JBG SMITH(US:JBGS)2020-08-04 22:50PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for JBG SMITH Properties as of June 30, 2020, and for the three and six-month periods ended June 30, 2020 and 2019, including balance sheets, statements of operations, comprehensive loss, equity, and cash flows, along with accompanying notes Condensed Consolidated Balance Sheets The balance sheet as of June 30, 2020, shows total assets of $6.5 billion, an increase from $6.0 billion at year-end 2019, driven by a significant increase in cash and cash equivalents to $710.7 million, while total liabilities also rose to $2.56 billion from $1.99 billion, primarily due to increased borrowings Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Real estate, net | $4,719,348 | $4,655,948 | | Cash and cash equivalents | $710,677 | $126,413 | | Investments in unconsolidated real estate ventures | $464,437 | $543,026 | | TOTAL ASSETS | $6,495,777 | $5,986,251 | | Liabilities & Equity | | | | Mortgages payable, net | $1,312,524 | $1,125,777 | | Revolving credit facility | $500,000 | $200,000 | | Unsecured term loans, net | $397,637 | $297,295 | | Total liabilities | $2,556,008 | $1,986,816 | | Total equity | $3,440,686 | $3,386,677 | Condensed Consolidated Statements of Operations For the second quarter of 2020, the company reported a net loss attributable to common shareholders of $36.8 million, a significant increase from the $3.0 million loss in Q2 2019, with total revenue decreasing to $145.0 million from $160.6 million year-over-year, while for the six-month period, net income was $6.1 million, down from $21.8 million in the prior year, despite a $59.5 million gain on the sale of real estate Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $144,952 | $160,617 | $303,059 | $315,816 | | Total expenses | $156,962 | $149,140 | $314,893 | $303,674 | | Gain on sale of real estate | $0 | $0 | $59,477 | $39,033 | | Net Income (Loss) | $(40,263) | $(3,328) | $7,912 | $24,920 | | Net Income (Loss) Attributable to Common Shareholders | $(36,780) | $(3,040) | $6,145 | $21,821 | | Diluted EPS | $(0.28) | $(0.03) | $0.04 | $0.16 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2020, net cash provided by operating activities increased to $85.5 million from $52.8 million in the prior-year period, investing activities provided $33.3 million in cash, a reversal from a $68.7 million use of cash in 2019, driven by $154.5 million in proceeds from real estate sales, and financing activities provided a substantial $469.7 million, mainly from borrowings, compared to an $86.8 million use of cash in 2019 Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $85,519 | $52,783 | | Net cash provided by (used in) investing activities | $33,346 | $(68,708) | | Net cash provided by (used in) financing activities | $469,652 | $(86,829) | | Net increase (decrease) in cash | $588,517 | $(102,754) | Notes to Condensed Consolidated Financial Statements The notes provide detailed information on the company's organization, accounting policies, and financial activities, including the impact of COVID-19, the sale of Metropolitan Park to Amazon for $155.0 million, a $6.5 million impairment charge on The Marriott Wardman Park hotel investment, details on debt and credit facilities, and the repurchase of 1.4 million common shares for $41.2 million - As of June 30, 2020, the company's operating portfolio consisted of 63 assets, including 43 commercial properties (13.3 million sq. ft.) and 20 multifamily properties (7,367 units)25 - The company sold the Metropolitan Park development site to Amazon for $155.0 million in January 2020, resulting in a gain of $59.5 million4346 - A $6.5 million impairment charge was recorded on the investment in the venture owning The Marriott Wardman Park hotel, reducing its book value to zero due to a decline in fair value50 - In response to COVID-19, the company recorded credit losses of $4.7 million against billed rent and $3.6 million against deferred rent for the six months ended June 30, 2020, primarily from retail tenants41 - The company repurchased and retired 1.4 million common shares for $41.2 million at an average price of $29.01 per share during the first six months of 202093 Management's Discussion and Analysis of Financial Condition and Results of Operations This section details management's perspective on the company's financial performance and condition, heavily emphasizing the adverse effects of the COVID-19 pandemic, including decreased retail and parking revenue, increased credit losses, and operational challenges, while highlighting the resilience of the D.C. market and the strategic importance of its relationship with Amazon in National Landing, covering operating results, segment performance, liquidity measures, and cash flow analysis Overview and 2020 Outlook Management discusses the significant negative impact of the COVID-19 pandemic on operations, particularly on retail tenants, parking revenue, and hotel income, with rent collections for Q2 2020 strong for office (98.5%) and multifamily (98.5%) but weak for retail (61.8%), while despite near-term headwinds, the company expects the D.C. market to be recession-resilient, bolstered by government and Amazon-related activity, having executed leases totaling 857,000 sq. ft. with Amazon - The COVID-19 pandemic has negatively impacted retail revenue, parking income, and near-term leasing activity, leading the company to record significant credit losses and reserves against receivables156158 Q2 2020 Rent Collections (Consolidated) | Tenant Type | Rent Collected | 2019 Historical Average | | :--- | :--- | :--- | | Commercial Office | 98.5% | 99.7% | | Multifamily | 98.5% | 99.9% | | Commercial Retail | 61.8% | 98.4% | - Management believes the D.C. metropolitan area will prove more recession-resilient than other markets, with potential for countercyclical growth driven by government spending and accelerated hiring by Amazon154161 Results of Operations This sub-section provides a detailed comparison of operating results for the three and six months ended June 30, 2020, versus 2019, where key drivers for the decline in revenue and increase in net loss were the sale of several properties, reduced rental income due to COVID-19 impacts, and a $6.5 million impairment charge on an unconsolidated hotel venture, partially offset by