Business context and reporting period
JBG SMITH Properties’ unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. The statements are historical combined carve-out results for Vornado Realty Trust’s Washington, D.C. assets, before JBG SMITH’s July 17 spin-off and July 18 combination with The JBG Companies. Accordingly, these results do not represent the post-transaction company and may not indicate its future performance.
Following the combination, the portfolio included 68 operating assets, 11 assets under construction, two near-term development assets and 44 future development assets. The operating portfolio comprised office, multifamily and other properties.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $118.0 million | $116.3 million | $234.3 million | $233.1 million |
| Operating income | $25.2 million | $30.3 million | $44.8 million | $54.5 million |
| Net income attributable to JBG SMITH | $11.3 million | $16.8 million | $17.7 million | $28.3 million |
| Operating cash flow | Not separately provided for quarter | $72.7 million | $90.9 million | |
| Cash and cash equivalents at period end | — | $280.6 million | $46.3 million |
Quarterly revenue increased 1.4%, while operating income fell 16.7% and net income fell 32.4%. For the six-month period, revenue increased 0.5%, operating income declined 17.8% and net income declined 37.7%. Approximate operating margin was 21.4% in Q2 2017 versus 26.0% in Q2 2016, and 19.1% for the first half versus 23.4% a year earlier.
At June 30, 2017, mortgages payable were $1.381 billion gross ($1.376 billion net of financing costs), including $767.3 million variable-rate and $613.6 million fixed-rate debt. The company also reported $289.9 million payable to Vornado. The 1% interest-rate sensitivity on consolidated variable-rate debt was approximately $7.7 million annually. Total assets were $3.910 billion and total liabilities $1.748 billion.
Six-month investing cash outflow was $56.6 million, primarily $54.7 million of development, construction and real estate additions. Financing cash inflow was $235.6 million, including $220.0 million borrowed for The Bartlett. Same-store NOI, a non-GAAP measure, grew 1.1% in the quarter and 1.6% in the six-month period.
Material changes versus the prior comparable period
- Property rentals rose 1.9% in Q2 and 1.8% for the first half, primarily reflecting The Bartlett entering service, partly offset by properties taken out of service.
- Third-party real estate services revenue declined 15.6% in Q2 and 19.3% for the first half, mainly due to lower management fees and leasing commissions.
- Real estate tax expense rose 10.2% in Q2 and 5.1% for the first half. Interest expense increased 7.7% and 11.2%, respectively, including effects of lower capitalized interest as The Bartlett entered service.
- Transaction and other costs were $5.2 million for Q2 and $11.1 million for the first half, primarily professional fees related to the spin-off and combination; there were no comparable costs in 2016.
- Operating cash flow fell by $18.3 million year over year in the first half. Investing outflow was lower by $88.1 million, principally because prior-year development and venture investment spending was higher.
Outlook, commentary, risks and unusual items
Management stated that operating cash flows over the next 12 months, financing proceeds and existing cash were expected to be adequate for operations, debt service, capital expenditures and distributions. The filing provides no quantified earnings or revenue guidance. Management cautioned that historical carve-out results and allocated Vornado corporate costs do not necessarily reflect standalone costs or post-combination performance.
After quarter-end, JBG SMITH completed its spin-off and acquired JBG’s management business and assets, including approximately $770 million of mortgage principal, in exchange for shares and partnership units. Purchase-price allocation was still in process, and pro forma disclosures were not included in this filing. The company also entered into a $1.4 billion credit facility; it drew $115.8 million on the revolver and $50.0 million on the delayed-draw term loan in connection with the combination and incurred $6.8 million of fees and expenses.
At June 30, contractual obligations included $1.636 billion of mortgage principal and interest, $576.1 million of operating lease payments (primarily long-term ground leases), and $55.2 million of purchase obligations, primarily construction commitments. The company expected to contribute approximately $5.3 million to unconsolidated ventures. Management reported no expected material adverse effect from ordinary-course legal matters or identified environmental conditions, but noted potential remediation costs could arise. The U.S. federal government represented about 19.8% of first-half total revenue. Unconsolidated venture debt was approximately $304 million; the company stated its exposure to certain unconsolidated variable-interest entities was limited to its investments.
Important facts for investors to verify
- How the post-spin, post-combination results, debt and liquidity compare with the historical carve-out figures, including the finalized purchase-price allocation and pro forma disclosures.
- The company’s standalone operating-cost base versus the Vornado-allocated corporate costs, which were $12.2 million in the first half of 2017.
- Debt maturities and refinancing plans, especially near-term maturities shown at June 30, subsequent repayments, and variable-rate exposure.
- Whether same-store NOI growth and leasing trends continue, given higher property taxes, lower third-party services revenue and reliance on lease-related income.
- Funding needs for construction and development, long-term ground-lease obligations, and any material changes in environmental or legal contingencies.