Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 001-37994
JBG SMITH PROPERTIES
________________________________________________________________________________
(Exact name of Registrant as specified in its charter)
Maryland
81-4307010
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
4747 Bethesda Avenue Suite 200
Bethesda MD
20814
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (240) 333-3600
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, par value $0.01 per share
JBGS
New York Stock Exchange
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. Yes ☒ No ☐
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). Yes ☒ No ☐
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.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
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 ☐ No ☒
As of July 29, 2022, JBG SMITH Properties had 114,390,891 common shares outstanding.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2022
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
Page
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2022 and December 31, 2021
3
Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2022 and 2021
4
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2022 and 2021
5
Condensed Consolidated Statements of Equity (unaudited) for the three and six months ended June 30, 2022 and 2021
6
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2022 and 2021
8
Notes to Condensed Consolidated Financial Statements (unaudited)
10
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
49
Item 4.
Controls and Procedures
50
PART II – OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
51
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
54
Signatures
55
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value amounts)
June 30, 2022
December 31, 2021
ASSETS
Real estate, at cost:
Land and improvements
$
1,217,216
1,378,218
Buildings and improvements
4,004,286
4,513,606
Construction in progress, including land
385,085
344,652
5,606,587
6,236,476
Less: accumulated depreciation
(1,257,871)
(1,368,003)
Real estate, net
4,348,716
4,868,473
Cash and cash equivalents
162,270
264,356
Restricted cash
212,848
37,739
Tenant and other receivables
46,605
44,496
Deferred rent receivable
154,487
192,265
Investments in unconsolidated real estate ventures
414,349
462,885
Intangible assets, net
157,819
201,956
Other assets, net
82,808
240,160
Assets held for sale
—
73,876
TOTAL ASSETS
5,579,902
6,386,206
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Liabilities:
Mortgages payable, net
1,612,169
1,777,699
Revolving credit facility
300,000
Unsecured term loans, net
398,500
398,664
Accounts payable and accrued expenses
112,784
106,136
Other liabilities, net
111,852
342,565
Total liabilities
2,235,305
2,925,064
Commitments and contingencies
Redeemable noncontrolling interests
521,392
522,725
Shareholders' equity:
Preferred shares, $0.01 par value - 200,000 shares authorized; none issued
Common shares, $0.01 par value - 500,000 shares authorized; 115,862 and 127,378 shares issued and outstanding as of June 30, 2022 and December 31, 2021
1,160
1,275
Additional paid-in capital
3,285,511
3,539,916
Accumulated deficit
(513,746)
(609,331)
Accumulated other comprehensive income (loss)
18,640
(15,950)
Total shareholders' equity of JBG SMITH Properties
2,791,565
2,915,910
Noncontrolling interests
31,640
22,507
Total equity
2,823,205
2,938,417
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
See accompanying notes to the condensed consolidated financial statements (unaudited).
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
REVENUE
Property rental
117,036
122,819
248,634
245,060
Third-party real estate services, including reimbursements
22,157
26,745
46,127
64,852
Other revenue
6,312
5,080
12,709
10,021
Total revenue
145,505
154,644
307,470
319,933
EXPENSES
Depreciation and amortization
49,479
56,678
107,541
121,404
Property operating
35,445
35,000
76,089
69,731
Real estate taxes
14,946
18,558
33,132
36,868
General and administrative:
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
Total expenses
142,359
156,399
305,258
324,212
OTHER INCOME (EXPENSE)
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)
Interest expense
(16,041)
(16,773)
(32,319)
(33,069)
Gain on the sale of real estate, net
158,767
11,290
158,631
Loss on the extinguishment of debt
(1,038)
(1,629)
Total other income (expense)
141,253
(1,568)
