JBG SMITH Properties — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited. JBG SMITH owns and operates primarily office and multifamily properties in the Washington, D.C. metropolitan area, alongside a third-party real estate services business.
Business context and comparability
At quarter-end, the operating portfolio comprised 65 assets: 46 office properties, 15 multifamily properties and four other assets. Seven assets were under construction, with 43 future development assets. Results for 2017 are not directly comparable with 2018 because the Separation from Vornado and Combination with The JBG Companies occurred in July 2017; the 2017 periods include the JBG Assets only after the Combination.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $158.4 million | $152.4 million | $480.9 million | $386.6 million |
| Operating income (loss) | $15.1 million | $(88.7) million | $46.2 million | $(43.9) million |
| Net income (loss) attributable to common shareholders | $22.8 million | $(69.8) million | $39.2 million | $(57.9) million |
| Diluted earnings (loss) per share | $0.19 | $(0.61) | $0.33 | $(0.55) |
| Consolidated NOI | $81.9 million | $79.2 million | $254.3 million | $218.7 million |
| Same-store NOI | $70.0 million | $70.5 million | $203.1 million | $194.2 million |
Q3 revenue rose 4.0%; rental revenue increased 5.8%, while third-party real estate services revenue declined 5.4%. Nine-month revenue rose 24.4%, reflecting in significant part the acquired JBG business and properties. Same-store NOI declined 0.7% in Q3 but grew 4.6% year to date. Management attributed the quarterly same-store decline mainly to tenant incentives, rent abatements and anticipated move-outs.
Reported earnings include material unusual items: 2018 included real estate sale gains of $11.9 million in Q3 and $45.8 million year to date. The nine-month period also included a $15.5 million gain from selling the company’s 5% interest in the Investment Building venture. 2017 included $104.1 million of Q3 transaction and other costs and a $27.8 million bargain-purchase gain; nine-month transaction costs were $115.2 million. The 2018 nine-month results also include a $7.6 million reduction of the bargain-purchase gain following finalization of acquisition-date fair values.
Cash flow: For the first nine months, operating cash flow was $136.7 million, investing cash flow was $88.9 million and financing cash flow was negative $183.9 million. Investing cash flow included $346.1 million of real estate sale proceeds, partly offset by $260.4 million of development and property additions. Cash and restricted cash totaled $380.2 million at September 30, 2018, including $253.1 million unrestricted cash.
Debt, liquidity and capital
- At September 30, 2018, mortgages payable, net, were $1.770 billion and unsecured term loans, net, were $297.0 million; revolving-facility borrowings were zero. Including the $42.0 million mortgage classified with assets held for sale, total outstanding debt was approximately $2.1 billion. The filing reports a $85.8 million year-to-date decrease in outstanding debt.
- Mortgage debt had a 4.16% weighted-average effective rate on variable-rate balances and 4.19% on fixed-rate balances. The $300 million outstanding term loans carried rates of 3.32% and 3.81% at quarter-end. The $1.0 billion revolving facility matures in July 2021, with two six-month extension options; term loans mature in 2023 and 2024.
- The company repaid mortgages with $251.1 million aggregate principal during the first nine months and recorded $4.5 million of debt-extinguishment losses. It drew $250 million under term loans and repaid its revolving-facility balance. Interest expense was $19.0 million for Q3 and $56.3 million year to date.
- Management expected operating cash flow, financing and asset-sale proceeds, and existing cash to be adequate for operations, debt amortization, capital expenditures and distributions over the next 12 months. The filing does not provide quantified earnings guidance.
- Common dividends declared during the first nine months totaled $0.675 per share; the Board subsequently declared a $0.225 quarterly dividend, payable November 26, 2018.
Portfolio activity, outlook and risks
- Office leased and occupied percentages at the company’s share were 87.1% and 85.4%, respectively, at September 30, versus 88.0% and 87.2% at December 31, 2017. Multifamily leased and occupied percentages were 96.1% and 94.3%, versus 95.6% and 93.8% at year-end.
- During the nine months, the company sold three office assets and a development asset for $358.6 million gross, recognizing $45.8 million in gains. It contributed 1900 N Street, valued at $95.9 million, to a venture with CPPIB; CPPIB committed approximately $101 million for a 45% interest as funded.
- Construction in progress required an estimated additional $396.2 million to complete, including $85.4 million attributable to the company’s share of unconsolidated ventures, expected primarily over the next two to three years. The company also expected to contribute approximately $48.6 million to certain unconsolidated investments over that period.
- After quarter-end, the company sold 1233 20th Street for $65.0 million gross and repaid its related mortgage; it also sold an out-of-service portion of Falkland Chase-North for $3.8 million. The Commerce Executive sale was expected to close in early 2019.
- Key risks include leasing and occupancy, tenant credit, local economic conditions, construction and renovation costs, interest rates and refinancing, and potential cost or availability constraints on insurance. Environmental remediation costs and guarantees, including development-related obligations, may also create exposure. The company reported no material changes to previously disclosed risk factors and said ordinary-course legal matters were not expected to have a material adverse effect.
- The company was evaluating adoption of the new lease standard, effective for it in January 2019. It disclosed $573.9 million of future ground-lease payments; the resulting right-of-use asset and liability were still being assessed.
Important facts for investors to verify
- Separate recurring property and same-store performance from gains on asset and venture sales, acquisition accounting adjustments and prior-year formation costs.
- Assess the sustainability of office occupancy and same-store NOI, particularly the Q3 same-store decline and leasing trends.
- Review funding plans for construction commitments, future development, debt maturities and the dividend, including reliance on asset sales and financing.
- Examine venture-related exposures, guarantees, insurance coverage and the potential balance-sheet effect of adopting the lease standard.