JBG SMITH Properties quarterly report, Q2 FY2020

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JBG SMITH Properties — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. JBG SMITH is a Washington, D.C.-area commercial and multifamily REIT. Unless noted, financial amounts below are in millions.

Financial performance and liquidity

  • Q2 revenue: $145.0, down 9.8% from $160.6 a year earlier. Property rental revenue was $115.5, down 5.6%; third-party real estate services revenue, including reimbursements, was $27.2, down 7.9%.
  • Q2 earnings: Net loss attributable to common shareholders was $36.8, or $0.28 per diluted share, compared with a $3.0 million loss, or $0.03 per share, in Q2 2019. The quarter included a $6.5 million impairment of the investment in the Marriott Wardman Park venture and a $3.0 million share of a venture’s loss on sale of Woodglen. Losses from unconsolidated ventures totaled $13.5 million.
  • First-half results: Revenue was $303.1 versus $315.8. Net income attributable to common shareholders was $6.1, or $0.04 per diluted share, versus $21.8, or $0.16 per share. Both periods included real estate sale gains: $59.5 in 2020 and $39.0 in 2019.
  • Operating measures: Q2 consolidated NOI was $64.6, down from $78.6; same-store NOI fell 3.0% to $74.5. First-half consolidated NOI was $138.7 versus $155.1, while same-store NOI increased 0.4% to $150.4. Q2 commercial NOI declined 18.9% to $50.3; multifamily NOI declined 2.2% to $16.3. These NOI measures are non-GAAP.
  • Cash flow: First-half operating cash flow was $85.5, compared with $52.8 in 2019. Investing activities provided $33.3, including $154.5 of real estate sale proceeds and $70.8 of venture distributions, partly offset by $181.2 of development and property additions. Financing activities provided $469.7. Cash and restricted cash totaled $731.0 at June 30, including $710.7 of unrestricted cash.
  • Debt and liquidity: Consolidated debt was approximately $2.2 billion at June 30, up $590.7 from year-end 2019. This included $1.319 billion of mortgages, $500 million drawn on the revolving facility, and $400 million of unsecured term loans. In July, the company repaid the $500 million revolver balance and closed $385 million of mortgage loans. As of July 30, remaining credit-facility availability was $998.5 million, net of letters of credit.
  • Margins and distributions: Q2 consolidated NOI was approximately 55.6% of property revenue, versus 60.9% a year earlier. The company paid $60.3 in common dividends in the first half and declared a $0.225-per-share quarterly dividend in July.

Material changes versus the prior comparable period

  • COVID-19-related rent deferrals, uncollectible receivables, lower parking revenue and reduced activity affected results. Q2 rent collections were 98.5% for commercial office and multifamily tenants, but 61.8% for retail tenants on a consolidated basis; retail collections had averaged 98.4% in 2019.
  • Q2 property rental revenue declined partly because of sold properties and pandemic-related rent deferrals and credit losses. Newly operating assets, including 4747 Bethesda Avenue, West Half and F1RST Residences, partly offset the decline.
  • Commercial NOI was pressured by dispositions, rent collection issues and a $2.4 million reserve related to a parking operator’s bankruptcy. Multifamily revenue rose, but occupancy and expenses weighed on Q2 NOI.
  • Interest expense rose 20.3% in Q2 to $15.8, reflecting higher borrowing balances, a new mortgage and lower capitalized interest. First-half interest expense declined 8.3% to $27.8, mainly due to dispositions and prior mortgage repayments, partly offset by increased borrowing and lower capitalized interest.
  • The company sold Metropolitan Park to Amazon in January for $155.0 million, recognizing a $59.5 million gain. The sale of Pen Place to Amazon was expected to close in 2021.

Outlook, risks and contingencies

  • Management gave no numerical earnings or NOI guidance, citing uncertainty about the pandemic. It expected COVID-19 to continue negatively affecting operations through 2020 and into 2021, and stated that the impact could materially reduce revenue, NOI, net income or FFO.
  • Management identified risks including tenant defaults and concessions, retail tenant distress, lower parking receipts, weaker leasing and occupancy, coworking tenant distress, hotel disruption, higher cleaning costs, and slower development entitlements. It also noted potential longer-term pressure on office rent growth from increased teleworking.
  • The company deferred approximately $69 million of planned discretionary operating-asset capital expenditures on a consolidated basis ($73 million at its share) and paused plans to start construction at 1900 Crystal Drive. It reported that projects were active and generally on schedule, except 7900 Wisconsin Avenue, whose revised delivery was Q1 2021.
  • Construction in progress required an estimated additional $52.6 million to complete, expected primarily over the next one to two years. Capital commitments and certain recorded guarantees to unconsolidated ventures totaled $57.2 million; the company reported no principal payment guarantees for those ventures. Consolidated-entity principal payment guarantees were $8.3 million.
  • Other risks include refinancing and interest-rate exposure, covenant compliance, the transition from LIBOR, venture-partner funding needs, insurance availability and environmental liabilities. Environmental liabilities were $17.9 million. Management said ordinary-course legal matters were not expected to have a material adverse effect.
  • Management expected available cash, operating cash flow, venture distributions, financing and asset-sale proceeds to meet needs over the next 12 months, while warning that COVID-19 could adversely affect liquidity. Disclosure controls were reported effective as of June 30, 2020.

Important facts for investors to verify

  • Subsequent rent collections, tenant concessions, receivable write-offs and leasing/occupancy trends, particularly for retail and multifamily.
  • Whether the July mortgage proceeds and revolver repayment leave the company with adequate liquidity and manageable maturities; verify credit-facility availability and covenant headroom.
  • Performance and valuation of the Marriott Wardman Park investment and other unconsolidated ventures, including venture debt and capital-call exposure.
  • Progress and closing conditions for the expected 2021 Pen Place sale, and the timing, costs and lease-up of development projects.
  • Whether the $0.225 quarterly dividend remains sustainable given operating cash flow, capital needs, debt service and pandemic-related uncertainty.
  • Interpret non-GAAP NOI and FFO alongside GAAP results and cash flows; first-half FFO attributable to common shareholders was $60.5, or $0.45 per share, versus $74.6, or $0.59 per share.