JBG SMITH Properties — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018, compared with December 31, 2017. JBG SMITH owns and operates office and multifamily properties, primarily in Metro-served Washington, DC submarkets, and provides third-party real estate services. The portfolio included 68 operating assets, 10 assets under construction, and 43 future development assets.
Comparability: The July 2017 Formation Transaction added JBG assets and the management business. Q1 2018 includes those operations, while Q1 2017 reflects the Vornado predecessor assets and excludes JBG; reported year-over-year changes are therefore not directly comparable. Management also provided selected pro forma 2017 figures.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $163.0 million | $116.3 million |
| Operating income | $14.4 million | $19.6 million |
| Net income (loss) attributable to common shareholders | $(4.2) million; $(0.04) per share | $6.3 million; $0.06 per share |
| Consolidated NOI (non-GAAP) | $87.1 million | $68.6 million |
| Same-store NOI (non-GAAP) | $71.4 million | $64.2 million |
| Cash provided by operating activities | $34.7 million | $39.6 million |
Revenue growth reflected primarily the acquired JBG assets and services business. Property rentals rose 27.9%; third-party real estate services revenue, including reimbursements, rose 241.5%. Operating expenses increased, including depreciation and amortization, service-business costs, and $9.4 million of Formation Transaction-related share-based compensation. Interest expense increased 38.4% to $19.3 million. Same-store NOI increased 11.3%, primarily due to rent commencements and the expiration of rent abatements and assumed-lease-liability payments.
Office NOI was $70.5 million, up from $53.3 million; multifamily NOI was $15.2 million, up from $12.2 million. Management reported office occupancy of 87.0% and leased percentage of 87.8%, both slightly lower than year-end 2017. Multifamily occupancy was 94.2% and leased percentage was 96.1%, both higher than year-end.
Cash and cash equivalents were $221.6 million; restricted cash was $26.8 million. Cash, cash equivalents and restricted cash together decreased $90.1 million during the quarter to $248.4 million. Investing activities used $93.3 million, including $84.6 million for development, construction and real estate additions. Financing activities used $31.5 million, including $26.5 million of common dividends paid.
Consolidated debt, including debt classified with assets held for sale, was approximately $2.2 billion, according to management. The balance sheet reported $1.921 billion of net mortgages, $115.8 million drawn on the revolving facility, and $96.7 million of net unsecured term debt; a separate $59.0 million mortgage was classified with held-for-sale assets. The $1.0 billion revolving facility matures in July 2021, subject to extension options. Mortgage weighted-average effective rates were 3.91% for variable-rate and 4.24% for fixed-rate debt. The company had $368.1 million invested in unconsolidated real estate ventures.
Outlook, developments and risks
Management said cash from operations, financing and asset sales, together with existing cash, is expected to be adequate for operations, debt amortization, capital expenditures, dividends and OP-unit distributions over the next 12 months. The filing does not provide specific earnings or operating guidance.
Construction in progress required an estimated additional $610.3 million to complete, expected to be spent primarily over two to three years. The company also expected to fund approximately $49.3 million of additional capital to unconsolidated investments over that period. Management anticipated funding requirements through debt, asset recapitalizations and sales, institutional partners and available cash.
Subsequent to quarter-end, the company sold Summit I and II for $95.0 million gross and repaid their $59.0 million mortgage. It also sold the Bowen Building for $140.0 million gross and repaid $115.1 million on its revolving credit facility. The board declared a $0.225-per-share quarterly dividend in May 2018.
Risks and contingencies include exposure to interest rates and refinancing, property occupancy and tenant credit, development costs and execution, and the ability of venture partners to meet capital commitments. Construction commitments, debt guarantees, insurance limitations, environmental remediation exposure, and possible indemnification obligations under the Vornado Tax Matters Agreement are also disclosed. Management stated that ordinary-course legal matters were not expected to have a material adverse effect and that no material risk-factor changes had occurred since the 2017 Form 10-K.
The company uses swaps and caps to manage interest-rate exposure and states it does not use derivatives for speculation. A 1 percentage-point increase in base rates was estimated to increase annual interest expense by $3.9 million on consolidated variable-rate mortgages and $1.2 million on the revolving facility; the filing also presents a $1.6 million effect for its pro rata share of variable-rate venture debt. Future ground lease payments totaled $574.8 million; the company was evaluating the accounting impact of the new lease standard.
Important facts for investors to verify
- Assess operating trends using pro forma or same-store data where available, given the non-comparable post-Formation Transaction reporting periods.
- Track office leasing and occupancy, same-store NOI drivers, and the operating results of the expanded third-party services business.
- Review debt maturities, variable-rate exposure, hedge effectiveness, and liquidity after the post-quarter asset sales and associated debt repayments.
- Monitor funding and completion costs for the $610.3 million construction commitment and the $49.3 million expected venture contributions.
- Evaluate cash flow and distribution coverage: Q1 operating cash flow was $34.7 million, while common dividends paid were $26.5 million.
- Consider potential obligations from guarantees, environmental matters, insurance coverage, ground leases, and the Vornado Tax Matters Agreement.