JBG SMITH Properties — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unless stated otherwise, amounts are in U.S. dollars; financial statement figures are in millions. JBG SMITH is a Washington, D.C.-area mixed-use real estate owner, operator, developer and third-party real estate services provider, with approximately two-thirds of its holdings in National Landing, Northern Virginia.
Financial and operating performance
- Q2 revenue: $152.1 million, up 4.5% from $145.5 million a year earlier. Property rental revenue was $120.6 million, up 3.0%; third-party real estate services revenue, including reimbursements, was $22.9 million, up 3.2%.
- Q2 earnings: Net loss attributable to common shareholders was $10.5 million, or $0.10 per diluted share, compared with net income of $123.3 million, or $1.02 per share, in Q2 2022. The prior-year quarter included a $158.8 million real estate sale gain; Q2 2023 had no such gain. Interest expense increased 61% to $25.8 million.
- Six-month earnings: Net income attributable to common shareholders was $10.6 million, or $0.09 per diluted share, versus $123.2 million, or $0.99 per share, in the first half of 2022. The 2023 period included $40.7 million of real estate sale gains, compared with $158.6 million in 2022.
- NOI and FFO: Consolidated NOI was $75.1 million in Q2, up from $71.2 million; six-month NOI was $152.7 million versus $148.1 million. Same-store NOI rose 0.1% in Q2 to $78.3 million and fell 0.7% for six months to $153.5 million. Nareit FFO attributable to common shareholders was $33.4 million in Q2 versus $33.6 million, and $66.4 million for six months versus $84.9 million.
- Segment trends: Q2 commercial NOI declined 10.8% to $42.3 million, primarily reflecting dispositions; multifamily NOI rose 23.3% to $28.7 million, benefiting from acquired/consolidated properties and higher occupancy and rents. For the first half, commercial NOI fell 11.0% and multifamily NOI grew 19.8%.
- Cash flow: First-half operating cash flow was $89.4 million, down from $107.6 million. Investing used $135.5 million, including $164.8 million for development, construction and real estate additions; financing used $25.2 million. Cash and restricted cash ended June at $202.8 million, down $71.2 million from year-end.
- Balance sheet and liquidity: Total assets were $5.78 billion and total liabilities $2.74 billion. Debt was approximately $2.5 billion. Cash and cash equivalents were $156.6 million, and the company reported $687.5 million of availability on its revolving credit facility. Total equity was $2.59 billion.
- Margins and occupancy: Q2 consolidated NOI was about 49% of total revenue; this is a non-GAAP operating measure and not a net-income margin. At the company’s share, commercial portfolio leased/occupied rates were 86.3%/84.0%; multifamily rates were 96.8%/93.7%.
Material changes and capital allocation
- Q2 rental growth reflected multifamily gains, partly offset by lower commercial revenue from asset dispositions. First-half rental revenue declined 1.6%, principally because of disposed commercial properties.
- Interest expense rose materially year over year, driven by higher rates on variable-rate mortgages, new and additional borrowings, construction draws and changes in the fair value of ineffective interest rate caps. The company reported that $1.4 billion of debt was fixed or hedged through effective swaps and caps; certain mortgage-loan caps had a weighted-average strike of 2.42% and matured, on average, in August 2023.
- In March, JBG SMITH sold an 80% interest in 4747 Bethesda Avenue for a gross price of $196 million, implying a $245 million gross valuation; the venture assumed the associated $175 million mortgage. The company also repaid $142.4 million of mortgage loans during June.
- In June, the company amended its revolving credit facility: capacity was reduced from $1.0 billion to $750 million and maturity extended to June 2027. It also added a $120 million term loan due June 2028, with a swap fixing SOFR at 4.01%. Outstanding revolver borrowings were $62 million at quarter-end. The company said all its debt and hedging arrangements used SOFR by the filing date.
- JBG SMITH repurchased 10.5 million shares for $155.8 million during the first half, at an average $14.79 per share, and raised its repurchase authorization to $1.5 billion. It declared a Q3 dividend of $0.225 per share. The Q2 dividend was also $0.225 per share.
Outlook, commentary and risks
- Management said operating cash flows, financing, asset sales and recapitalizations, together with existing cash, are expected to cover operations, debt amortization, capital expenditures and distributions over the next 12 months. No specific earnings or FFO guidance was provided in the filing.
- The company expects asset-sale activity to remain slower through the rest of 2023 because of curtailed lending. It expects to continue evaluating dispositions, recapitalizations, joint ventures, ground leases and share repurchases as capital-allocation options.
- Construction of two Amazon office buildings totaling 2.1 million square feet at Metropolitan Park was completed in Q2, and Amazon took occupancy in June. The company reported leases with Amazon totaling 1.0 million square feet across six National Landing buildings.
- Office leasing remains pressured by tenant uncertainty over future space needs. Q2 office occupancy fell 120 basis points from Q1 to 84.0%; management cited slow leasing decisions, higher concessions and rising vacancy. Of 1.8 million square feet of National Landing office leases expiring through 2024 or on month-to-month status, management anticipated 1.2 million square feet would vacate, implying about 33% retention. Anticipated Amazon vacates total 678,000 square feet; 444,000 square feet relates to two buildings planned for removal from service and entitlement for alternate use.
- Multifamily occupancy improved sequentially; Q2 renewals achieved 7.5% gross rent increases and a 49.3% renewal rate. Seasonal leasing patterns affect quarterly results.
- Assets under construction require an estimated additional $284.7 million to complete, primarily over the next three years. Tenant-related obligations were $53.1 million. Additional capital commitments and certain recorded guarantees to unconsolidated ventures and other investments totaled $62.0 million; consolidated-entity debt principal payment guarantees were $8.3 million.
- Risks include office vacancy and tenant retention, higher interest rates and refinancing costs, construction funding and completion, asset-sale market conditions, and the cost or availability of adequate insurance. Environmental liabilities were $18.0 million. The company said ordinary-course legal matters were not expected to have a material adverse effect and reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether anticipated National Landing office vacancies, particularly Amazon-related expirations, materialize and how they affect occupancy, leasing costs and cash flow.
- Current maturity, interest-rate exposure and hedge/cap coverage for the debt portfolio, including the status and replacement of mortgage caps expiring around August 2023.
- Progress and remaining costs for the $284.7 million construction commitment, and the availability of financing, asset-sale proceeds or recapitalizations to fund it.
- Whether asset dispositions and multifamily growth offset weaker commercial NOI and higher interest expense; assess both GAAP results and non-GAAP NOI/FFO reconciliations.
- Cash needs and capital allocation alongside share repurchases and the $0.225 quarterly dividend; confirm liquidity and revolver availability as conditions change.