JBG SMITH Properties — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. JBG SMITH owns and operates office and multifamily properties, primarily in Metro-served Washington, D.C.-area submarkets, and provides third-party real estate services. Comparisons with 2017 are not directly comparable: the JBG asset and management-business combination closed in July 2017, so 2017 results largely reflect the predecessor Vornado assets, while 2018 includes the combined business.
Financial performance and position
- Q2 revenue: $159.4 million, up 35% from $118.0 million. Property rentals were $125.2 million; third-party real estate services revenue was $24.2 million.
- Q2 earnings: Net income was $24.0 million and net income attributable to common shareholders was $20.6 million, or $0.17 per diluted share, versus $11.3 million, or $0.11 per share, in Q2 2017. Q2 included $33.4 million of real estate sale gains, a $4.5 million debt-extinguishment loss, and a $7.6 million reduction to the bargain-purchase gain.
- First-half results: Revenue was $322.5 million versus $234.3 million. Net income attributable to common shareholders was $16.4 million, or $0.14 per diluted share, versus $17.7 million, or $0.18, in the prior-year period. The 2018 period included $33.9 million of real estate sale gains.
- Property operations: Same-store NOI, a non-GAAP measure, increased 6.2% to $70.2 million in Q2 and 8.0% to $139.5 million for the first half. Management attributed growth largely to tax refunds and lower assessments, and the expiration of payments related to assumed lease liabilities. Q2 consolidated NOI was $85.3 million, compared with $70.2 million.
- Cash flow: First-half operating cash flow was $93.5 million, versus $72.7 million. Investing activities provided $51.3 million, principally reflecting $232.9 million of property-sale proceeds, offset in part by $165.7 million of development and real estate additions. Financing activities used $221.7 million, including debt repayments and $53.1 million of common dividends.
- Balance sheet and debt: At June 30, cash and cash equivalents were $239.4 million, or $261.7 million including restricted cash. Total assets were $5.91 billion. Consolidated debt carrying value was approximately $2.04 billion, down from approximately $2.19 billion at year-end 2017; mortgage debt had a weighted average effective rate of 4.15% fixed and 3.94% variable. These figures exclude debt of unconsolidated ventures.
- Liquidity and distributions: The company had a $1.0 billion revolving facility, with $35.7 million outstanding at quarter-end; that balance was repaid in July. The board declared a quarterly dividend of $0.225 per common share in August. Management said cash from operations, financing, recapitalizations and asset sales, together with existing cash, should fund operations, debt amortization, capital expenditures and distributions over the next 12 months.
Material developments and outlook
- Sold Summit I and II for $95.0 million and the Bowen Building for $140.0 million; together with a land parcel sale, these transactions contributed substantially to reported sale gains. Related debt was repaid.
- Invested $165.7 million in development and real estate additions during the first half. Construction in progress requires an estimated additional $461.0 million to complete, expected primarily over the next two to three years. The company also expects to fund about $48.6 million of additional capital to unconsolidated investments over that period.
- After quarter-end, drew $200.0 million under the Tranche A-2 term loan and repaid the $35.7 million revolving balance. It also entered into an equity distribution agreement allowing issuance of up to $200 million of common shares.
- Subsequent events included an agreement to sell Commerce Executive for $115.0 million and a partner’s obligation to acquire the company’s 5% Investment Building venture interest for $20.9 million. These were not quarter-end completed sales.
- Office portfolio leased and occupied percentages at the company’s share were 87.4% and 86.0%; multifamily figures were 95.9% and 92.6%. Management noted that recently delivered assets affected the quarter-end comparisons.
Risks, contingencies and unusual items
- Future development spending and liquidity rely partly on debt proceeds, asset sales and recapitalizations. The company faces refinancing, interest-rate, leasing, tenant-credit, construction-cost and local-market risks; some mortgage loans are recourse and include covenants.
- Potential exposure includes $61.3 million of principal payment guarantees for consolidated entities, environmental and nonrecourse carve-out guarantees, and obligations under the Vornado tax matters agreement. The amount of some potential guarantee payments is not estimable. Management said ordinary-course legal matters are not expected to have a material adverse effect.
- Future ground lease payments totaled $574.4 million. The company expected the new lease accounting standard, effective for it in 2019, to require recognition of right-of-use assets and lease liabilities; the impact was still being evaluated.
- Share-based compensation was $27.3 million for the first half, including $18.5 million related to the Formation Transaction. There was also a $7.6 million purchase-accounting adjustment reducing the bargain-purchase gain.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Separate underlying property and same-store performance from acquisition effects and one-time sale gains; 2017 comparisons are not on a combined-company basis.
- Track leasing, occupancy and rent trends, including the effect of newly delivered properties and assets moved into service.
- Assess funding for the $461.0 million construction completion estimate and $48.6 million expected venture contributions against cash, financing capacity and planned asset sales.
- Review debt maturities, variable-rate exposure, covenant restrictions and the effect of post-quarter borrowing and share issuance capacity.
- Monitor dilution and noncontrolling interests: 19.8 million OP Units were redeemable beginning August 2018, and holders gave notice to redeem 3.0 million units for common shares; common shares outstanding were 120,328,976 on August 3, 2018.