JBG SMITH Properties — 2017 Form 10-K
Business context and reporting period
For the fiscal year ended December 31, 2017. JBG SMITH is a Washington, DC-area REIT focused on office, multifamily and related retail properties, plus fee-based real estate services. The year included the July 2017 spin-off from Vornado and combination with The JBG Companies. Because 2017 includes predecessor results before the transaction and JBG assets only after acquisition, comparisons with 2016 are not directly comparable.
At year-end, the operating portfolio comprised 69 assets: 51 office properties totaling 13.7 million square feet, 14 multifamily properties with 6,016 units, and four other assets. At the company’s ownership share, office occupancy was 87.2% and multifamily occupancy was 93.8%. Ten assets were under construction; the future development pipeline comprised 43 assets.
Financial and operating results
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $543.0 million | $478.5 million |
| Operating income (loss) | ($52.2 million) | $112.8 million |
| Net income (loss) attributable to common shareholders | ($71.8 million) | $62.0 million |
| Diluted earnings (loss) per share | ($0.70) | $0.62 |
| Cash provided by operating activities | $74.2 million | $159.5 million |
| Cash and restricted cash at year-end | $338.6 million | $32.3 million |
Revenue increased 13.5%, but the comparison reflects the acquired business and is not like-for-like. 2017 results included $127.7 million of transaction and other costs, $29.3 million of formation-related share compensation, and a $24.4 million bargain-purchase gain. Same-store NOI, a non-GAAP measure, rose 6.5% to $272.0 million; management attributed the increase chiefly to rent abatements ending and new leases commencing. Consolidated NOI was $297.1 million versus $281.2 million.
Year-end consolidated debt principal was approximately $2.2 billion; the company’s share of consolidated and unconsolidated venture debt exceeded $2.6 billion. Variable-rate consolidated debt was $664.0 million, including the effect of hedges; a 100-basis-point rate increase was estimated to add about $6.7 million to annual interest expense. The $1.0 billion revolving facility had $115.8 million drawn at year-end, with $5.7 million of letters of credit. Cash, restricted cash and the undrawn revolver provide liquidity, subject to facility terms and restrictions.
Changes, outlook, risks and unusual items
- Operating cash flow fell by $85.4 million year over year. Management cited $210.6 million invested in development, construction and real estate additions; 2017 investing cash flows also included cash received in the combination and other repayments.
- The company had $766.0 million of estimated remaining construction investment, expected mainly over the next two to three years, and expected to fund it through debt, asset sales or recapitalizations, available cash and venture capital.
- Management expected operating cash flow, financing and asset-sale proceeds, and cash balances to cover operations, debt amortization, capital expenditures and distributions over the following 12 months. No specific earnings or occupancy guidance was provided.
- Major risks include geographic concentration in the Washington, DC region, exposure to federal spending and leasing (19.4% of total rental revenue came from the U.S. federal government), office-market and tenant demand, development costs and execution, refinancing and interest-rate risk, and dependence on joint-venture partners. Five assets generated approximately 25% of share-based annualized rent.
- Year-end contractual debt obligations, including principal and interest, totaled $2.58 billion; $438.1 million was scheduled for 2018. The filing reported no mortgage or credit-facility defaults.
- The company declared $0.45 per common share in 2017; the $0.225 declared in December was paid in January 2018. Future dividends are at the board’s discretion and depend on cash flow, capital needs and REIT requirements.
- Subsequent to year-end, the company agreed to sell Summit I and II for $95.0 million gross, against an $87.9 million combined carrying value. It also entered into development and hotel ventures described in the filing.
Important facts for investors to verify
- Assess normalized earnings and cash generation after separating transaction costs, formation-related compensation, the bargain-purchase gain and acquisition-period effects.
- Review comparable same-store leasing, occupancy, rent growth and renewal activity, particularly given federal-government exposure and lease expirations.
- Verify funding plans and expected returns for the $766.0 million construction commitment and the broader development pipeline.
- Review debt maturities, covenant headroom, variable-rate exposure, hedging and the capacity of available liquidity to meet obligations and dividends.
- Consider the limits of historical comparisons: prior-period financials primarily reflect Vornado’s contributed assets, and allocated standalone costs may differ from future costs. The auditor did not provide an internal-control effectiveness opinion because of the new-public-company transition period.