see Note 4 to the financial statements.
46
From time to time, we (or ventures in which we have an ownership interest) have agreed, and may in the future agree with respect to unconsolidated real estate ventures, to (i) guarantee portions of the principal, interest and other amounts in connection with borrowings, (ii) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) in connection with borrowings or (iii) provide guarantees to lenders and other third parties for the completion of development projects. We customarily have agreements with our outside venture partners whereby the partners agree to reimburse the real estate venture or us for their share of any payments made under certain of these guarantees. At times, we also have agreements with certain of our outside venture partners whereby we agree to either indemnify the partners and/or the associated ventures with respect to certain contingent liabilities associated with operating assets or to reimburse our partner for its share of any payments made by them under certain guarantees. Guarantees (excluding environmental) customarily terminate either upon the satisfaction of specified circumstances or repayment of the underlying debt. Amounts that we may be required to pay in future periods in relation to guarantees associated with budget overruns or operating losses are not estimable.
As of June 30, 2022, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures and other investments totaling $66.4 million. As of June 30, 2022, we had no principal payment guarantees related to our unconsolidated real estate ventures.
We evaluate reconsideration events as we become aware of them. Reconsideration events include amendments to real estate venture agreements or changes in our partner's ability to make contributions to the venture. Under certain circumstances, we may purchase our partner's interest. A reconsideration event could cause us to consolidate an unconsolidated real estate venture in the future or deconsolidate a consolidated entity.
Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $150.0 million per occurrence and in the aggregate, and property and rental value insurance coverage with limits of $1.5 billion per occurrence, with sub-limits for certain perils such as floods and earthquakes on each of our properties. We also maintain coverage, through our wholly owned captive insurance subsidiary, for a portion of the first loss on the above limits and for both terrorist acts and for nuclear, biological, chemical or radiological terrorism events with limits of $2.0 billion per occurrence. These policies are partially reinsured by third-party insurance providers.
We will continue to monitor the state of the insurance market, and the scope and costs of coverage for acts of terrorism. We cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for deductibles and losses in excess of the insurance coverage, which could be material.
Our debt, consisting of mortgages payable secured by our properties, a revolving credit facility and unsecured term loans, contains customary covenants requiring adequate insurance coverage. Although we believe that we currently have adequate insurance coverage, we may not be able to obtain an equivalent amount of coverage at a reasonable cost in the future. If lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance or refinance our properties.
Construction Commitments
As of June 30, 2022, we had assets under construction that will, based on our current plans and estimates, require an additional $528.5 million to complete, which we anticipate will be primarily expended over the next two to three years. These capital expenditures are generally due as the work is performed, and we expect to finance them with debt proceeds, proceeds from asset sales and recapitalizations, and available cash.
Other
As of June 30, 2022, we had committed tenant-related obligations totaling $74.3 million ($68.8 million related to our consolidated entities and $5.5 million related to our unconsolidated real estate ventures at our share). The timing and
47
amounts of payments for tenant-related obligations are uncertain and may only be due upon satisfactory performance of certain conditions.
There are various legal actions against us in the ordinary course of business. In our opinion, the outcome of such matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
With respect to borrowings of our consolidated entities, we have agreed, and may in the future agree, to (i) guarantee portions of the principal, interest and other amounts, (ii) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) or (iii) provide guarantees to lenders, tenants and other third parties for the completion of development projects. As of June 30, 2022, the aggregate amount of principal payment guarantees was $8.3 million for our consolidated entities.
