JBG SMITH(JBGS) - 2024 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements and detailed notes for periods ended June 30, 2024, and December 31, 2023 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (In thousands) | ASSETS / LIABILITIES, REDEEMABLE NONCONTROLLING EQUITY INTERESTS AND SHAREHOLDERS' EQUITY | June 30, 2024 | December 31, 2023 | | :--------------------------------------------------------------------------------------- | :------------ | :---------------- | | ASSETS | | | | Real estate, net | $4,526,415 | $4,536,759 | | Cash and cash equivalents | $163,536 | $164,773 | | Restricted cash | $42,366 | $35,668 | | Investments in unconsolidated real estate ventures | $101,043 | $264,281 | | Total assets | $5,325,116 | $5,518,515 | | LIABILITIES | | | | Mortgage loans, net | $1,876,459 | $1,783,014 | | Revolving credit facility | $40,000 | $62,000 | | Term loans, net | $717,610 | $717,172 | | Total liabilities | $2,853,861 | $2,825,929 | | Redeemable noncontrolling interests | $436,673 | $440,737 | | Total shareholders' equity of JBG SMITH Properties | $2,019,646 | $2,222,876 | | Total equity | $2,034,582 | $2,251,849 | | TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | $5,325,116 | $5,518,515 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (In thousands, except per share data) | REVENUE / EXPENSES / OTHER INCOME (EXPENSE) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | REVENUE | | | | | | Property rental | $112,536 | $120,592 | $235,172 | $244,625 | | Third-party real estate services | $17,397 | $22,862 | $35,265 | $45,646 | | Total revenue | $135,320 | $152,095 | $280,504 | $305,057 | | EXPENSES | | | | | | Depreciation and amortization | $51,306 | $49,218 | $108,161 | $102,649 | | Property operating | $36,254 | $35,912 | $71,533 | $71,524 | | Real estate taxes | $14,399 | $14,424 | $28,194 | $29,648 | | Total expenses | $138,434 | $140,244 | $283,177 | $287,280 | | OTHER INCOME (EXPENSE) | | | | | | Net income (loss) attributable to common shareholders | $(24,373) | $(10,545) | $(56,649) | $10,626 | | Earnings (loss) per common share - Basic and Diluted | $(0.27) | $(0.10) | $(0.63) | $0.09 | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (In thousands) | Item | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------------------------------------------------------------------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | NET INCOME (LOSS) | $(33,414) | $(12,254) | $(75,604) | $12,056 | | Change in fair value of derivative financial instruments | $8,020 | $21,789 | $32,860 | $12,820 | | Reclassification of net income on derivative financial instruments from accumulated other comprehensive income into interest expense | $(10,471) | $(7,534) | $(20,892) | $(15,350) | | Total other comprehensive income (loss) | $(2,451) | $14,255 | $11,968 | $(2,530) | | COMPREHENSIVE INCOME (LOSS) | $(35,865) | $2,001 | $(63,636) | $9,526 | | COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO JBG SMITH PROPERTIES | $(26,895) | $910 | $(47,861) | $8,473 | Condensed Consolidated Statements of Equity Condensed Consolidated Statements of Equity (In thousands) | Item | June 30, 2024 | December 31, 2023 | | :------------------------------------------------------------------------------------------------------------------------------------------------------------- | :------------ | :---------------- | | Common Shares (Shares) | 87,306 | 94,309 | | Common Shares (Amount) | $874 | $944 | | Additional Paid-In Capital | $2,855,724 | $2,978,852 | | Accumulated Deficit | $(865,782) | $(776,962) | | Accumulated Other Comprehensive Income | $28,830 | $20,042 | | Noncontrolling Interests | $14,936 | $28,973 | | Total Equity | $2,034,582 | $2,251,849 | | Net loss attributable to common shareholders and noncontrolling interests (Six Months Ended June 30, 2024) | $(67,616) | | | Common shares repurchased (Six Months Ended June 30, 2024) | $(118,158) | | | Dividends declared on common shares ($0.35 per common share) (Six Months Ended June 30, 2024) | $(32,171) | | | Acquisition of noncontrolling interests (Six Months Ended June 30, 2024) | $(26,586) | | | Total other comprehensive income (Six Months Ended June 30, 2024) | $11,968 | | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (In thousands) | Cash Flow Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------------------------------------------------------------------------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $60,813 | $89,431 | | Net cash provided by (used in) investing activities | $61,992 | $(135,500) | | Net cash used in financing activities | $(117,344) | $(25,160) | | Net increase (decrease) in cash and cash equivalents, and restricted cash | $5,461 | $(71,229) | | Cash and cash equivalents, and restricted cash, end of period | $205,902 | $202,844 | | Cash paid for interest (net of capitalized interest of $4,211 and $7,221 in 2024 and 2023) | $52,747 | $44,379 | | Accrued capital expenditures included in accounts payable and accrued expenses | $64,521 | $75,565 | | Common shares repurchased | $116,358 | $155,845 | | Dividends paid to common shareholders | $32,171 | $49,455 | Notes to Condensed Consolidated Financial Statements 1. Organization and Basis of Presentation - JBG SMITH Properties is a Maryland REIT focused on mixed-use properties in high-growth Washington, D.C. submarkets, primarily National Landing (75% of holdings)[170] - The company operates through JBG SMITH Properties LP, its operating partnership, in which JBG SMITH holds an 86.4% ownership interest as of June 30, 2024[171] - As of June 30, 2024, the operating portfolio included 40 assets (15 multifamily, 23 commercial, 2 land assets) and a development pipeline of two under-construction multifamily assets (1,583 units) and 18 assets (11.4 million sq ft) in the development pipeline[172] 2. Summary of Significant Accounting Policies - The financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, with no material changes to significant accounting policies disclosed in the Annual Report[174][180] - The company has elected to be taxed as a REIT, distributing at least 90% of its taxable income as dividends to shareholders, and intends to maintain this status, also subject to federal, state, and local taxes on income from taxable REIT subsidiaries[179] - New accounting guidance includes ASU 2023-09 (Income Taxes) and ASU 2023-07 (Segment Reporting), effective for fiscal years beginning after December 15, 2024, and December 15, 2023, respectively, while the SEC's climate-related disclosure rules (March 2024) are currently stayed pending judicial review[198][199][200] 3. Dispositions Disposition Activity (Six Months Ended June 30, 2024) | Date Disposed | Assets | Segment | Sales Price (In thousands) | Proceeds from Sale (In thousands) | Gain on Sale of Real Estate (In thousands) | | :-------------- | :-------------- | :---------- | :------------------------- | :-------------------------------- | :----------------------------------------- | | January 22, 2024 | North End Retail | Multifamily | $14,250 | $12,410 | $(1,200) | | Other | | | | | $1,486 | | Total | | | | | $286 | - The company is under contract to sell a multifamily asset in Washington D.C. for $86.8 million, anticipated to close in 2024[187] 4. Investments in Unconsolidated Real Estate Ventures Investments in Unconsolidated Real Estate Ventures (In thousands) | Real Estate Venture | Effective Ownership Interest (June 30, 2024) | June 30, 2024 | December 31, 2023 | | :------------------ | :------------------------------------------- | :------------ | :---------------- | | PGIM | 50.0% | $724 | $163,375 | | J.P. Morgan | 50.0% | $73,892 | $72,742 | | 4747 Bethesda Venture | 20.0% | $11,672 | $13,118 | | Brandywine Realty Trust | 30.0% | $13,701 | $13,681 | | CBREI Venture | 10.0% | $174 | $180 | | Landmark Partners | 18.0% | $575 | $605 | | Other | | $305 | $580 | | Total | | $101,043 | $264,281 | - In February 2024, the PGIM venture sold its interest in Central Place Tower for $325.0 million, resulting in a proportionate share of aggregate gain of $480,000 for JBG SMITH[205][207] - The company provides leasing, property management, and other real estate services to its unconsolidated ventures, recognizing revenue of $4.1 million and $8.7 million for the three and six months ended June 30, 2024, respectively[206] 5. Variable Interest Entities - JBG SMITH LP is the most significant consolidated VIE, with JBG SMITH holding an 86.4% limited partnership interest and acting as the general partner, exercising full control[234] - In June 2024, JBG SMITH acquired the ground lessee's interest in 1900 Crystal Drive for $26.6 million, resulting in 1900 Crystal Drive no longer being a VIE[235] - As of June 30, 2024, excluding JBG SMITH LP, the company consolidated one VIE (2000/2001 South Bell Street) with total assets of $256.1 million and liabilities of $157.9 million[236] 6. Other Assets, Net Summary of Other Assets, Net (In