JBG SMITH Properties — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. JBG SMITH is a REIT focused on commercial and multifamily real estate and fee-based real estate services, with its portfolio concentrated in the Washington, D.C. region, particularly National Landing.
Business and portfolio
At year-end, the operating portfolio comprised 62 assets: 44 commercial properties totaling 12.7 million square feet and 18 multifamily properties totaling 7,111 units (10.7 million square feet and 5,327 units, respectively, at the company’s ownership share). Seven assets were under construction, with a further 40 future-development assets representing 21.9 million square feet of estimated potential density (18.7 million at share). These portfolio figures include unconsolidated venture assets and should not be read as wholly owned consolidated amounts.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $647.8 million | $644.2 million |
| Net income attributable to common shareholders | $65.6 million; $0.48 per diluted share | $39.9 million; $0.31 per diluted share |
| FFO attributable to common shareholders | $150.6 million; $1.15 per diluted share | $158.6 million; $1.33 per diluted share |
| Consolidated NOI | $311.1 million | $320.0 million |
| Same-store NOI | $292.3 million | $314.1 million |
| Cash from operating activities | $174.0 million | $188.2 million |
| Cash and restricted cash at year-end | $142.5 million, including $126.4 million unrestricted cash | $399.5 million, including $260.6 million unrestricted cash |
Revenue was nearly flat year over year. Property rental revenue declined 3.9% to $493.3 million, while third-party services revenue, including reimbursements, increased 22.5% to $120.9 million. Commercial NOI fell 5.0% to $245.6 million; multifamily NOI rose 4.5% to $66.5 million. Commercial occupancy at share was 88.2% occupied and 91.4% leased at year-end, compared with 85.5% and 89.6% a year earlier. Operating multifamily occupancy was 87.2% and leased percentage 89.5% at share; the lower figures versus 2018 were partly attributed to recently delivered West Half. The in-service multifamily portfolio, excluding recently delivered assets, was 93.3% occupied.
Year-end consolidated debt principal was approximately $1.63 billion, down from approximately $2.15 billion a year earlier; the company repaid $709.1 million of mortgage principal during 2019 and had a $200.0 million revolving-credit draw outstanding at year-end. Consolidated debt carrying amounts were $1.62 billion, including $1.13 billion of mortgages, $200.0 million on the revolver and $300.0 million of term loans. The company reported $2.0 billion of total debt at its share when including its share of unconsolidated venture debt. It was not in default under its mortgages or credit facility. The filing states that operating cash flow, financing, asset sales and existing cash are expected to fund needs over the next 12 months.
FFO and NOI are non-GAAP measures; FFO is not cash flow or a measure of cash available for distribution. The filing does not provide a single operating margin measure. GAAP net income rose, but included a $105.0 million gain on real estate sales; 2019 FFO declined 13.9%.
Material changes and unusual items
- Same-store NOI declined 7.0%, primarily reflecting rent abatements and reductions and payments on assumed lease liabilities following earlier lease renewals.
- Net income included $105.0 million of real-estate sale gains, versus $52.2 million in 2018. The 2019 amount included the sale and remeasurement gain associated with a 50% interest in the Central Place Tower venture.
- Interest expense fell 29.2% to $52.7 million, reflecting mortgage repayments and higher capitalized interest, partly offset by revolving borrowings and the end of interest capitalization on completed projects.
- Cash and restricted cash decreased by $257.0 million, primarily as investment and financing outflows exceeded operating cash generation. Development, construction and real-estate additions totaled $441.0 million.
- The company issued 11.5 million common shares at $42 per share in April, receiving net proceeds of $472.8 million. It declared $0.90 per share in dividends for 2019, compared with $1.00 in 2018, which included a special dividend.
- 2019 transaction and other costs were $23.2 million, including $10.9 million related to headquarters relocation and a right-of-use asset impairment, and $5.4 million of demolition costs.
Outlook, risks and contingencies
Management expects regular quarterly dividends in 2020 to be comparable to 2019, subject to Board discretion. It expects NOI to rebound in 2020 as lease concessions normalize, construction deliveries contribute and F1RST Residences is included; it cautioned that this improvement may not immediately increase FFO because completed projects reduce capitalized interest. The company was marketing more than $500 million of assets for potential sale and expected to transact on at least $200 million in 2020, citing a challenging investment-sales market. The January 2020 sale of Metropolitan Park to Amazon for $155.0 million exceeded its prior estimate by $11.0 million; the Pen Place sale was expected in 2021.
Amazon had executed leases for approximately 857,000 square feet across five National Landing buildings. Management identifies the risk that Amazon may invest less or more slowly than anticipated, and that it may later vacate currently leased space as its own headquarters buildings are completed. Other key risks include the company’s regional and National Landing concentration; material federal-government tenant exposure (GSA represented 23.4% of annualized rent at share); lease rollover and major-tenant concentration; development cost, timing, entitlement and lease-up risk; and access to capital. Variable-rate debt and the expected LIBOR transition also pose financing risks. A 100-basis-point rate increase was estimated to raise annual interest expense by approximately $2.7 million after current hedges.
Remaining estimated investment to complete assets under construction was $196.9 million. Capital commitments and certain recorded guarantees to unconsolidated ventures totaled $57.7 million; future payments under some guarantees were not estimable. Recorded environmental liabilities were $17.9 million. Management said ordinary-course legal matters were not expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls; the audit identified valuation and consolidation judgments for unconsolidated ventures as a critical audit matter.
Most important facts for investors to verify
- Whether the anticipated 2020 same-store NOI recovery materialized, and how it translated into FFO after capitalization of interest declined.
- Actual leasing, occupancy and rent performance, including Amazon’s move-ins, space requirements and potential future vacancies in National Landing.
- Progress, cost and funding of construction commitments, development projects and the Pen Place land sale.
- Asset-sale proceeds and debt reduction versus the company’s stated 2020 disposition expectations; also monitor liquidity after the sharp year-end cash decline.
- Debt maturities, covenant headroom, variable-rate exposure and execution of the LIBOR replacement transition.
- Dividend coverage and sustainability, considering FFO per share, capital needs, REIT distribution requirements and Board discretion.