In connection with the Formation Transaction, we have an agreement with Vornado regarding tax matters (the Tax Matters Agreement) that provides special rules that allocate tax liabilities if the distribution of JBG SMITH shares by Vornado, together with certain related transactions, is determined not to be tax-free. Under the Tax Matters Agreement, we may be required to indemnify Vornado against any taxes and related amounts and costs resulting from a violation by us of the Tax Matters Agreement
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on such real estate. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of remediation or removal of such substances may be substantial and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner's ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of our assets, we may be potentially liable for such costs. The operations of current and former tenants at our assets have involved, or may have involved, the use of hazardous materials or generated hazardous waste. The release of such hazardous materials and waste could result in us incurring liabilities to remediate any resulting contamination. The presence of contamination or the failure to remediate contamination at our properties may (i) expose us to third-party liability (e.g., for cleanup costs, natural resource damages, bodily injury or property damage), (ii) subject our properties to liens in favor of the government for damages and costs the government incurs in connection with the contamination, (iii) impose restrictions on the manner in which a property may be used or which businesses may be operated, or (iv) materially adversely affect our ability to sell, lease or develop the real estate or to borrow using the real estate as collateral. In addition, our assets are exposed to the risk of contamination originating from other sources. While a property owner may not be responsible for remediating contamination that has migrated onsite from an identifiable and viable offsite source, the contaminant's presence can have adverse effects on operations and the redevelopment of our assets. To the extent we send contaminated materials to other locations for treatment or disposal, we may be liable for cleanup of those sites if they become contaminated.
Most of our assets have been subject, at some point, to environmental assessments that are intended to evaluate the environmental condition of the assets. These environmental assessments generally have included a historical review, a public records review, a visual inspection of the site and surrounding assets, visual or historical evidence of underground storage tanks, and the preparation and issuance of a written report. Soil and/or groundwater subsurface testing is conducted at our assets, when necessary, to further investigate any issues raised by the initial assessment that could reasonably be expected to pose a material concern to the property or result in us incurring material environmental liabilities as a result of redevelopment. They may not, however, have included extensive sampling or subsurface investigations. In each case where the environmental assessments have identified conditions requiring remedial actions required by law, we have initiated appropriate actions. The environmental assessments did not reveal any material environmental contamination that we believe would have a material adverse effect on our overall business, financial condition or results of operations, or that have not been anticipated and remediated during site redevelopment as required by law. Nevertheless, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites or changes in cleanup requirements would not result in significant cost to us. As disclosed in Note 17 to the financial statements, environmental liabilities totaled $19.4 million and $18.2 million as of June 30, 2022 and December 31, 2021 and are included in Other liabilities, net in our balance sheets.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We have exposure to fluctuations in interest rates, which are sensitive to many factors that are beyond our control. The following is a summary of our annual exposure to a change in interest rates:
| June 30, 2022 | December 31, 2021 |
| |||||||||||||
|
| Weighted |
|
|
| Weighted |
| |||||||||
Average | Annual | Average |
| |||||||||||||
Effective | Effect of 1% | Effective |
| |||||||||||||
Interest | Change in | Interest |
| |||||||||||||
Balance | Rate |
| Base Rates | Balance | Rate |