thousands) | Item | June 30, 2024 | December 31, 2023 | | :-------------------------------------- | :------------ | :---------------- | | Prepaid expenses | $10,188 | $13,215 | | Derivative financial instruments, at fair value | $42,116 | $42,341 | | Deferred financing costs, net | $8,740 | $10,199 | | Operating lease right-of-use assets | $45,238 | $60,329 | | Investments in funds | $24,119 | $21,785 | | Other investments | $3,487 | $3,487 | | Other | $12,546 | $12,125 | | Total other assets, net | $146,434 | $163,481 | - Unrealized gains related to investments in real estate-focused technology companies were $797,000 and $1.3 million for the three and six months ended June 30, 2024, respectively[238] 7. Debt Summary of Mortgage Loans (In thousands) | Item | Weighted Average Effective Interest Rate (June 30, 2024) | June 30, 2024 | December 31, 2023 | | :------------------------------------------ | :------------------------------------------------------- | :------------ | :---------------- | | Variable rate | 6.23% | $701,283 | $608,582 | | Fixed rate | 4.78% | $1,188,709 | $1,189,643 | | Mortgage loans | | $1,889,992 | $1,798,225 | | Unamortized deferred financing costs and premium / discount, net | | $(13,533) | $(15,211) | | Mortgage loans, net | | $1,876,459| $1,783,014 | Summary of Revolving Credit Facility and Term Loans (In thousands) | Item | Effective Interest Rate (June 30, 2024) | June 30, 2024 | December 31, 2023 | | :------------------------------------------ | :-------------------------------------- | :------------ | :---------------- | | Revolving credit facility | 6.78% | $40,000 | $62,000 | | Tranche A-1 Term Loan | 2.70% | $200,000 | $200,000 | | Tranche A-2 Term Loan | 3.58% | $400,000 | $400,000 | | 2023 Term Loan | 5.31% | $120,000 | $120,000 | | Term loans | | $720,000 | $720,000 | | Unamortized deferred financing costs, net | | $(2,390) | $(2,828) | | Term loans, net | | $717,610 | $717,172 | - As of June 30, 2024, the net carrying value of real estate collateralizing mortgage loans totaled $2.2 billion and the company had interest rate swap and cap agreements on certain mortgage loans with an aggregate notional value of $1.6 billion[240][241] 8. Other Liabilities, Net Summary of Other Liabilities, Net (In thousands) | Item | June 30, 2024 | December 31, 2023 | | :------------------------------------------ | :------------ | :---------------- | | Lease intangible liabilities, net | $3,268 | $3,496 | | Lease incentive liabilities | $7,710 | $7,546 | | Liabilities related to operating lease right-of-use assets | $46,172 | $64,501 | | Prepaid rent | $12,864 | $11,881 | | Security deposits | $12,474 | $12,133 | | Environmental liabilities | $17,468 | $17,568 | | Deferred tax liability, net | $2,445 | $3,326 | | Derivative financial instruments, at fair value | $5,458 | $14,444 | | Other | $4,123 | $3,974 | | Total other liabilities, net | $111,982 | $138,869 | 9. Redeemable Noncontrolling Interests - As of June 30, 2024, outstanding OP Units and redeemable LTIP Units totaled 13.8 million, representing a 13.6% ownership interest in JBG SMITH LP[249] - During the six months ended June 30, 2024, unitholders redeemed 625,166 OP Units, which were exchanged for an equivalent number of common shares[249] 10. Property Rental Revenue Summary of Property Rental Revenue (In thousands) | Revenue Type | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Fixed | $103,602 | $108,124 | $216,579 | $221,195 | | Variable | $8,934 | $12,468 | $18,593 | $23,430 | | Total Property Rental Revenue | $112,536 | $120,592 | $235,172 | $244,625 | 11. Share-Based Payments - In January 2024, the company granted 974,140 Time-Based LTIP Units with a weighted average grant-date fair value of $15.93 per unit, primarily vesting over four years[256] - Also in January 2024, 1.9 million performance-based AO LTIP Units were granted with a grant-date fair value of $3.79 per unit, subject to a TSR modifier and a three-year performance period[258] Summary of Share-Based Compensation Expense (In thousands) | Item | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Time-Based LTIP Units | $5,885 | $5,324 | $11,357 | $10,856 | | AO LTIP Units and Performance-Based LTIP Units | $3,476 | $3,282 | $6,954 | $6,942 | | LTIP Units | $1,552 | $1,000 | $1,552 | $1,000 | | Other equity awards | $1,168 | $1,262 | $2,212 | $2,798 | | Share-based compensation expense - other | $12,081 | $10,868 | $22,075 | $21,596 | | Share-based compensation related to Formation