141,639
(18,798)
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT
144,399
(3,323)
143,851
(23,077)
Income tax (expense) benefit
(2,905)
(2,434)
(4,310)
NET INCOME (LOSS)
141,494
(3,318)
141,417
(27,387)
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) ATTRIBUTABLE TO COMMON SHAREHOLDERS
123,275
(2,973)
123,243
(23,704)
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
1.02
(0.03)
0.99
(0.19)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED
121,316
131,480
123,984
131,510
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
OTHER COMPREHENSIVE INCOME:
Change in fair value of derivative financial instruments
7,225
(1,404)
32,320
5,007
Reclassification of net loss on derivative financial instruments from accumulated other comprehensive income (loss) into interest expense
2,791
3,834
6,547
7,575
Total other comprehensive income
10,016
2,430
38,867
12,582
COMPREHENSIVE INCOME (LOSS)
151,510
(888)
180,284
(14,805)
Other comprehensive income attributable to redeemable noncontrolling interests
(1,311)
(235)
(4,277)
(1,208)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO JBG SMITH PROPERTIES
131,980
(778)
157,833
(12,330)
Condensed Consolidated Statements of Equity
Accumulated
Other
Additional
Comprehensive
Common Shares
Paid-In
Income
Noncontrolling
Total
Shares
Amount
Capital
Deficit
(Loss)
Interests
Equity
BALANCE AS OF MARCH 31, 2022
124,248
1,243
3,444,793
(609,363)
9,935
28,438
2,875,046
Net income (loss) attributable to common shareholders and noncontrolling interests
123,246
Conversion of common limited partnership units ("OP Units") to common shares
72
1
1,761
1,762
Common shares repurchased
(8,499)
(84)
(213,807)
(213,891)
Common shares issued pursuant to employee incentive compensation plan and Employee Share Purchase Plan ("ESPP")
41
1,143
Dividends declared on common shares($0.225 per common share)
(27,658)
Contributions from noncontrolling interests, net
3,231
Redeemable noncontrolling interests redemption value adjustment and total other comprehensive income allocation
51,621
50,310
BALANCE AS OF JUNE 30, 2022
115,862
BALANCE AS OF MARCH 31, 2021
131,277
1,314
3,631,277
(433,675)
(30,800)
8,730
3,176,846
Net loss attributable to common shareholders and noncontrolling interests
Conversion of OP Units to common shares
530
17,756
17,761
Common shares issued pursuant to employee incentive compensation plan and ESPP
34
1,090
(29,582)
7,810
94
(141)
BALANCE AS OF JUNE 30, 2021
131,841
1,319
3,650,217
(466,230)
(28,605)
16,540
3,173,241
BALANCE AS OF DECEMBER 31, 2021
127,378
123,159
280
7,773
7,776
(11,840)
(118)
(306,921)
(307,039)
44
1,429
9,217
43,314
39,037
BALANCE AS OF DECEMBER 31, 2020
131,778
3,657,643
(412,944)
(39,979)
167
3,206,206
(1,108)
(24,812)
649
21,674
21,680
(620)
(6)
(19,197)
(19,203)
1,339
17,481
(11,242)
(12,450)
7
Condensed Consolidated Statements of Cash Flows
OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Share-based compensation expense
25,375
26,892
Depreciation and amortization, including amortization of deferred financing costs
109,697
123,444
Deferred rent
(7,237)
(12,170)
Income from unconsolidated real estate ventures, net
(3,010)
Amortization of market lease intangibles, net
(621)
(658)
Amortization of lease incentives
4,303
4,191
Loss on extinguishment of debt
1,629
(158,631)
(11,290)
Loss on operating lease and other receivables
738
975
Income from investments, net
(15,282)
Return on capital from unconsolidated real estate ventures
6,028
10,348
Other non-cash items
(4,781)
473
Changes in operating assets and liabilities:
(2,847)
11,204
(3,669)
274
(1,375)
238
13,943
32
Net cash provided by operating activities
107,649
123,556
INVESTING ACTIVITIES:
Development costs, construction in progress and real estate additions
(128,114)
(67,408)
Proceeds from the sale of real estate
923,108
14,370
Proceeds from the sale of investments
19,030
Distributions of capital from unconsolidated real estate ventures
52,465
4,583
Investments in unconsolidated real estate ventures and other investments
(81,185)
(21,990)
Net cash provided by (used in) investing activities
785,304
(70,445)
FINANCING ACTIVITIES:
Repayments of mortgages payable
(167,132)
(3,342)
Repayments of revolving credit facility
(300,000)
Debt issuance costs
(1,256)
(4,587)
Proceeds from common shares issued pursuant to ESPP
800
880
(297,040)
Dividends paid to common shareholders
(56,323)
(59,232)
Distributions to redeemable noncontrolling interests