| ||||||||||
(Dollars in thousands) |
| |||||||||||||||
Debt (contractual balances): | ||||||||||||||||
Mortgages payable: |
|
|
|
|
|
|
|
|
| |||||||
Variable rate (1) | $ | 857,446 |
| 3.68% | $ | 8,694 | $ | 867,246 |
| 2.01% | ||||||
Fixed rate (2) |
| 763,681 |
| 4.45% |
| — |
| 921,013 |
| 4.32% | ||||||
$ | 1,621,127 | $ | 8,694 | $ | 1,788,259 | |||||||||||
Credit facility: | ||||||||||||||||
Revolving credit facility (3) | $ | — |
| 2.84% | $ | — | $ | 300,000 |
| 1.15% | ||||||
Tranche A-1 Term Loan (4) |
| 200,000 |
| 2.61% |
| — |
| 200,000 |
| 2.59% | ||||||
Tranche A-2 Term Loan (4) |
| 200,000 |
| 2.49% |
| — |
| 200,000 |
| 2.49% | ||||||
$ | 400,000 | $ | — | $ | 700,000 | |||||||||||
Pro rata share of debt of unconsolidated real estate ventures (contractual balances): | ||||||||||||||||
Variable rate (1) | $ | 189,136 |
| 4.78% | $ | 1,918 | $ | 281,608 |
| 2.56% | ||||||
Fixed rate (2) |
| 90,643 |
| 4.49% |
| — |
| 91,653 |
| 4.49% | ||||||
$ | 279,779 | $ | 1,918 | $ | 373,261 | |||||||||||
| (1) | Includes variable rate mortgages payable with interest rate cap agreements. |
| (2) | Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements. |
| (3) | The interest rate for our revolving credit facility excludes a 0.15% facility fee. |
| (4) | As of June 30, 2022 and December 31, 2021, the outstanding balance was fixed by interest rate swap agreements. As of June 30, 2022, the interest rate swaps mature in July 2024, fix SOFR at a weighted average interest rate of 1.46% for the Tranche A-1 Term Loan, and fix LIBOR at a weighted average rate of 1.34% for the Tranche A-2 Term Loan. In July 2022, the Tranche A-2 Term Loan was amended. See Note 7 to the financial statements for additional information. |
The fair value of our mortgages payable is estimated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit profiles based on market sources. The fair value of our revolving credit facility and unsecured term loans is calculated based on the net present value of payments over the term of the facilities using estimated market rates for similar notes and remaining terms. As of June 30, 2022 and December 31, 2021, the estimated fair value of our consolidated debt was $2.0 billion and $2.5 billion. These estimates of fair value, which are made at the end of the reporting period, may be different from the amounts that may ultimately be realized upon the disposition of our financial instruments.
Hedging Activities
To manage or hedge our exposure to interest rate risk, we follow established risk management policies and procedures, including the use of a variety of derivative financial instruments. We do not enter into derivative financial instruments for speculative purposes.
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Derivative Financial Instruments Designated as Effective Hedges
Certain derivative financial instruments, consisting of interest rate swap and cap agreements, are cash flow hedges that are designated as effective hedges, and are carried at their estimated fair value on a recurring basis. We assess the effectiveness of our hedges both at inception and on an ongoing basis. If the hedges are deemed to be effective, the fair value is recorded in Accumulated other comprehensive income (loss) in our balance sheets and is subsequently reclassified into Interest expense in our statements of operations in the period that the hedged forecasted transactions affect earnings. Our hedges become less than perfectly effective if the critical terms of the hedging instrument and the forecasted transactions do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and interest rates. In addition, we evaluate the default risk of the counterparty by monitoring the creditworthiness of the counterparty. While management believes its judgments are reasonable, a change in a derivative's effectiveness as a hedge could materially affect expenses, net income (loss) and equity.
As of June 30, 2022 and December 31, 2021, we had interest rate swap and cap agreements with an aggregate notional value of $930.2 million and $862.7 million, which were designated as effective hedges. The fair value of our interest rate swaps and caps designated as effective hedges consisted of assets totaling $20.4 million and $393,000 as of June 30, 2022 and December 31, 2021 included in Other assets, net in our balance sheets, and liabilities totaling $18.4 million as of December 31, 2021, included in Other liabilities, net in our balance sheet.