Transaction and special equity awards | $0 | $0 | $0 | $351 | | Total share-based compensation expense | $12,081 | $10,868 | $22,075 | $21,947 | | Less: amount capitalized | $(590) | $(782) | $(1,046) | $(1,433) | | Share-based compensation expense | $11,491 | $10,086 | $21,029 | $20,514 | 12. Transaction and Other Costs Summary of Transaction and Other Costs (In thousands) | Item | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Completed, potential and pursued transaction expenses | $34 | $227 | $1,541 | $274 | | Severance and other costs | $505 | $1,799 | $512 | $3,247 | | Demolition costs | $285 | $1,466 | $285 | $2,443 | | Transaction and other costs | $824 | $3,492 | $2,338 | $5,964 | 13. Interest Expense Summary of Interest Expense (In thousands) | Item | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest expense before capitalized interest | $31,234 | $27,805 | $62,074 | $55,713 | | Amortization of deferred financing costs | $4,179 | $1,351 | $8,082 | $2,630 | | Net loss on non-designated derivatives: | | | | | | Net unrealized loss | $27 | $2,944 | $69 | $5,641 | | Net realized loss | $0 | $97 | $0 | $230 | | Capitalized interest | $(3,467) | $(6,362) | $(8,092) | $(11,537) | | Interest expense | $31,973 | $25,835 | $62,133 | $52,677 | 14. Shareholders' Equity and Earnings (Loss) Per Common Share - The Board of Trustees authorized the repurchase of up to $1.5 billion of common shares, with $1.1 billion repurchased and retired since the program began in March 2020[269] Common Shares Repurchased (In millions, except per share data) | Period | Common Shares Repurchased | Weighted Average Purchase Price Per Share | | :-------------------------------------- | :------------------------ | :---------------------------------------- | | Three months ended June 30, 2024 | 4.7 | $14.62 | | Three months ended June 30, 2023 | 9.3 | $14.54 | | Six months ended June 30, 2024 | 7.7 | $15.35 | | Six months ended June 30, 2023 | 10.5 | $14.79 | | Program total through June 30, 2024 | 53.6 | $20.09 | Earnings (Loss) Per Common Share (In thousands, except per share amounts) | Item | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) attributable to common shareholders | $(24,373) | $(10,545) | $(56,649) | $10,626 | | Net income (loss) available to common shareholders - basic and diluted | $(24,876) | $(11,262) | $(57,806) | $9,909 | | Weighted average number of common shares outstanding - basic and diluted | 91,030 | 109,695 | 91,832 | 111,862 | | Earnings (loss) per common share - basic and diluted | $(0.27) | $(0.10) | $(0.63) | $0.09 | - On July 24, 2024, a quarterly dividend of $0.175 per common share was declared, payable on August 21, 2024[274] 15. Fair Value Measurements - The company uses derivative financial instruments (interest rate swaps and caps) to manage interest rate risk, with a net unrealized gain of $33.1 million on effective hedges as of June 30, 2024[275][276] Assets and Liabilities Measured at Fair Value on a Recurring Basis (In thousands) | Item | June 30, 2024 (Total) | June 30, 2024 (Level 2) | December 31, 2023 (Total) | December 31, 2023 (Level 2) | | :---------------------------------------------------------------- | :-------------------- | :---------------------- | :------------------------ | :-------------------------- | | Derivative financial instruments designated as effective hedges: | | | | | | Classified as assets in "Other assets, net" | $36,606 | $36,606 | $35,632 | $35,632 | | Classified as liabilities in "Other liabilities, net" | $0 | $0 | $7,936 | $7,936 | | Non-designated derivatives: | | | | | | Classified as assets in "Other assets, net" | $5,510 | $5,510 | $6,709 | $6,709 | | Classified as liabilities in "Other liabilities, net" | $5,458 | $5,458 | $6,508 | $6,508 | - An impairment loss of $18.2 million was recognized for two development parcels during the six months ended June 30, 2024, writing them down to their estimated fair value of $24.7 million[286] 16. Segment Information - The company aggregates its operating segments into three reportable segments: multifamily, commercial, and third-party asset management and real estate services[289] - The Chief Operating Decision Maker (CODM) evaluates multifamily and commercial segments based on Net Operating Income (NOI), which includes property rental and parking revenue, less operating expenses and real estate taxes[290] Consolidated NOI by Segment (In thousands) | Segment | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :---------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Multifamily | $28,190 | $28,696 | $56,454 | $55,767 | | Commercial | $34,559 | $42,300 | $71,260 | $89,983 | | Other | $2,395 | $4,055 | $4,409 | $6,917 | | Total Consolidated NOI | $65,144 | $75,051 | $132,123 | $152,667 | 17. Commitments and Contingencies - The company maintains general liability insurance ($150.0 million per occurrence) and property/rental value insurance ($1.0 billion per occurrence), with additional coverage for terrorist acts through a captive insurance subsidiary[299] - As of June 30, 2024, assets under construction require an additional $98.5 million to complete, primarily over the next two years, to be financed by debt, asset sales, and available cash[302] - Environmental liabilities totaled $17.5 million as of June 30, 2024, included in 'Other liabilities, net' on the balance sheet[305] - The company had committed tenant-related obligations of $44.4 million and additional capital commitments and guarantees to unconsolidated real estate ventures totaling $58.0 million as of June 30, 2024[306][309] 18. Transactions with Related Parties - Third-party real estate services revenue from JBG Legacy Funds and WHI Impact Pool affiliates decreased to $3.2 million for the three months ended June 30, 2024, from $5.9 million in the prior year[316] - The company incurred $1.3 million and $2.8 million in rent expense for its corporate offices from an unconsolidated real estate venture for the three and six months ended June 30, 2024, respectively[317] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operating results, portfolio overview, strategic outlook, and liquidity for Q2 2024 Overview and Outlook - As of June 30, 2024, the operating portfolio consisted of 40 assets (15 multifamily, 23 commercial, 2 land assets) and a development pipeline of two under-construction multifamily assets (1,583 units) and 18 assets (11.4 million sq ft) in the development pipeline[214] - The company's strategy focuses on repositioning holdings in National Landing through placemaking initiatives, including new multifamily and office developments, retail amenities, and public infrastructure improvements, with 1900 Crystal Drive (The Grace and Reva) delivered in Q2 2024[215] - Multifamily portfolio occupancy was 94.3% as of June 30, 2024, with effective rents increasing by 4.6% blended across new and renewal leases, and 1900 Crystal Drive began leasing in January 2024 and was 38.5% leased by June 30, 2024[217] - Office portfolio occupancy decreased to 80.6% as of June 30, 2024, down 250 basis points from March 31, 2024, due to hybrid work trends, with plans to repurpose older, obsolete office buildings for redevelopment or conversion[218][219] Operating Results Key Highlights Key Operating Results Highlights (In millions, except per share data) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss attributable to common shareholders | $(24.4) | $(10.5) | $(56.6) | $10.6 | | Diluted common share (loss) / earnings | $(0.27) | $(0.10) | $(0.63) | $0.09 | | Third-party real estate services revenue (incl. reimbursements) | $17.4 | $22.9 | $35.3 | $45.6 | | Same store NOI increase | 3.2% | | 5.2% | | Portfolio Occupancy and Leasing Highlights (at our share) | Metric | June 30, 2024 | March 31, 2024 | June 30, 2023 | | :------------------------------------------------------------------ | :------------ | :------------- | :------------ | | Operating multifamily portfolio leased percentage | 96.9% | 95.9% | 96.8% | | Operating multifamily portfolio occupied percentage | 94.3% | 94.3% | 93.7% | | Operating commercial portfolio leased percentage | 82.3% | 84.6% | 86.3% | | Operating commercial portfolio occupied percentage | 80.6% | 83.1% | 84.0% | | Square feet leased (3 months ended June 30, 2024) | 248,000 | | | | Initial rent per square foot (3 months ended June 30, 2024) | $46.61 | | | | GAAP-basis weighted average rent per square foot (3 months ended June 30, 2024) | $47.34 | | | - Subsequent to June 30, 2024, the company declared a quarterly dividend of $0.175 per common share, repurchased 897,531 common shares for $14.0 million, and entered a contract to sell a multifamily asset for $86.8 million[53][224] Comparison of the Three Months Ended June 30, 2024 to 2023 Three Months Ended June 30, 2024 vs. 2023 (In thousands, % Change) | Item | 2024 | 2023 | % Change | | :---------------------------------------------------------------- | :-------- | :-------- | :------- | | Property