(8,196)
(9,712)
Distributions to noncontrolling interests
(21)
(22)
Contributions from noncontrolling interests
9,238
17,464
Net cash used in financing activities
(819,930)
(77,754)
Net increase (decrease) in cash and cash equivalents, and restricted cash
73,023
(24,643)
Cash and cash equivalents, and restricted cash, beginning of period
302,095
263,336
Cash and cash equivalents, and restricted cash, end of period
375,118
238,693
CASH AND CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD:
201,150
37,543
Cash and cash equivalents, and restricted cash
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:
Cash paid for interest (net of capitalized interest of $3,928 and $3,256 in 2022 and 2021)
34,612
30,335
Accrued capital expenditures included in accounts payable and accrued expenses
57,426
41,662
Write-off of fully depreciated assets
7,993
43,185
Deconsolidation of real estate asset
26,476
Cash paid for amounts included in the measurement of lease liabilities for operating leases
1,092
1,320
9
Notes to Condensed Consolidated Financial Statements
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 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. As of June 30, 2022, JBG SMITH, as its sole general partner, controlled JBG SMITH LP and owned 88.4% of its OP Units, after giving effect to the conversion of certain vested long-term incentive partnership units ("LTIP Units") that are convertible into OP Units. JBG SMITH is referred to herein 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."
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 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
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 $202.0 million were reclassified from "Other assets, net" to "Intangible assets, net" in our balance sheet as of December 31, 2021 to present intangible assets separately from other assets, which is consistent with our current year presentation.
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.
11
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)
Gross
Cash
on the Sale
Square
Sales
Proceeds
of Real
Date Disposed
Assets
Segment
Location
Feet
Price
from Sale
Estate
March 28, 2022
Development Parcel
Arlington, Virginia
3,250
3,149
(136)
April 1, 2022
Universal Buildings (1)
Commercial
Washington, D.C.
659
228,000
194,737
41,245
April 13, 2022
7200 Wisconsin Avenue, 1730 M Street, RTC-West and Courthouse Plaza 1 and 2 (2)
Commercial/Other
Bethesda, Maryland, Washington, D.C., Reston, Virginia, Arlington, Virginia
2,944
580,000
527,694
(3,980)
May 25, 2022
Pen Place (3)
2,082
198,000
197,528
121,502
5,685
1,009,250
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 no assets held for sale as of June 30, 2022. The following is a summary of assets held for sale as of December 31, 2021:
Assets Held
Square Feet
for Sale
Pen Place (1)
12
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)
Prudential Global Investment Management
50.0%
205,965
208,421
Landmark Partners ("Landmark")
18.0% - 49.0%
25,437
28,298
CBREI Venture (2)
5.0% - 64.0%
56,170
57,812
Canadian Pension Plan Investment Board ("CPPIB")
55.0%
1,358
48,498
J.P. Morgan Global Alternatives ("J.P. Morgan") (3)
60,203
52,769
Berkshire Group
50,941
52,770
Brandywine Realty Trust
30.0%
13,694
13,693
581
624
Total investments in unconsolidated real estate ventures (4)
On April 13, 2022, we formed an unconsolidated real estate venture with affiliates of Fortress Investment Group LLC ("Fortress") 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 (7200 Wisconsin Avenue, 1730 M Street, RTC-West and Courthouse Plaza 1 and 2). Additionally, we contributed $66.1 million in cash for a 33.5% interest in the venture, while Fortress contributed $131.0 million for a 66.5% interest in the venture. In connection with the transaction, the venture obtained mortgage loans totaling $458.0 million secured by the properties, of which $402.0 million was drawn at closing. We provide asset management, property management and leasing services to the venture. Because our interest in the venture is subordinated to a 15% preferred return to Fortress, we do not anticipate receiving any near-term cash flow distributions from it. As of June 30, 2022, our investment in the venture was zero, and we have discontinued applying the equity method as we have not guaranteed its obligations or otherwise committed to providing financial support.