Derivative Financial Instruments Designated as Ineffective Hedges
Certain derivative financial instruments, consisting of interest rate swap and cap agreements, are cash flow hedges that are designated as ineffective hedges, and are carried at their estimated fair value on a recurring basis. Realized and unrealized gains or losses are recorded in Interest expense in our statements of operations. As of June 30, 2022 and December 31, 2021, we had various interest rate swap and cap agreements with an aggregate notional value of $692.7 million and $867.7 million, which were designated as ineffective hedges. The fair value of our interest rate swaps and caps designated as ineffective hedges consisted of assets totaling $6.0 million and $558,000 as of June 30, 2022 and December 31, 2021, included in Other assets, net in our balance sheets.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2022, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are, from time to time, involved in legal actions arising in the ordinary course of business. In our opinion, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in our Annual Report.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| (a) | Not applicable. |
| (b) | Not applicable. |
| (c) | Purchases of equity securities by the issuer and affiliated purchasers: |
Period | Total Number Of Common Shares Purchased | Average Price Paid Per Common Share | Total Number Of Common Shares Purchased As Part Of Publicly Announced Plans Or Programs | Approximate Dollar Value Of Common Shares That May Yet Be Purchased Under the Plan Or Programs | |||||||
April 1, 2022 - April 30, 2022 | 706,598 | $ | 27.39 | 706,598 | $ | 125,042,507 | |||||
May 1, 2022 - May 31, 2022 | 3,465,029 | 25.31 | 3,465,029 | 37,281,008 | |||||||
June 1, 2022 - June 30, 2022 | 4,326,740 | 24.66 | 4,326,740 | 430,516,492 | |||||||
Total for the three months ended June 30, 2022 | 8,498,367 | 25.15 | 8,498,367 | ||||||||
Total for the six months ended June 30, 2022 | 11,839,514 | 25.91 | 11,839,514 | ||||||||
Program total since inception in March 2020 (1) | 20,986,335 | 27.12 | 20,986,335 |
| (1) | In July 2022, we repurchased and retired 1.5 million common shares for $36.0 million, a weighted average purchase price per share of $23.92, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. |
In March 2020, our Board of Trustees authorized the repurchase of up to $500.0 million of our outstanding common shares and in June 2022, increased the authorized repurchase amount by $500.0 million to an aggregate of $1.0 billion. Purchases under the program are made either in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will be subject to economic and market conditions, share price, applicable legal requirements and other factors. The program may be suspended or discontinued at our discretion without prior notice.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Delayed Draw Term Credit Agreement
On July 29, 2022, JBG SMITH LP entered into a new Credit Agreement (the Delayed Draw Term Credit Agreement) with Wells Fargo Bank, National Association, as administrative agent (the Agent), and the lenders party thereto as set forth in the Delayed Draw Term Credit Agreement. The Delayed Draw Term Credit Agreement provides for a $400.0 million senior unsecured delayed draw term loan facility maturing January 13, 2028 (the Delayed Draw Term Loan). As of July 29, 2022, $200.0 million of the Delayed Draw Term Loan was advanced, substantially all the proceeds of which were used to repay in full JBG SMITH LP’s existing $200.0 million Tranche A-2 Term Loan facility previously outstanding
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under the Existing Credit Agreement (as defined below). This draw of the Delayed Draw Term Loan as well as the repayment of Tranche A-2 Term Loan of the existing term loan facility results in an overall increased borrowing capacity of $200.0 million. The additional $200.0 million of commitments in respect of the Delayed Draw Term Loan may be borrowed, in whole or in part, in one or more draws, at any time until July 29, 2023. The Delayed Draw Term Credit Agreement includes the option to add additional term loans up to $200.0 million in the aggregate to the extent that the lenders (whether or not an existing lender under the Delayed Draw Term Loan) agree to provide such additional credit extensions.
The Delayed Draw Term Loan bears interest, at JBG SMITH LP’s option, at a rate of either SOFR plus a margin ranging from 1.15% to 1.70% (plus a credit spread adjustment of 0.10%) or the base rate plus a margin ranging from 0.15% to 0.70%, in each case, with the actual margin determined according to JBG SMITH LP’s ratio of indebtedness to a valuation of certain real property and assets. The base rate is the highest of the Agent’s prime rate, the federal funds rate plus 0.50% and the adjusted Term SOFR for a one-month tenor plus 1.0%. The Delayed Draw Term Loan may be voluntarily prepaid in full or in part at any time, subject to customary breakage costs, if applicable. The Delayed Draw Term Credit Agreement also includes a sustainability component whereby the applicable margin can decrease upon JBG SMITH LP’s achievement of certain sustainability performance metrics specified in the Delayed Draw Term Credit Agreement.
