JBG SMITH(JBGS) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements The unaudited condensed consolidated financial statements detail the company's financial position and performance Condensed Consolidated Balance Sheets Total assets and equity decreased from year-end 2022, driven by lower cash and real estate values Condensed Consolidated Balance Sheet Highlights (In thousands) | Metric | June 30, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $5,783,602 | $5,903,438 | $(119,836) | | Real estate, net | $4,740,894 | $4,823,082 | $(82,188) | | Cash and cash equivalents | $156,639 | $241,098 | $(84,459) | | Mortgage loans, net | $1,689,207 | $1,890,174 | $(200,967) | | Term loans, net | $716,757 | $547,072 | $169,685 | | Total Liabilities | $2,736,734 | $2,708,016 | $28,718 | | Total Equity | $2,590,982 | $2,714,112 | $(123,130) | Condensed Consolidated Statements of Operations Net income and EPS declined significantly year-over-year due to lower real estate sale gains and higher interest expense Condensed Consolidated Statements of Operations Highlights (In thousands, except per share data) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | % Change (YoY) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenue | $152,095 | $145,505 | 4.5% | $305,057 | $307,470 | (0.8%) | | Total expenses | $140,244 | $142,359 | (1.5%) | $287,280 | $305,258 | (5.9%) | | Interest expense | $25,835 | $16,041 | 61.1% | $52,677 | $32,319 | 63.0% | | Gain on the sale of real estate, net | $0 | $158,767 | (100.0%) | $40,700 | $158,631 | (74.3%) | | Net income (loss) | $(12,254) | $141,494 | (108.7%) | $12,056 | $141,417 | (91.5%) | | Net income (loss) attributable to common shareholders | $(10,545) | $123,275 | (108.6%) | $10,626 | $123,243 | (91.4%) | | Earnings (loss) per common share - basic and diluted | $(0.10) | $1.02 | (109.8%) | $0.09 | $0.99 | (90.9%) | Condensed Consolidated Statements of Comprehensive Income Comprehensive income decreased significantly year-over-year, reflecting lower net income Condensed Consolidated Statements of Comprehensive Income Highlights (In thousands) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(12,254) | $141,494 | $12,056 | $141,417 | | Change in fair value of derivative financial instruments | $21,789 | $7,225 | $12,820 | $32,320 | | Total other comprehensive income (loss) | $14,255 | $10,016 | $(2,530) | $38,867 | | Comprehensive income attributable to JBG SMITH Properties | $910 | $131,980 | $8,473 | $157,833 | Condensed Consolidated Statements of Equity Total equity declined due to net losses, share repurchases, and dividends Condensed Consolidated Statements of Equity Highlights (In thousands) | Metric | June 30, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total equity | $2,590,982 | $2,714,112 | $(123,130) | Key Activities Affecting Equity (Six Months Ended June 30) | Activity | 2023 (In thousands) | 2022 (In thousands) | | :--- | :--- | :--- | | Net income (loss) attributable to common shareholders | $10,626 | $123,243 | | Common shares repurchased | $(155,845) | $(307,039) | | Dividends declared on common shares | $(23,803) | $(27,658) | | Total other comprehensive income (loss) | $(2,530) | $38,867 | Condensed Consolidated Statements of Cash Flows Operating cash flow decreased while investing activities became a net cash user due to lower asset sales Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, In thousands) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $89,431 | $107,649 | $(18,218) | | Net cash (used in) provided by investing activities | $(135,500) | $785,304 | $(920,804) | | Net cash used in financing activities | $(25,160) | $(819,930) | $794,770 | | Net (decrease) increase in cash and cash equivalents, and restricted cash | $(71,229) | $73,023 | $(144,252) | | Cash and cash equivalents, and restricted cash, end of period | $202,844 | $375,118 | $(172,274) | - Investing activities shifted from a net cash provider in 2022 to a net cash user in 2023, primarily due to a significant decrease in proceeds from the sale of real estate ($69.0 million in 2023 vs $923.1 million in 2022) and increased development costs, construction in progress, and real estate additions ($164.8 million in 2023 vs $128.1 million in 2022)[20][233] - Financing activities saw a substantial reduction in net cash used, from $(819.9) million in 2022 to $(25.2) million in 2023, driven by lower common share repurchases and increased borrowings