JBG SMITH Properties — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. JBG SMITH is a Washington, D.C.-area REIT focused on commercial, multifamily and related real estate services. Results for 2017 are not directly comparable because the July 2017 Formation Transaction added JBG assets and its services business.
Financial and operating highlights
- Revenue: $644.2 million in 2018, versus $543.0 million in 2017. Property rentals were $499.8 million; third-party real estate services revenue, including reimbursements, was $98.7 million.
- Profit: Net income attributable to common shareholders was $39.9 million, or $0.31 per diluted share, compared with a net loss of $71.8 million, or $0.70 per share, in 2017.
- Unusual items: 2018 results included $52.2 million of gains on real estate sales, $39.4 million of income from unconsolidated ventures and $27.7 million of transaction and other costs. 2017 included $127.7 million of transaction and other costs and a $24.4 million bargain-purchase gain.
- NOI and margins: Consolidated NOI, a non-GAAP measure, was $320.0 million, up from $289.3 million. Same-store NOI fell 1.1% to $250.3 million; management cited rent abatements, higher ground rent and anticipated tenant move-outs. The filing does not provide a directly comparable company-wide GAAP operating margin.
- Cash flow: Operating cash flow was $188.2 million, investing cash flow was positive $66.3 million and financing cash flow was negative $193.5 million. Development, construction and real estate additions used $385.9 million; real estate sale proceeds were $413.1 million.
- Liquidity: Cash and restricted cash totaled $399.5 million at year-end. The $1.0 billion revolving facility had no balance outstanding at December 31, 2018; the company also had $300.0 million drawn under unsecured term loans. Management expected operating cash flow, financing, recapitalizations and asset sales, together with cash balances, to cover needs for the next 12 months.
- Debt: Consolidated debt principal was approximately $2.1 billion; unconsolidated ventures had $1.1 billion of debt, or $299.4 million at JBG SMITH’s share. Total debt at the company’s share exceeded $2.4 billion. Of consolidated debt, $1.6 billion was described as variable-rate debt, with swaps and caps providing partial protection. A 100-basis-point rate increase was estimated to raise annual interest expense by $5.2 million.
- Portfolio: At year-end, the operating portfolio comprised 46 commercial assets totaling about 12.9 million square feet and 16 multifamily assets totaling 6,315 units. At the company’s share, commercial occupancy was 85.5% and multifamily occupancy was 93.9%. Nine assets were under construction; estimated remaining investment was $519.4 million.
- Dividends: 2018 declarations totaled $1.00 per common share, including a $0.10 special dividend. Management expected regular quarterly dividends in 2019 to be comparable, subject to Board discretion.
Changes, outlook and material risks
- Revenue growth and higher NOI largely reflected the Combination, newly delivered assets and the acquired services business; expenses also rose. Same-store NOI declined despite the higher total company NOI.
- Management said lease renewals completed in 2017 and 2018 would reduce NOI in 2019, primarily because of free rent. It expected NOI to recover as free rent burns off and construction assets deliver, surpassing 2018 levels by the second half of 2020.
- Amazon announced National Landing as its proposed HQ2 location in November 2018. At the filing date, definitive documentation remained subject to negotiation; expected development, management and leasing arrangements, an expected lease at 1770 Crystal Drive, and potential land sales were not assured. About 43% of the company’s holdings were within a half-mile of the proposed HQ2 location.
- The company’s geographic concentration is material: all assets are in the Washington, D.C. metropolitan area, and National Landing represented 57.9% of the operating portfolio. Federal government tenants generated 17.6% of total rental revenue in 2018.
- Key risks include HQ2 negotiations or investment falling short of expectations; federal spending or leasing changes; office and retail demand, vacancies and tenant credit; development cost, schedule, entitlement and lease-up risks; substantial debt and refinancing or interest-rate exposure; and the funding needs of construction and future development.
- Construction in progress required an estimated additional $519.4 million to complete, principally over the next two to three years. The company also expected to contribute about $48.6 million to unconsolidated investments over that period.
- Environmental liabilities were $17.9 million at year-end, primarily for pre-existing matters at Potomac Yard Land Bay H. The company reported no legal proceedings expected to have a material adverse effect.
- Auditors issued an unqualified opinion on the financial statements and internal controls; the filing emphasizes that pre-Formation historical costs may not reflect standalone costs.
Most important facts for investors to verify
- Whether definitive Amazon agreements were executed and whether HQ2 leasing, development fees and the contemplated land transactions progressed on expected terms.
- Actual 2019 operating performance, including rent abatements, lease renewals, occupancy, same-store NOI and the timing of the projected recovery.
- Funding and completion costs for the construction pipeline, and the pace and economics of future development and asset sales.
- Debt maturities, covenant headroom, variable-rate exposure, hedge effectiveness and available liquidity after committed spending and dividends.
- How much of reported earnings and cash generation came from asset and venture sales versus recurring property operations, bearing in mind the limited comparability with 2017.