income from newly service-placed assets like 4747 Bethesda Avenue and West Half, with FFO per share decreasing to $0.18 in Q2 2020 from $0.30 in Q2 2019 - Q2 2020 property rental revenue decreased by 5.6% YoY to $115.5 million, primarily due to disposed properties and COVID-19 impacts on rent collection173 - Loss from unconsolidated real estate ventures increased significantly to $13.5 million in Q2 2020 from $1.8 million in Q2 2019, driven by a $6.5 million impairment charge on The Marriott Wardman Park hotel and a $3.0 million loss on the sale of Woodglen184 Funds from Operations (FFO) per Share | Period | FFO per Share (Diluted) | YoY Change | | :--- | :--- | :--- | | Q2 2020 | $0.18 | -40.0% | | Q2 2019 | $0.30 | N/A | | Six Months 2020 | $0.45 | -23.7% | | Six Months 2019 | $0.59 | N/A | - Same Store NOI decreased by 3.0% for Q2 2020 compared to Q2 2019, driven by lower multifamily occupancy and reduced commercial revenue due to the COVID-19 pandemic211 Liquidity and Capital Resources The company's primary liquidity source is property rental income, and in response to COVID-19 uncertainty, it took steps to enhance liquidity, including drawing $500 million on its revolving credit facility (repaid in July 2020) and deferring approximately $69 million in planned discretionary capital expenditures, with total debt standing at $2.2 billion as of June 30, 2020, and $41.2 million of common shares repurchased in H1 2020 - To mitigate the impact of COVID-19, the company deferred approximately $69 million of planned discretionary capital expenditures for 2020 and 2021244 - The company increased its cash balance by drawing $500 million from its revolving credit facility and $100 million from its Tranche A-1 Term Loan during H1 2020, with the revolver balance repaid in July 2020244 - As of June 30, 2020, the company had $52.6 million in remaining construction commitments, which it expects to fund with debt proceeds, asset sales, and available cash120268 - A quarterly dividend of $0.225 per common share was declared on July 30, 2020134248 Quantitative and Qualitative Disclosures about Market Risk This section outlines the company's exposure to market risks, primarily interest rate risk, with significant variable-rate debt as of June 30, 2020, including $500 million on its revolving credit facility and $294.5 million in mortgages, and the company uses derivative instruments like interest rate swaps and caps to hedge this exposure, with a total notional value of $1.34 billion in hedging agreements Debt Exposure to Interest Rate Risk (as of June 30, 2020, in thousands) | Debt Category | Balance | Type | Effect of 1% Rate Change | | :--- | :--- | :--- | :--- | | Mortgages payable | $294,500 | Variable | $2,986 | | Revolving credit facility | $500,000 | Variable | $5,069 | | Unsecured term loans | $200,000 | Variable (unhedged portion) | $0 (fully hedged) | | Pro rata share of unconsolidated debt | $303,918 | Variable | $3,081 | - The company utilizes interest rate swaps and caps to manage interest rate risk, having agreements designated as cash flow hedges with a notional value of $862.7 million and non-designated hedges with a notional value of $482.7 million as of June 30, 2020284285 Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter, despite many employees working remotely due to the COVID-19 pandemic - The CEO and CFO concluded that as of June 30, 2020, the company's disclosure controls and procedures were effective286 - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020287 PART II – OTHER INFORMATION Legal Proceedings The company is involved in various legal actions in the ordinary course of business but does not expect the outcomes to have a material adverse effect on its financial position, results of operations, or cash flows - The company states that the outcome of ordinary course legal actions is not expected to have a material adverse effect on its financial condition288 Risk Factors This section adds a significant new risk factor detailing the impacts of the COVID-19 pandemic, warning that the outbreak has already disrupted business and is expected to continue to have a significant, and possibly materially adverse, impact, with key risks highlighted including reduced rental income, declining demand for office and retail space, potential deterioration of the 'Placemaking' model, difficulty accessing capital, and increased operational costs and litigation risks - A new, extensive risk factor has been added regarding the significant and ongoing adverse impact of the COVID-19 pandemic on the company's business, financial performance, and cash flows290 - Specific risks include tenants' inability to pay rent, with retail tenants being particularly affected (38.2% of consolidated retail tenants had not paid Q2 rent)291 - Demand for office space is likely to decline due to the economic downturn and increased teleworking, which could negatively impact occupancy and rental rates291 - The company's 'Placemaking' model, which relies on amenity-rich, walkable, Metro-served neighborhoods, may become less appealing due to changes in work habits and perceptions of public transportation293 - Increased indebtedness, which rose by $590.7 million since year-end 2019, combined with decreased revenues, could heighten the risk of default on debt covenants295 Unregistered Sales of Equity Securities and Use of Proceeds This item is marked as 'Not applicable' in the report, indicating no unregistered sales of equity securities or specific use of proceeds to report for the period - The report indicates 'Not applicable' for this item302 Defaults Upon Senior Securities The company reports 'None,' indicating there were no defaults upon senior securities during the reporting period - The company reported no defaults upon senior securities299 Mine Safety Disclosures This item is marked as 'Not applicable,' as the company's operations do not involve mine safety - The report indicates 'Not applicable' for this item300 Other Information The company reports 'None,' indicating no other material information was required to be disclosed in this section for the period - The company reported no other information under this item304 Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, compensatory plan agreements, and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1) and XBRL data files306