under mortgage loans and term loans[20][234] Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, asset sales, debt structure, and commitments - JBG SMITH is a Maryland real estate investment trust (REIT) focused on mixed-use properties in the Washington, D.C. metropolitan area, with approximately two-thirds of its holdings in the National Landing submarket, anchored by Amazon's new headquarters and Virginia Tech's Innovation Campus[24][130] - During the six months ended June 30, 2023, the company sold an 80.0% interest in 4747 Bethesda Avenue for a gross sales price of $196.0 million, recognizing a gain of $40.05 million[39] - The company entered into a new $187.6 million loan facility collateralized by The Wren and F1RST Residences, which was used to repay a $131.5 million mortgage loan[61][62][212][213] - The revolving credit facility was amended to reduce borrowing capacity from $1.0 billion to $750.0 million, extend maturity to June 2027, and adjust interest rates[64][65][217][218] - As of June 30, 2023, all debt and hedging arrangements use SOFR as a reference rate, transitioning from LIBOR[222] - The company repurchased and retired 10.5 million common shares for $155.8 million during the six months ended June 30, 2023, with the Board increasing the repurchase authorization to $1.5 billion[90][223] - As of June 30, 2023, the company had $284.7 million in construction commitments for assets under construction and $53.1 million in committed tenant-related obligations[113][115][244][245] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operating results, and strategic initiatives Organization and Basis of Presentation JBG SMITH is a Maryland REIT focused on mixed-use properties in the Washington, D.C. area - JBG SMITH operates as a Maryland REIT, owning, operating, investing in, and developing mixed-use properties in high-growth submarkets around Washington, D.C., with approximately two-thirds of its holdings in National Landing[130] - The company's business is conducted primarily through JBG SMITH Properties LP, its operating partnership, where JBG SMITH holds an 88.1% ownership interest as of June 30, 2023[24][132] - Revenue is primarily derived from multifamily and commercial leases, and fee-based third-party asset management and real estate services[26][131] - The company has elected to be taxed as a REIT and intends to maintain this status, distributing at least 90% of its REIT taxable income as dividends[32][135] Overview The company's operating portfolio includes 51 assets with a significant development pipeline in National Landing - As of June 30, 2023, the Operating Portfolio consisted of 51 operating assets: 31 commercial assets (9.7 million sq ft), 18 multifamily assets (6,756 units), and two wholly owned land assets[25][140] - The company has two under-construction multifamily assets (1,583 units) and 20 assets in the development pipeline (12.5 million sq ft of estimated potential development density)[25][141] - JBG SMITH is implementing a Placemaking strategy in National Landing, including new developments, retail, public spaces, and deployment of next-generation public and private 5G digital infrastructure[142] - During Q2 2023, construction of two new office buildings for Amazon in National Landing (2.1 million sq ft) was completed, and Amazon took occupancy in June 2023[143] Outlook The strategy focuses on capital allocation to maximize NAV, though asset sales have slowed and office occupancy has decreased - The company's strategy is to maximize long-term net asset value (NAV) per share through active capital allocation, including opportunistic sales or recapitalizations of assets and land sites[144] - Proceeds from asset sales are intended to fund share repurchases, new acquisitions, and development projects, advancing a strategic shift towards a majority multifamily portfolio[144] - Curbed lending activity has significantly slowed the pace of asset sales, a trend expected to continue through 2023[144] - Office portfolio occupancy decreased by 120 basis points to 84.0% as of June 30, 2023, compared to March 31, 2023[145] - The company anticipates 1.2 million square feet of office leases in National Landing expiring through 2024 will vacate, with over half (678,000 sq ft) from Amazon[145] - Multifamily portfolio occupancy increased by 80 basis points to 93.7% as of June 30, 2023, with gross rents increasing by 7.5% on renewals[147][148] Operating Results