JBG SMITH Properties — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited interim results.
Business context and comparability
JBG SMITH was formed through Vornado’s July 17, 2017 spin-off of its Washington, DC assets and the July 18 acquisition of The JBG Companies’ management business and certain assets. The company owns and operates office, multifamily and other real estate, principally in the Washington, DC region, and provides third-party real estate services. The 2017 statements combine the Vornado predecessor’s results before the transaction and include JBG Assets only from July 18; 2016 reflects the Vornado assets. Consequently, reported year-over-year comparisons are not fully like-for-like.
At September 30, the portfolio included 69 operating assets, nine assets under construction, one near-term development multifamily asset and 42 future development assets. The operating portfolio comprised 51 office properties, 14 multifamily properties and four other assets.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $152.4 million | $123.4 million | $386.6 million | $356.5 million |
| Operating income (loss) | $(88.7) million | $33.0 million | $(43.9) million | $87.6 million |
| Net income (loss) attributable to JBG SMITH | $(69.8) million | $21.0 million | $(57.9) million | $49.3 million |
| Diluted EPS | $(0.61) | $0.21 | $(0.55) | $0.49 |
| Company-reported NOI | $79.2 million | $71.7 million | $218.7 million | $209.1 million |
Q3 property rental revenue rose 12.8% to $116.5 million, primarily reflecting $13.8 million of rent from acquired assets, partly offset by lower revenue from existing assets. Third-party real estate services revenue increased to $25.1 million from $8.3 million, mainly due to the acquired business. Same-store NOI increased 6.3% in Q3 and 3.1% for the nine-month period; management attributed the gains mainly to rent abatements expiring and higher rental revenue from lease commencements. Q3 office occupancy was 87.5% and leased occupancy 88.2%; multifamily occupancy was 94.6%.
Q3 operating expenses included $104.1 million of transaction and other costs and $14.4 million of Formation Transaction-related share-based compensation. A $27.8 million bargain-purchase gain partly offset these charges. The acquired JBG Assets contributed $34.9 million of revenue and a $7.8 million net loss from the acquisition date through quarter-end. The nine-month results also include $115.2 million of transaction and other costs and the same $27.8 million gain.
Cash flow: For the nine months, operating activities provided $23.4 million, investing activities provided $88.2 million, and financing activities provided $227.3 million. Cash increased by $338.9 million to $367.9 million. Investing inflows included $83.9 million received in the Combination, $75.0 million repayment of a former-parent receivable and $50.9 million repayment of acquired notes; these were partly offset by $115.9 million of development and real estate additions. Operating cash flow was down from $101.4 million in the prior-year period.
Debt and liquidity: September 30 debt principal was approximately $2.154 billion, including $1.988 billion of mortgages, $115.8 million drawn on the revolving facility and $50.0 million under the Tranche A-1 term loan. Cash was $367.9 million. The company entered a $1.4 billion credit facility, including a $1.0 billion revolver; $200 million each of delayed-draw term loans were also authorized, but only $50 million of Tranche A-1 was drawn at quarter-end. Mortgage weighted-average rates were 2.95% for variable-rate and 4.79% for fixed-rate debt. Debt principal maturities included $376.0 million in 2018 and $327.5 million in 2022. The company reported compliance with all debt covenants.
Construction in progress required an estimated additional $707.8 million to complete, primarily over the next two to three years; the company also expected to contribute approximately $50.6 million to unconsolidated investments. Management stated that operating cash flows over the next 12 months, financing and asset-sale proceeds, and existing cash were expected to be adequate for operations, debt amortization, capital expenditures and distributions. The board declared a subsequent quarterly dividend of $0.225 per common share, payable November 30, 2017.
Outlook, risks and unusual items
- No specific earnings or operating guidance was provided. Management’s liquidity expectation depends in part on future financing and asset recapitalizations or sales.
- Key business sensitivities include Washington-area leasing demand, tenant credit, occupancy and rents, development and renovation costs, interest rates, access to capital and refinancing conditions.
- Federal government tenants represented 20.0% of nine-month total rental revenue, down from 22.9% in the comparable period.
- A 1 percentage-point increase in base rates was estimated to affect annual interest expense by about $11.7 million on variable-rate mortgages, $1.2 million on the revolver and $0.5 million on the term loan, before considering other exposures.
- Unconsolidated ventures had $1.176 billion of mortgage debt in total; JBG SMITH reported $63.8 million of principal-payment guarantees for such ventures. Some guarantee exposure for budget overruns or operating losses was not estimable.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Environmental assessments had not identified material contamination expected to materially affect the company, though future findings could result in significant costs. The company stated there were no material changes to previously disclosed risk factors.
- The company intended to elect REIT status for 2017 and noted that future dividends remain at the board’s discretion and depend on cash, capital needs and REIT distribution requirements.
Important facts for investors to verify
- Separate recurring property performance from acquisition effects, Formation Transaction costs, share-based compensation and the bargain-purchase gain; assess the company’s pro forma results alongside reported results.
- Review the final purchase-price allocation for the JBG Combination, which was preliminary, and the acquired assets’ contribution to future earnings and cash flow.
- Assess funding plans and returns for the $707.8 million construction completion requirement and anticipated $50.6 million of venture contributions.
- Check debt maturities, variable-rate exposure, refinancing needs, covenant headroom and the availability remaining under the credit facility.
- Evaluate the cash-flow quality and recurring liquidity apart from transaction-related receipts and repayments, and consider the 14.4% redeemable OP Unit interest, which becomes redeemable beginning August 2018 subject to limitations.