JBG SMITH Properties — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the same periods in 2018 unless noted. Dollar amounts are in millions except per-share data. JBG SMITH is a REIT focused on commercial and multifamily properties in the Washington, D.C. metro area. At quarter-end, its operating portfolio comprised 45 commercial assets and 16 multifamily assets; it also had eight assets under construction and 40 future development assets.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $167.1 | $158.4 | $482.9 | $480.9 |
| Net income attributable to common shareholders | $9.4 | $22.8 | $31.2 | $39.2 |
| Diluted EPS | $0.06 | $0.19 | $0.23 | $0.33 |
| Consolidated NOI | $77.8 | $77.7 | $232.8 | $241.7 |
| FFO attributable to common shareholders | $45.6 | $42.6 | $120.2 | $119.5 |
| FFO per diluted share | $0.34 | $0.36 | $0.93 | $1.01 |
- Revenue mix: Q3 property rentals fell 2.1% to $124.0 million, while third-party real estate services revenue, including reimbursements, rose 45.4% to $34.6 million. Nine-month rental revenue declined 4.9% to $365.7 million; services revenue increased 27.0% to $91.8 million.
- Margins and operating trends: Q3 consolidated NOI was nearly unchanged year over year, while same-store NOI declined 8.4% to $72.0 million. Nine-month same-store NOI fell 9.5% to $217.7 million. Management attributed same-store weakness largely to increased rental abatements, rent reductions and assumed lease liability payments.
- Cash flow: Nine-month operating cash flow was $112.6 million, versus $136.7 million. Investing used $145.4 million, including $294.4 million of development and real estate additions, offset in part by $157.8 million of sale proceeds. Financing used $123.0 million, including $482.8 million of mortgage repayments, $99.7 million of dividends and $473.5 million of net common-share issuance proceeds.
- Debt and liquidity: Gross consolidated debt was approximately $1.66 billion at September 30, down from $2.14 billion at year-end 2018; reported cash and restricted cash totaled $243.7 million, including $230.1 million of cash and cash equivalents. The $1.0 billion revolving facility had no borrowings outstanding. The company reported that cash, operating flows and expected financing, recapitalization and asset-sale proceeds should cover needs for the next 12 months.
- Capital and distributions: The April public offering of 11.5 million shares generated $472.8 million net proceeds. The quarterly dividend was $0.225 per share; the board declared the same amount in October, payable November 29, 2019.
Material changes and management commentary
- Common-share net income and EPS declined materially, despite higher total revenue. Lower property rental revenue and reduced income from unconsolidated ventures were important factors; Q3 2018 included a $15.5 million gain on sale of a venture interest. Nine-month 2019 results included $47.1 million of real estate sale gains.
- Interest expense declined to $10.6 million in Q3 and $40.9 million for nine months, primarily reflecting mortgage repayments and higher capitalized interest. Property operating and real estate tax expenses also declined year over year, partly due to disposed assets.
- Commercial portfolio leased/occupied percentages at the company’s share were 90.2%/86.8% at September 30, 2019; multifamily figures were 96.5%/94.9%.
- Amazon had signed leases totaling approximately 585,000 square feet at four National Landing office buildings. The company agreed to sell the Metropolitan Park and Pen Place development sites to Amazon for approximately $293.9 million, subject to customary closing conditions. It expected the F1RST Residences acquisition, for approximately $160.5 million, to close by year-end as a replacement property for a like-kind exchange.
- Management said that, excluding future capital recycling, it expects NOI to grow and exceed 2018 levels by the second half of 2020 as early-renewal free rent burns off and development assets deliver. This is an outlook statement, not quantified formal guidance.
- At September 30, operating assets included approximately 12.7 million commercial square feet and 6,321 multifamily units; construction commitments required an estimated additional $283.8 million to complete, primarily over the next two to three years.
Risks, contingencies and unusual items
- Market risks include leasing and tenant credit conditions, Washington-area supply and demand, construction costs, interest rates, refinancing availability, and the ability to sell or recapitalize assets. The filing reported no material changes to previously disclosed risk factors.
- Interest-rate swaps and caps are used for hedging, not speculation. Derivative values moved from a net unrealized gain position in accumulated other comprehensive income at year-end 2018 to a net unrealized loss of $27.7 million for designated cash-flow hedges at September 30, 2019; $6.3 million was expected to be reclassified as increased interest expense within 12 months.
- Construction in progress requires substantial remaining spending, and the company expects to fund it through debt, asset transactions, equity issuance and available cash. It also expected to contribute approximately $47.1 million to certain unconsolidated investments.
- Environmental liabilities were $17.9 million, primarily related to remediation at Potomac Yard Land Bay H. The company disclosed ordinary-course legal matters that it did not expect to have a material adverse effect, and potential exposure under development, debt, environmental and tax-related guarantees and indemnities.
- The adoption of lease accounting Topic 842 in 2019 recognized operating right-of-use assets and lease liabilities and changed certain presentation and leasing-cost accounting; management said it did not materially change rental revenue recognition or opening accumulated deficit.
Important facts for investors to verify
- Progress and closing conditions for the Amazon land sale, related like-kind exchange, and F1RST Residences acquisition.
- Whether same-store NOI stabilizes as rent abatements and early-renewal free rent roll off, and whether occupancy and leasing trends support the 2020 outlook.
- Funding sources, cost-to-complete estimates and delivery timing for the development pipeline, including the $283.8 million remaining construction commitment.
- Debt maturities, refinancing needs, covenant capacity, interest-rate exposure and the company’s ability to maintain liquidity while funding development and dividends.
- Underlying recurring operating performance apart from asset-sale gains, share-based compensation, noncash lease adjustments and other non-GAAP measures such as FFO and NOI.