rental revenue | $112,536 | $120,592 | (6.7)% | | Third-party real estate services revenue, including reimbursements | $17,397 | $22,862 | (23.9)% | | Depreciation and amortization expense | $51,306 | $49,218 | 4.2% | | Property operating expense | $36,254 | $35,912 | 1.0% | | Real estate taxes expense | $14,399 | $14,424 | (0.2)% | | General and administrative expense: Corporate and other | $17,001 | $15,093 | 12.6% | | General and administrative expense: Third-party real estate services | $18,650 | $22,105 | (15.6)% | | Income (loss) from unconsolidated real estate ventures, net | $(226) | $510 | (144.3)% |\n| Interest expense | $31,973 | $25,835 | 23.8% | - Property rental revenue decreased by $8.1 million, primarily due to commercial assets taken out of service (1800 South Bell Street, 2100 Crystal Drive) and disposed properties, partially offset by 1900 Crystal Drive and lease termination revenue[56][57] - Interest expense increased by $6.1 million, driven by higher outstanding debt and rising interest rates on variable rate mortgage loans, partially offset by a decrease in capitalized interest[190] Comparison of the Six Months Ended June 30, 2024 to 2023 Six Months Ended June 30, 2024 vs. 2023 (In thousands, % Change) | Item | 2024 | 2023 | % Change | | :---------------------------------------------------------------- | :-------- | :-------- | :------- | | Property rental revenue | $235,172 | $244,625 | (3.9)% | | Third-party real estate services revenue, including reimbursements | $35,265 | $45,646 | (22.7)% | | Depreciation and amortization expense | $108,161 | $102,649 | 5.4% | | Property operating expense | $71,533 | $71,524 | — | | Real estate taxes expense | $28,194 | $29,648 | (4.9)% | | General and administrative expense: Corporate and other | $31,974 | $31,216 | 2.4% | | General and administrative expense: Third-party real estate services | $40,977 | $45,928 | (10.8)% | | Income from unconsolidated real estate ventures, net | $749 | $943 | (20.6)% | | Interest expense | $62,133 | $52,677 | 18.0% | | Gain on the sale of real estate, net | $286 | $40,700 | (99.3)% | - Property rental revenue decreased by $9.5 million, primarily due to a $23.0 million decrease from commercial assets (Disposed Properties, 1800 South Bell Street, 2100 Crystal Drive), partially offset by lease termination revenue and multifamily asset increases[192] - Interest expense increased by $9.5 million, mainly due to higher outstanding debt and rising interest rates, partially offset by decreases from derivative expirations and repaid mortgage loans[39] Liquidity and Capital Resources - Primary sources of operating cash flow are property rental income and fee-based real estate services, with other liquidity sources including financings, asset sales, and securities issuance[49] - The company anticipates that cash flows from operations, financings, asset sales, and existing cash will be adequate to fund business operations, debt service, capital expenditures, and dividends over the next 12 months[49] Mortgage Loans Summary of Mortgage Loans (In thousands) | Item | Effective Interest Rate (June 30, 2024) | June 30, 2024 | December 31, 2023 | | :------------------------------------------ | :-------------------------------------- | :------------ | :---------------- | | Variable rate | 6.23% | $701,283 | $608,582 | | Fixed rate | 4.78% | $1,188,709 | $1,189,643 | | Mortgage loans | | $1,889,992 | $1,798,225 | | Unamortized deferred financing costs and premium/discount, net | | $(13,533) | $(15,211) | | Mortgage loans, net | | $1,876,459| $1,783,014 | - As of June 30, 2024, the net carrying value of real estate collateralizing mortgage loans totaled $2.2 billion and the company had interest rate swap and cap agreements on certain mortgage loans with an aggregate notional value of $1.6 billion[64][65] Revolving Credit Facility and Term Loans - As of June 30, 2024, the unsecured revolving credit facility and term loans totaled $1.5 billion, consisting of a $750.0 million revolving credit facility, a $200.0 million Tranche A-1 Term Loan, a $400.0 million Tranche A-2 Term Loan, and a $120.0 million 2023 Term Loan[66] Summary of Revolving Credit Facility and Term Loans (In thousands) | Item | Effective Interest Rate (June 30, 2024) | June 30, 2024 | December 31, 2023 | | :------------------------------------------ | :-------------------------------------- | :------------ | :---------------- | | Revolving credit facility | 6.78% | $40,000 | $62,000 | | Tranche A-1 Term Loan | 2.70% | $200,000 | $200,000 | | Tranche A-2 Term Loan | 3.58% | $400,000 | $400,000 | | 2023 Term Loan | 5.31% | $120,000 | $120,000 | | Term loans | | $720,000 | $720,000 | | Unamortized deferred financing costs, net | | $(2,390) | $(2,828) | | Term loans, net | | $717,610 | $717,172 | - Interest rate swaps fix SOFR at weighted average rates of 1.46% for Tranche A-1, 2.29% for Tranche A-2, and 4.01% for the 2023 Term Loan as of June 30, 2024[70] Common Shares Repurchased - The Board of Trustees authorized the repurchase of up to $1.5 billion of common shares, with $1.1 billion repurchased and retired since the program began in March 2020[71] Common Shares Repurchased (In millions, except per share data) | Period | Common Shares Repurchased | Weighted Average Purchase Price Per Share | | :-------------------------------------- | :------------------------ | :---------------------------------------- | | Three months ended June 30, 2024 | 4.7 | $14.62 | | Three months ended June 30, 2023 | 9.3 | $14.54 | | Six months ended June 30, 2024 | 7.7 | $15.35 | | Six months ended June 30, 2023 | 10.5 | $14.79 | | Program total through June 30, 2024 | 53.6 | $20.09 | - In July 2024, an additional 897,531 common shares were repurchased for $14.0 million at $15.55 per share[72] Material Cash Requirements - Material cash requirements include normal recurring expenses, debt service ($120.9 million mortgage loan maturing in August 2024, $424.0 million in 2025), capital expenditures ($44.4 million committed tenant-related obligations), and development expenditures ($98.5 million for assets under construction)[79][81] - Other cash requirements include dividends to shareholders ($0.175 per common share declared July 2024), possible common share repurchases, and potential property acquisitions[81] - These needs are expected to be met by cash and cash equivalents ($163.5 million as of June 30, 2024), cash flows from operations, distributions from real estate ventures, borrowing capacity ($694.3 million available under revolving credit facility), and proceeds from financings, asset sales, or securities issuance[82] Summary of Cash Flows Summary of Cash Flows (Six Months Ended June 30, In thousands) | Cash Flow Activity | 2024 | 2023 | | :------------------------------------------------ | :----------- | :----------- | | Net cash provided by operating activities | $60,813 | $89,431 | | Net cash provided by (used in) investing activities | $61,992 | $(135,500) |\n| Net cash used in financing activities | $(117,344) | $(25,160) | | Cash and cash equivalents, and restricted cash, end of period | $205,902 | $202,844 | - Net cash from operating activities was $60.8 million, driven by net income (before non-cash items), return on capital from unconsolidated ventures, and changes in operating assets/liabilities[84] - Net cash from investing activities was $62.0 million, primarily from distributions of capital from unconsolidated ventures ($163.9 million) and proceeds from real estate sales ($12.4 million), partially offset by development costs ($113.4 million)[86] - Net cash used in financing activities was $117.3 million, mainly due to repayments on the revolving credit facility ($195.0 million), common share repurchases ($116.4 million), and dividends paid ($32.2 million), partially offset by borrowings[87] Unconsolidated Real Estate Ventures - As of June 30, 2024, investments in unconsolidated real estate ventures totaled $101.0 million, accounted for using the equity method[89] - The company may guarantee portions of borrowings, provide environmental indemnifications, and completion guarantees for unconsolidated ventures, with agreements for partners to reimburse their share of payments[90] - Additional capital commitments and recorded guarantees to unconsolidated real estate ventures totaled $58.0 million as of June 30, 2024, with no debt principal payment guarantees[91] Commitments and Contingencies - The company maintains general liability insurance ($150.0 million per occurrence) and property/rental value insurance ($1.0 billion per occurrence), with additional coverage for terrorist acts through a captive insurance subsidiary[92] - As of June 30, 2024, assets under construction require an additional $98.5 million to complete, primarily over the next two years, to be financed by debt, asset sales, and available cash[97] - Environmental liabilities totaled $17.5 million as of June 30, 2024. The company is potentially