We provide leasing, property management and other real estate services to our unconsolidated real estate ventures. We recognized revenue, including expense reimbursements, of $6.6 million and $12.2 million for the three and six months ended June 30, 2022, and $5.9 million and $11.8 million for the three and six months ended June 30, 2021, for such services.
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
Payable
Share of
Venture
Repaid by
Aggregate
Partner
Percentage
Gain (1)
January 27, 2022
Landmark
The Alaire, The Terano and 12511 Parklawn Drive
1.8% - 18.0%
137,500
79,829
5,243
May 10, 2022
Galvan
1.8%
152,500
89,500
407
June 1, 2022
CPPIB
1900 N Street
265,000
151,709
529
6,179
The following is a summary of the debt of our unconsolidated real estate ventures:
Weighted
Average Effective
Interest Rate (1)
Variable rate (2)
4.60%
499,076
785,369
Fixed rate (3)
4.16%
275,016
309,813
Mortgages payable (4)
774,092
1,095,182
Unamortized deferred financing costs
(597)
(5,239)
Mortgages payable, net (4) (5)
773,495
1,089,943
The following is a summary of financial information for our unconsolidated real estate ventures:
Combined balance sheet information: (1)
1,684,823
2,116,290
217,108
264,397
Total assets
1,901,931
2,380,687
81,925
118,752
855,420
1,208,695
1,046,511
1,171,992
Total liabilities and equity
14
X
Combined income statement information: (1)
41,379
47,864
84,253
96,081
Operating income (2)
36,108
41,493
84,534
43,207
Net income (2)
25,127
33,356
64,410
26,830
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 $149.0 million and $145.2 million, which were included in "Investments in unconsolidated real estate ventures" in our balance sheets. Our equity in the income of unconsolidated VIEs is included in "Income (loss) from unconsolidated real estate ventures, net" in our statements of operations. Our maximum loss exposure in these entities is limited to our investments, construction commitments and debt guarantees. See Note 17 for additional information.
Consolidated VIEs
JBG SMITH LP is our most significant consolidated VIE. We hold 88.4% of the limited partnership interest in JBG SMITH LP, act as the general partner and exercise full responsibility, discretion and control over its day-to-day management. The noncontrolling interests of JBG SMITH LP do not have substantive liquidation rights, substantive kick-out rights without cause or substantive participating rights that could be exercised by a simple majority of noncontrolling interest limited partners (including by such a limited partner unilaterally). Because the noncontrolling interest holders do not have these rights, JBG SMITH LP is a VIE. As general partner, we have the power to direct the activities of JBG SMITH LP that most significantly affect its economic performance, and through our majority interest, we have both the right to receive benefits from and the obligation to absorb losses of JBG SMITH LP. Accordingly, we are the primary beneficiary of JBG SMITH LP and consolidate it in our financial statements. Because we conduct our business through JBG SMITH LP, its total assets and liabilities comprise substantially all of our consolidated assets and liabilities.
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 two VIEs with total assets of $135.4 million and liabilities of $24.6 million. As of December 31, 2021, excluding JBG SMITH LP, we consolidated three VIEs with total assets of $269.7 million and liabilities of $13.9 million. The assets of the VIEs can only be used to settle the obligations of the VIEs, and the liabilities include third-party liabilities of the VIEs for which the creditors or beneficial interest holders do not have recourse against us.
6.Other Assets, Net
The following is a summary of other assets, net:
Prepaid expenses
14,651
17,104
Derivative agreements, at fair value
26,334
951
Deferred financing costs, net
9,907
11,436
Deposits
1,870
1,938
Operating lease right-of-use assets
1,521
1,660
Finance lease right-of-use assets (1)
180,956
Other (2) (3)
28,525
26,115
Total other assets, net
7.Debt
Mortgages Payable
The following is a summary of mortgages payable:
Weighted Average
3.68%
857,446
867,246
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)
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
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 $1.2 billion and $1.3 billion. See Note 15 for additional information.