Net income and EPS decreased significantly due to the absence of large real estate sale gains Operating Results Summary (In thousands, except per share data) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | % Change (YoY) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net income (loss) attributable to common shareholders | $(10,545) | $123,275 | (108.6%) | $10,626 | $123,243 | (91.4%) | | EPS - Basic and Diluted | $(0.10) | $1.02 | (109.8%) | $0.09 | $0.99 | (90.9%) | | Property rental revenue | $120,592 | $117,036 | 3.0% | $244,625 | $248,634 | (1.6%) | | Third-party real estate services revenue, including reimbursements | $22,862 | $22,157 | 3.2% | $45,646 | $46,127 | (1.0%) | | Interest expense | $25,835 | $16,041 | 61.1% | $52,677 | $32,319 | 63.0% | | Gain on the sale of real estate, net | $0 | $158,767 | (100.0%) | $40,700 | $158,631 | (74.3%) | - Property rental revenue increased by $3.6 million (3.0%) in Q2 2023, driven by a $9.5 million increase from multifamily assets, partially offset by a $7.6 million decrease from commercial assets[159] - Property rental revenue decreased by $4.0 million (1.6%) in H1 2023, primarily due to a $23.3 million decrease from commercial assets, partially offset by a $17.3 million increase from multifamily assets[171] - Interest expense increased significantly by 61.1% in Q2 2023 and 63.0% in H1 2023, mainly due to new mortgage loans and rising variable interest rates[167][181] FFO (Funds From Operations) Funds From Operations decreased year-over-year, primarily due to lower net income - FFO is a non-GAAP financial measure used to assess operating performance, excluding real estate depreciation and amortization, and gains/losses from real estate sales[183][185] FFO Attributable to Common Shareholders (In thousands) | Period | 2023 | 2022 | % Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $33,423 | $33,561 | (0.4%) | | Six Months Ended June 30 | $66,425 | $84,861 | (21.7%) | NOI and Same Store NOI Consolidated NOI increased, but Same Store NOI for the six-month period decreased due to commercial portfolio vacancy - NOI is a non-GAAP measure reflecting property-related revenue less operating expenses and ground rent, used to assess asset-level performance[187] Consolidated NOI (In thousands) | Period | 2023 | 2022 | % Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $75,051 | $71,159 | 5.5% | | Six Months Ended June 30 | $152,667 | $148,128 | 3.1% | Same Store NOI (In thousands) | Period | 2023 | 2022 | % Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $78,340 | $78,236 | 0.1% | | Six Months Ended June 30 | $153,535 | $154,650 | (0.7%) | - The decrease in Same Store NOI for the six months ended June 30, 2023, was primarily due to increased abatement and higher vacancy in the commercial portfolio, partially offset by higher occupancy and rents in the multifamily portfolio[191] - The same store pool increased to 50 properties for the three months ended June 30, 2023, and to 49 properties for the six months ended June 30, 2023[189][190] Reportable Segments Multifamily NOI grew significantly while commercial NOI declined due to disposed properties - The company aggregates its operating segments into three reportable segments: multifamily, commercial, and third-party asset management and real estate services[100][195] Consolidated NOI by Segment (In thousands) | Segment | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | % Change (YoY) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Commercial | $42,300 | $47,448 | (10.8%) | $89,983 | $101,102 | (11.0%) | | Multifamily | $28,696 | $23,265 | 23.3% | $55,767 | $46,531 | 19.8% | | Other | $4,055 | $446 | 809.2% | $6,917 | $495 | 1297.4% | | Total Consolidated NOI | $75,051 | $71,159 | 5.5% | $152,667 | $148,128 | 3.1% | Third-Party Real Estate Services Revenue Less Expenses (In thousands) | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended June 30 | $757 | $(1,986) | | Six Months Ended June 30 | $(282) | $(5,065) | - Commercial NOI decreased primarily due to the impact of Disposed Properties, partially offset by increased occupancy at 800 North Glebe and 2121 Crystal Drive[203][205] - Multifamily NOI increased significantly due to the consolidation of Atlantic Plumbing and 8001 Woodmont, and higher occupancy and rents across the portfolio[204][206] Liquidity and Capital Resources Liquidity is sourced from property income, services, and financing, and is expected to