liable for investigation and remediation costs of hazardous substances on its real estate[106] - Committed tenant-related obligations totaled $44.4 million as of June 30, 2024. The aggregate amount of debt principal payment guarantees for consolidated entities was $8.3 million[98][100] Item 3. Quantitative and Qualitative Disclosures about Market Risk Details market risk exposure, primarily interest rate risk, and management strategies through hedging activities Interest Rate Risk Debt (Contractual Balances) and Effect of 1% Change in Rates (In thousands) | Debt Type | June 30, 2024 Balance | Weighted Average Effective Interest Rate (June 30, 2024) | Annual Effect of 1% Change in Base Rates | | :---------------------------------------- | :-------------------- | :------------------------------------------------------- | :--------------------------------------- | | Mortgage loans: | | | | | Variable rate | $701,283 | 6.23% | $1,445 | | Fixed rate | $1,188,709 | 4.78% | — | | Total Mortgage loans | $1,889,992 | | $1,445 | | Revolving credit facility and term loans: | | | | | Revolving credit facility | $40,000 | 6.78% | $406 | | Tranche A-1 Term Loan | $200,000 | 2.70% | — | | Tranche A-2 Term Loan | $400,000 | 3.58% | — | | 2023 Term Loan | $120,000 | 5.31% | — | | Total Revolving credit facility and term loans | $760,000 | | $406 | | Pro rata share of debt of unconsolidated real estate ventures: | | | | | Variable rate | $35,000 | 5.73% | $— | | Fixed rate | $33,000 | 4.13% | — | | Total Unconsolidated Real Estate Ventures Debt | $68,000 | | $— | - As of June 30, 2024, the one-month term Secured Overnight Financing Rate (SOFR) was 5.34%, with the weighted average interest rate cap strike for mortgage loans at 3.52% and a weighted average maturity date of June 2025 (extended to October 2025 in July 2024)[108] - The estimated fair value of consolidated debt was $2.6 billion as of June 30, 2024, compared to $2.5 billion as of December 31, 2023[114] Hedging Activities - As of June 30, 2024, the company had interest rate swap and cap agreements with an aggregate notional value of $2.3 billion designated as effective hedges, primarily consisting of assets totaling $36.6 million[111] - Within the next 12 months, $20.7 million of net unrealized gain from effective hedges is expected to be reclassified as a decrease to interest expense[276] - Non-designated derivative financial instruments, primarily interest rate cap agreements, had an aggregate notional value of $475.2 million as of June 30, 2024, with their fair value changes recorded in 'Interest expense'[112] Item 4. Controls and Procedures Management concluded disclosure controls and procedures effective as of June 30, 2024, with no material internal control changes - As of June 30, 2024, the company's disclosure controls and procedures were deemed effective by the Chief Executive Officer and Chief Financial Officer[119] - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2024[120] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal actions, not expected to materially affect financial position or results - The company is involved in ordinary course legal actions, but their outcome is not expected to materially affect financial condition, results of operations, or cash flows[121] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Annual Report on Form 10-K - No material changes to the risk factors previously disclosed in the Annual Report[122] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details common share repurchase activities, including shares purchased, average price, and remaining authorized amount Purchases of Equity Securities by the Issuer (Common Shares) | Period | Total Number Of Common Shares Purchased | Average Price Paid Per Common Share | 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 | | :-------------------------------------- | :-------------------------------------- | :---------------------------------- | :--------------------------------------------------------------- | :--------------------------------------------------------------------------------------------- | | May 1, 2024 - May 31, 2024 | 494,539 | $14.02 | 494,539 | $484,844,099 | | June 1, 2024 - June 30, 2024 | 4,198,777 | $14.69 | 4,198,777 | $423,075,016 | | Total for the three months ended June 30, 2024 | 4,693,316 | $14.62 | 4,693,316 | | | Total for the six months ended June 30, 2024 | 7,684,176 | $15.35 | 7,684,176 | | | Program total since inception in March 2020 | 53,558,179