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 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. 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:
Revolving credit facility (2) (3) (4)
2.84%
Tranche A-1 Term Loan (5)
2.61%
200,000
Tranche A-2 Term Loan (5)
2.49%
Unsecured term loans
400,000
Unamortized deferred financing costs, net
(1,500)
(1,336)
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.
17
8.Other Liabilities, Net
The following is a summary of other liabilities, net:
Lease intangible liabilities, net
7,008
8,272
Lease assumption liabilities
3,970
5,399
Lease incentive liabilities
5,758
21,163
Liabilities related to operating lease right-of-use assets
5,868
6,910
Liabilities related to finance lease right-of-use assets (1)
162,510
Prepaid rent
14,752
19,852
Security deposits
13,973
18,188
Environmental liabilities
19,418
18,168
Deferred tax liability, net
6,888
5,340
Dividends payable
32,603
18,361
Deferred purchase price related to the acquisition of a future development parcel
19,793
19,691
14,424
6,108
Total other liabilities, net
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 280,451 and 648,752 OP Units, which we elected to redeem for an equivalent number of our common shares. As of June 30, 2022, outstanding OP Units and redeemable LTIP Units totaled 15.3 million, representing an 11.6% ownership interest in JBG SMITH LP. In our balance sheets, our OP Units and certain vested LTIP Units are presented at the higher of their redemption value or their carrying value, with adjustments to the redemption value recognized in "Additional paid-in capital." Redemption value per OP Unit is equivalent to the market value of one of our common shares at the end of the period.
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 97.0%. Our partner can redeem its interest for cash under certain conditions. As of June 30, 2022, we held a 96.0% ownership interest in the real estate venture.
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The following is a summary of the activity of redeemable noncontrolling interests:
Consolidated
JBG
SMITH LP
Balance, beginning of period
536,725
9,324
546,049
545,051
7,876
552,927
OP Unit redemptions
(1,762)
(17,761)
LTIP Units issued in lieu of cash bonuses (1)
987
797
18,240
18,248
(319)
(26)
(345)
Other comprehensive income
1,311
235
Distributions
(4,110)
(79)
(4,189)
(3,927)
12,369
12,807
Adjustment to redemption value
(50,334)
(1,287)
(51,621)
(712)
618
(94)
Balance, end of period
513,426
7,966
536,171
8,468
544,639
513,268
9,457
522,882
7,866
530,748
(7,776)
(21,680)
6,584
5,614
18,237
21
18,258
(2,516)
(59)
(2,575)
4,277
1,208
(148)
(4,258)
(5,289)
24,896
25,371
(41,950)
(1,364)
(43,314)
10,581
661
11,242
10.Property Rental Revenue
The following is a summary of property rental revenue from our non-cancellable leases:
Fixed
105,498
112,972
226,135
225,221
Variable
11,538
9,847
22,499
19,839
Property rental revenue
11.Share-Based Payments
LTIP Units and Time-Based LTIP Units
In January 2022, we granted to certain employees 660,785 LTIP Units with time-based vesting requirements ("Time-Based LTIP Units") and a weighted average grant-date fair value of $27.41 per unit that vest ratably over four years subject to continued employment. Compensation expense for these units is being recognized over a four-year period.
19
In February 2022, we granted 252,206 fully vested LTIP Units to certain employees, who elected to receive all or a portion of their cash bonuses, related to 2021 service, as LTIP Units. The LTIP units had a weighted average grant-date fair value of $22.19 per unit. Compensation expense totaling $5.6 million for these LTIP Units was recognized in 2021.
In April 2022, as part of their annual compensation, we granted to non-employee trustees a total of 95,084 fully vested LTIP Units with a grant-date fair value of $20.90 per unit, which includes LTIP Units elected in lieu of cash retainers. The LTIP Units may not be sold while a trustee is serving on the Board of Trustees.