The Delayed Draw Term Credit Agreement contains customary representations and warranties and affirmative, negative and financial covenants that are substantially similar to JBG SMITH LP’s existing Credit Agreement, dated as of July 18, 2017, as amended, by and among JBG SMITH LP, Wells Fargo Bank, National Association, as administrative agent, and the lenders from time to time party thereto (as amended, the Existing Credit Agreement). Consistent with the Existing Credit Agreement, such Delayed Draw Term Credit Agreement covenants include restrictions on mergers, affiliate transactions, and asset sales as well as the following financial maintenance covenants:
| ● percentage of total debt to capitalization value of not more than 60% (subject to a higher level of 65% for a period of 4 fiscal quarters following a real property asset acquisition); | |
● ratio of combined EBITDA to fixed charges of not less than 1.50 to 1.00; | ||
● percentage of secured indebtedness to capitalization value of not more than 50%; | ||
● ratio of combined EBITDA for unencumbered properties to interest expense on unsecured debt of not less than 1.50 to 1.00; and | ||
· |
| ● percentage of unsecured indebtedness to the capitalization value of unencumbered properties of not more than 60% (subject to a higher level of 65% for a period of 4 fiscal quarters following a real property asset acquisition). |
Consistent with the Existing Credit Agreement, the Delayed Draw Term Credit Agreement also includes customary events of default, the occurrence of which, following any applicable grace period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of JBG SMITH LP under the Delayed Draw Term Credit Agreement to be immediately due and payable.
The foregoing description does not purport to be complete and is qualified in its entirety by reference to the full text of the Delayed Draw Term Credit Agreement, a copy of which is filed as Exhibit 10.1 to this Current Report on Form 10-Q and is incorporated herein by reference.
Concurrently with entering into the Delayed Draw Term Credit Agreement, JBG SMITH LP amended their Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, which amends the existing Credit Agreement, dated January 14, 2022, by and among JBG SMITH LP, Wells Fargo Bank, National Association, as administrative agent, and the lenders from time to time party thereto, to change the benchmark interest rate applicable to the revolving loans under the Existing Credit Agreement from one or more rates based on LIBOR to one or more rates based on SOFR and to conform terms of the existing term credit agreement under the Existing Credit Agreement to the terms of the Delayed Draw Term Credit Agreement.
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Executive Retirement Agreement
On July 29, 2022, David P. Paul, President and Chief Operating Officer, informed us of his plans to retire from his position, effective December 31, 2022. Mr. Paul will continue to serve as a Senior Advisor until February 3, 2023.
On July 29, 2022, in connection with Mr. Paul’s planned retirement, we entered into a retirement agreement and release with Mr. Paul (the Retirement Agreement). The Retirement Agreement provides for the following: (i) for a six-month period following February 3, 2023 (the Transition Period), Mr. Paul will provide strategic advice to us regarding transition of his responsibilities and duties, (ii) during the Transition Period, we will pay Mr. Paul a monthly fee of $10,000, (iii) the time-based equity awards granted to Mr. Paul on November 12, 2018 not vested on the date that the Transition Period begins (the In-Flight Awards), will continue to vest during the Transition Period and, upon successful completion of the Transition Period or earlier termination thereof by us for any reason, any remaining unvested In-Flight Awards will continue to vest in accordance with the applicable Equity Award Agreement and (iv) subject to certain exceptions specified in the Retirement Agreement, all other outstanding equity awards held by Mr. Paul that are unvested as of the date that the Transition Period begins will remain outstanding, without requiring Mr. Paul’s continued employment by us.
The description of the Retirement Agreement herein is qualified by reference to the full text of the Retirement Agreement which is attached as Exhibit 10.4 to this report on Form 10-Q.
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ITEM 6. EXHIBITS
(a) Exhibit Index
Exhibits | Description |
|---|---|
3.1 | |
3.2 | |
3.3 | |
3.4 | |
10.1** | |
10.2** | |
10.3** | |
10.4†** | |
31.1** | |
31.2** | |
32.1** | |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | Inline XBRL Taxonomy Extension Schema |
101.CAL | Inline XBRL Extension Calculation Linkbase |
101.LAB | Inline XBRL Extension Labels Linkbase |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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