be adequate for the next 12 months - Primary sources of operating cash flow include property rental income and fee-based real estate services, with other sources from financings, asset sales, and securities issuance[207][209] - The company anticipates adequate cash flows to fund business operations, debt amortization, capital expenditures, and dividends over the next 12 months[209] - Material cash requirements include debt service, capital expenditures ($53.1 million in tenant-related obligations), and development expenditures ($284.7 million over three years)[228] - As of June 30, 2023, the company had $156.6 million in cash and cash equivalents and $687.5 million of availability under its revolving credit facility[229] - The Board of Trustees increased the common share repurchase authorization to $1.5 billion in May 2023; during H1 2023, 10.5 million common shares were repurchased for $155.8 million[223] Summary of Cash Flows Cash and cash equivalents decreased by $71.2 million, driven by net cash used in investing and financing activities Summary of Cash Flows (Six Months Ended June 30, In thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $89,431 | $107,649 | | Net cash (used in) provided by investing activities | $(135,500) | $785,304 | | Net cash used in financing activities | $(25,160) | $(819,930) | | Net (decrease) increase in cash and cash equivalents, and restricted cash | $(71,229) | $73,023 | - Net cash used in investing activities was $135.5 million, driven by $164.8 million in development costs and real estate additions, partially offset by $69.0 million from real estate sales[233] - Net cash used in financing activities was $25.2 million, primarily due to $278.5 million in mortgage loan repayments and $155.8 million in common share repurchases, partially offset by new borrowings[234] Unconsolidated Real Estate Ventures The company holds $309.2 million in investments in unconsolidated real estate ventures accounted for via the equity method - As of June 30, 2023, investments in unconsolidated real estate ventures totaled $309.2 million, accounted for using the equity method[236] - The company is not the primary beneficiary of these unconsolidated VIEs, despite managing day-to-day operations[51] - As of June 30, 2023, the company had additional capital commitments and certain recorded guarantees to its unconsolidated real estate ventures totaling $62.0 million[118][240] Commitments and Contingencies The company has significant construction commitments, tenant-related obligations, and various guarantees - The company maintains general liability insurance ($150.0 million per occurrence) and property/rental value insurance ($1.0 billion per occurrence), with coverage for terrorist acts up to $2.0 billion[110][241] - As of June 30, 2023, the company had assets under construction requiring an additional $284.7 million to complete over the next three years[113][244] - Committed tenant-related obligations totaled $53.1 million as of June 30, 2023[115][245] - The aggregate amount of debt principal payment guarantees for consolidated entities was $8.3 million as of June 30, 2023[119][247] - The company has an agreement with Vornado regarding tax matters, which may require indemnification for certain tax liabilities[120][248] Environmental Matters The company is subject to environmental laws and regulations, with recorded liabilities of $18.0 million - Owners of real estate are liable for remediation costs of hazardous substances, potentially without regard to fault[250] - Environmental assessments have not revealed material environmental contamination that would have a material adverse effect on the business[114][251] - Environmental liabilities totaled $18.0 million as of June 30, 2023, and December 31, 2022[114][251] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to interest rate risk, which is managed through derivative financial instruments Interest Rate Risk The company is exposed to fluctuations in interest rates, with all debt and hedging arrangements now using SOFR - The company has exposure to fluctuations in interest rates, which are sensitive to many factors beyond its control[252] Annual Effect of 1% Change in Base Rates (In thousands) | Debt Type | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Mortgage loans: Variable rate | $1,445 | $1,445 | | Revolving credit facility and term loans: Revolving credit facility | $629 | $0 | | Pro rata share of debt