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 $25.7 million. The Time-Based LTIP Units and the LTIP Units were valued based on the closing common share price on the grant date, less a discount for post-grant restrictions. The discount was determined using Monte Carlo simulations based on the following significant assumptions:
Expected volatility
30.0% to 41.0%
Risk-free interest rate
0.4% to 2.9%
Post-grant restriction periods
2 to 6 years
Appreciation-Only LTIP Units ("AO LTIP Units")
In January 2022, we granted to certain employees 1.5 million performance-based AO LTIP Units with a weighted average grant-date fair value of $4.44 per unit. The AO LTIP Units are structured in the form of profits interests that provide for a share of appreciation determined by the increase in the value of a common share at the time of conversion over the participation threshold of $32.30. The AO LTIP Units are subject to a TSR modifier whereby the number of AO LTIP Units that will ultimately be earned will be increased or reduced by as much as 25%. The AO LTIP Units have a three-year performance period with 50% of the AO LTIP Units that are earned vesting at the end of the three-year performance period and the remaining 50% vesting on the fourth anniversary of the grant date, subject to continued employment. The AO LTIPs expire on the tenth anniversary of their grant date.
The aggregate grant-date fair value of the AO LTIP Units granted during the six months ended June 30, 2022 was $6.6 million, valued using Monte Carlo simulations based on the following significant assumptions:
27.0%
Dividend yield
2.7%
1.6%
Performance-Based LTIP Units
In January 2022, 469,624 LTIP Units with performance-based vesting requirements ("Performance-Based LTIP Units"), which were unvested as of December 31, 2021, were forfeited as the performance measures were not met.
ESPP
Pursuant to the ESPP, employees purchased 39,851 common shares for $801,000 during the six months ended June 30, 2022. The following is a summary of the significant assumptions used to value the ESPP common shares using the Black-Scholes model:
23.0%
0.2%
Expected life
6 months
20
Share-Based Compensation Expense
The following is a summary of share-based compensation expense:
Time-Based LTIP Units
6,202
4,115
12,328
8,495
AO LTIP Units and Performance-Based LTIP Units
3,590
3,160
7,747
6,399
LTIP Units
1,000
1,091
Other equity awards (1)
1,399
1,459
2,826
2,922
Share-based compensation expense - other
12,191
9,825
23,901
18,907
Formation Awards
769
718
1,447
OP Units and LTIP Units (2)
248
2,265
831
5,049
Special Time-Based LTIP Units and Special Performance-Based LTIP Units (3)
560
1,458
1,847
2,890
Share-based compensation related to Formation Transaction and special equity awards (4)
Total share-based compensation expense
13,768
14,266
27,722
28,293
Less: amount capitalized
(1,297)
(610)
(2,347)
(1,401)
12,471
13,656
As of June 30, 2022, we had $63.3 million of total unrecognized compensation expense related to unvested share-based payment arrangements, which is expected to be recognized over a weighted average period of 3.3 years.
12.Transaction and Other Costs
The following is a summary of transaction and other costs:
Demolition costs
406
439
428
Integration and severance costs
727
222
872
462
Completed, potential and pursued transaction expenses (1)
854
1,609
1,586
4,051
13.Interest Expense
The following is a summary of interest expense:
Interest expense before capitalized interest
18,857
16,800
37,299
33,466
Amortization of deferred financing costs
1,121
1,045
2,251
2,092
Interest expense related to finance lease right-of-use assets
247
2,091
Net unrealized (gain) loss on derivative financial instruments designated as ineffective hedges
(2,027)
46
(5,394)
(87)
Capitalized interest
(2,157)
(1,546)
(3,928)
(3,256)
16,041
16,773
32,319
33,069
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 $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.
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):
(In thousands, except per share amounts)
Net income (loss) attributable to common shareholders
Distributions to participating securities
(12)
(734)
Net income (loss) available to common shareholders - basic and diluted
123,263
(3,707)
123,231
(24,438)
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 6.0 million and 5.9 million for the three and six months ended June 30, 2022, and 3.9 million for the three and six months ended June 30, 2021, were excluded from the calculation of diluted earnings (loss) per common share as they were antidilutive, but potentially could be dilutive in the future.
Dividends Declared in July 2022
On July 29, 2022, our Board of Trustees declared a quarterly dividend of $0.225 per common share, payable on August 26, 2022 to shareholders of record as of August 12, 2022.