of unconsolidated real estate ventures: Variable rate | $164 | $164 | - As of June 30, 2023, one-month LIBOR was 5.22% and one-month term SOFR was 5.14%; all debt and hedging arrangements now use SOFR as a reference rate[211][222][252] Hedging Activities The company uses interest rate swap and cap agreements to manage interest rate risk - The company uses derivative financial instruments (interest rate swap and cap agreements) to manage or hedge exposure to interest rate risk[94][258] - As of June 30, 2023, the company had interest rate swap and cap agreements with an aggregate notional value of $1.4 billion designated as effective hedges[95][260] - As of June 30, 2023, the company had various interest rate cap agreements with an aggregate notional value of $711.8 million designated as ineffective hedges[261] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in internal control Evaluation of Disclosure Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023 - As of June 30, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[262] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the quarter - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[263] PART II – OTHER INFORMATION Item 1. Legal Proceedings Ongoing legal actions are not expected to have a material adverse effect on the company's financial condition - The company is involved in various legal actions in the ordinary course of business; management believes the outcome of such matters will not have a material adverse effect on its financial condition, results of operations or cash flows[116][246][264] Item 1A. Risk Factors There have been no material changes to previously disclosed risk factors - There have been no material changes to the risk factors previously disclosed in the company's Annual Report[265] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 10.5 million shares in H1 2023 and increased its repurchase authorization to $1.5 billion Purchases of Equity Securities by the Issuer | Period | Total Number Of Common Shares Purchased | Average Price Paid Per Common Share | Approximate Dollar Value Of Common Shares That May Yet Be Purchased Under the Plan Or Programs | | :--- | :--- | :--- | :--- | | April 1, 2023 - April 30, 2023 | 2,399,238 | $14.17 | $322,367,801 | | May 1, 2023 - May 31, 2023 | 4,065,637 | $14.54 | $763,155,096 | | June 1, 2023 - June 30, 2023 | 2,856,095 | $14.86 | $720,668,410 | | Total for the three months ended June 30, 2023 | 9,320,970 | $14.54 | | | Total for the six months ended June 30, 2023 | 10,526,158 | $14.79 | | | Program total since inception in March 2020 | 33,823,567 | $23.02 | | - In May 2023, the Board of Trustees increased the common share repurchase authorization to $1.5 billion[268] - Subsequent to June 30, 2023, the company repurchased and retired an additional 2.0 million common shares for $31.5 million at a weighted average price of $16.03 per share[267] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[269] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable[270] Item 5. Other Information No officers adopted Rule 10b5-1 plans in Q2, and the company's Bylaws were amended and restated Trading Arrangements No officers or trustees adopted or terminated Rule 10b5-1 trading arrangements during Q2 2023 - None of the company's officers or trustees adopted or terminated any Rule 10b5-1 trading arrangements during the three months ended June 30, 2023[271] Second Amended and Restated Bylaws The Board amended and restated the Bylaws to allow electronic stockholder participation and update nomination procedures - On August 3, 2023, the Board amended and restated the Bylaws to: (i) expressly provide for the ability of stockholders to participate in meetings by electronic transmission, (ii) require any shareholder soliciting proxies to use a proxy card color other than white, and (iii) update the procedure and information requirements for the nominations of persons for election to the Board[272] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q - Key exhibits include the Second Amended and Restated Bylaws, the Amended and Restated Credit Agreement, and certifications from the Chief Executive Officer and Chief Financial Officer[276] Signatures The report is duly signed by the Chief Financial Officer and Chief Accounting Officer - The report was signed by M. Moina Banerjee, Chief Financial Officer, and Angela Valdes, Chief Accounting Officer, on August 8, 2023[280][281]