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 $21.6 million and ($17.2) million as of June 30, 2022 and December 31, 2021 and was recorded in "Accumulated other comprehensive income (loss)" in our balance sheets, of which a portion was allocated to "Redeemable noncontrolling interests." Within the next 12 months, we expect to reclassify $10.0 million of net unrealized gain as a decrease to interest expense.
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.
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The following is a summary of assets and liabilities measured at fair value on a recurring basis:
Fair Value Measurements
Level 1
Level 2
Level 3
Derivative financial instruments designated as effective hedges:
Classified as assets in "Other assets, net"
20,383
Derivative financial instruments designated as ineffective hedges:
5,951
393
Classified as liabilities in "Other liabilities, net"
558
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:
Carrying
Amount (1)
Fair Value
Financial liabilities:
1,606,673
1,814,780
300,363
400,263
400,519
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.
24
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 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. 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.
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:
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
1,424
2,877
2,284
Construction management fees
37
234
187
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
Third-party real estate services expenses
Third-party real estate services revenue less expenses
(1,986)
1,188
(5,065)
10,359
Management company assets primarily consist of management and leasing contracts with a net book value of $16.7 million and $19.6 million as of June 30, 2022 and December 31, 2021, which are classified in "Intangible assets, net" in our balance sheets. 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.
25
The following is the reconciliation of net income (loss) attributable to common shareholders to consolidated NOI:
Add:
Depreciation and amortization expense
General and administrative expense:
Income tax expense (benefit)
2,905
(5)
2,434
4,310
Net income (loss) attributable to redeemable noncontrolling interests
Less:
Third-party real estate services, including reimbursements revenue
1,798
1,904
3,994
4,090
Consolidated NOI
71,159
72,437
148,128
144,392
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
Multifamily
71,903
42,939
2,194
Parking revenue
4,187
250
77
4,514
Total property revenue
76,090
43,189
2,271
121,550
Property expense:
19,624
14,870
9,018
5,054
874
Total property expense
28,642
19,924
1,825
50,391
47,448
23,265
446
Three Months Ended June 30, 2021
89,189
32,718
912
2,959
110
107
3,176
92,148
32,828
1,019
125,995
25,097
12,042
(2,139)
12,148
5,065
1,345
37,245
17,107
(794)
53,558
54,903
15,721
1,813
26
Six Months Ended June 30, 2022
159,524
85,047
4,063
8,199
384
132
8,715
167,723
85,431
4,195
257,349
45,826
28,625
1,638
20,795
10,275
2,062
66,621
38,900
3,700
109,221
101,102
46,531
495
Six Months Ended June 30, 2021
176,370
65,304
3,386
5,649
175
5,931
182,019
65,479
3,493
250,991
49,061
24,237
(3,567)
23,920
10,310
2,638
72,981
34,547
(929)
106,599
109,038
30,932
4,422
The following is a summary of certain balance sheet data by segment:
Real estate, at cost
2,722,907
2,481,213
402,467
233,519
96,030
84,800
3,016,911
1,856,493
706,498
3,422,278
2,367,712
446,486
281,515
103,389
77,981
3,591,839
1,797,807
996,560
17.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.
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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 $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.
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 $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.
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 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.
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.
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 $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.
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 $114.4 million, which included a commitment from us of $11.2 million. As of June 30, 2022, our remaining unfunded commitment was $6.2 million.
The third-party real estate services revenue, including expense reimbursements, from the JBG Legacy Funds and the WHI Impact Pool was $4.8 million and $10.3 million for the three and six months ended June 30, 2022, and $5.8 million and $11.6 million for the three and six months ended June 30, 2021. As of June 30, 2022 and December 31, 2021, we had receivables from the JBG Legacy Funds and the WHI Impact Pool totaling $3.3 million and $3.2 million for such services.
We rented our former corporate offices from an unconsolidated real estate venture and made payments totaling $321,000 and $708,000 for the three and six months ended June 30, 2022, and $495,000 and $766,000 for the three and six months ended June 30, 2021.
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 $2.0 million and $5.1 million during the three and six months ended June 30, 2022, and $4.1 million and $8.5 million for the three and six months ended June 30, 2021, which is included in "Property operating expenses" in our statements of operations.
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.
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.
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 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
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 AT&T, 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:
Additionally, investing and financing activity during the six months ended June 30, 2022 included:
Activity subsequent to June 30, 2022 included:
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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.
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:
% Change
(Dollars in thousands)
(4.7)
%
(17.2)
(12.7)
Property operating expense
1.3
Real estate taxes expense
(19.5)
6.4
(5.5)
(64.5)
(12.5)
(153.3)
(4.4)
*
* 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.
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.
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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:
1.5
(28.9)
(11.4)
9.1
(10.1)
16.0
(6.1)
(59.3)
(51.6)
65.5
(2.3)
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
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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
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:
Gain on the sale of real estate, net of tax
(155,642)
(155,506)
Gain on the sale of unconsolidated real estate assets
(936)
(5,189)
(6,179)
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.
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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.
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The following is the reconciliation of net income (loss) attributable to common shareholders to NOI and same store NOI:
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
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.
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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.
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:
Property revenue:
Other (1)
Consolidated NOI:
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.
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
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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
Unamortized deferred financing costs and premium/discount, net (4)
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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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:
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.
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:
We expect to satisfy these needs using one or more of the following:
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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:
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.
Commitments and Contingencies
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
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amounts of payments for tenant-related obligations are uncertain and may only be due upon satisfactory performance of certain conditions.
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
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:
Average
Annual
Effect of 1%
Interest
Change in
Balance
Rate
Base Rates
Debt (contractual balances):
Mortgages payable:
Variable rate (1)
8,694
2.01%
Fixed rate (2)
4.32%
Credit facility:
Revolving credit facility (3)
1.15%
Tranche A-1 Term Loan (4)
2.59%
Tranche A-2 Term Loan (4)
700,000
Pro rata share of debt of unconsolidated real estate ventures (contractual balances):
189,136
4.78%
1,918
281,608
2.56%
90,643
4.49%
91,653
279,779
373,261
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
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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
125,042,507
May 1, 2022 - May 31, 2022
3,465,029
25.31
37,281,008
June 1, 2022 - June 30, 2022
4,326,740
24.66
430,516,492
Total for the three months ended June 30, 2022
8,498,367
25.15
Total for the six months ended June 30, 2022
11,839,514
25.91
Program total since inception in March 2020 (1)
20,986,335
27.12
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
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:
·
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.
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
Description
3.1
Declaration of Trust of JBG SMITH Properties, as amended and restated (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed on July 21, 2017).
3.2
Articles Supplementary to Declaration of Trust of JBG SMITH Properties (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed on March 6, 2018).
3.3
Articles of Amendment to Declaration of Trust of JBG SMITH Properties (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K, filed on May 3, 2018).
3.4
Amended and Restated Bylaws of JBG SMITH Properties (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed on February 21, 2020).
10.1**
Credit Agreement, dated as of July 29, 2022, by and among JBG SMITH Properties LP, as Borrower, the financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as Administrative Agent.
10.2**
Fourth Amendment to Credit Agreement, dated as of July 29, 2022, by and among JBG SMITH Properties LP, as Borrower, the financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as Administrative Agent.
10.3**
First Amendment to Credit Agreement, dated as of July 29, 2022, by and among JBG SMITH Properties LP, as Borrower, the financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as Administrative Agent.
10.4†**
Retirement Agreement and Release, dated as of July 29, 2022, by and between JBG SMITH Properties and David P. Paul.
31.1**
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended and Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended and 18 U.S.C 1350, as created by Section 906 of the Sarbanes- Oxley Act of 2002.
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)
**
Filed herewith.
†
Denotes a management contract or compensatory plan, contract or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JBG SMITH Properties
Date:
August 2, 2022
/s/ M. Moina Banerjee
M. Moina Banerjee
Chief Financial Officer
(Principal Financial Officer)
/s/ Angela Valdes
Angela Valdes
Chief Accounting Officer
(Principal Accounting Officer)