JBG SMITH Properties — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial figures are rounded to millions unless otherwise stated.
Business context
JBG SMITH is a REIT focused on commercial and multifamily real estate in Metro-served submarkets of the Washington, D.C. area. At quarter-end, its operating portfolio comprised 46 commercial assets totaling approximately 12.8 million square feet and 16 multifamily assets totaling 6,321 units. It also had eight assets under construction and 40 future development assets.
Amazon had signed leases for 537,000 square feet across three National Landing offices and, in April, an additional lease for approximately 48,000 square feet. Agreements to sell the Pen Place and Metropolitan 6, 7 and 8 development sites to Amazon for approximately $293.9 million remained subject to customary closing conditions.
Financial and operating results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $160.6m | $159.4m | $315.8m | $322.5m |
| Net income (loss) attributable to common shareholders | $(3.0)m | $20.6m | $21.8m | $16.4m |
| Diluted earnings (loss) per share | $(0.03) | $0.17 | $0.16 | $0.14 |
| Consolidated NOI | $78.6m | $81.2m | $155.1m | $164.1m |
| FFO attributable to common shareholders | $39.4m | $36.2m | $74.6m | $76.9m |
| FFO per diluted common share | $0.30 | $0.31 | $0.59 | $0.65 |
Same-store NOI declined 9.2% in Q2 to $74.0 million and 9.7% for the first half to $147.0 million. At the company’s share, commercial occupancy was 86.0% and multifamily occupancy was 95.0% at June 30; leased percentages were 90.3% and 98.0%, respectively.
Operating cash flow was $52.8 million for the first half, versus $93.5 million a year earlier. Investing activities used $68.7 million, including $181.0 million of development and property spending, partly offset by $117.7 million of real estate sale proceeds. Financing activities used $86.8 million, including $480.7 million of mortgage repayments and $69.5 million of dividends, partly offset by $473.5 million of net common-stock proceeds. Cash and restricted cash totaled $296.8 million at June 30.
Debt outstanding was approximately $1.7 billion, down from $2.1 billion at year-end 2018; mortgage principal was $1.364 billion and unsecured term-loan principal was $300 million. The $1.0 billion revolving credit facility had no borrowings outstanding. Mortgage debt had a 4.20% weighted-average effective rate and term-loan rates were 3.32% and 4.34% at quarter-end. The company reported total assets of $6.007 billion and total equity of $3.443 billion.
Changes versus comparable periods
- Q2 revenue rose 0.7%, but first-half revenue fell 2.1%. Property rental revenue fell 3.4% in Q2 and 6.2% for the first half, primarily reflecting asset sales and other property-level declines. Third-party services revenue, including reimbursements, grew 22.0% in Q2 and 17.9% for the first half.
- Q2 common-shareholder results shifted to a loss from income a year earlier, when the prior period included real estate sale gains and a bargain-purchase adjustment. First-half net income increased, including a $39.0 million gain on the sale of Commerce Executive/Commerce Metro Land.
- First-half consolidated NOI declined 5.5%; commercial NOI fell while multifamily NOI increased. Management attributed same-store pressure largely to greater rental abatements, lower Crystal City Marriott NOI during renovations, and higher assumed lease-liability payments.
- Interest expense declined 18.8% for the first half, primarily due to mortgage repayments and more interest capitalized to development. General and administrative costs increased, including because internal leasing costs were no longer capitalized after lease-accounting adoption and because of higher equity awards and professional expenses.
- The company issued 11.5 million common shares in April at $42 per share, receiving $472.8 million in net proceeds. It repaid approximately $475.1 million of mortgage principal during the first half.
Outlook, commentary and risks
- Management said it expects NOI to grow and exceed 2018 levels by the second half of 2020 as early-renewal free rent burns off and construction projects deliver, excluding future capital-recycling activity. It also set a 2019 goal of selling or recapitalizing $400 million of assets, subject to market conditions.
- Management expects operating cash flow, financing, recapitalizations, asset sales and existing cash to fund operations, debt amortization, capital spending and distributions for the next 12 months. This is an expectation, not a guarantee.
- Construction in progress required an estimated additional $362.8 million to complete, primarily over the next two to three years. The company also expected to contribute approximately $47.3 million to unconsolidated investments.
- Key exposures include leasing conditions and tenant credit, development costs and delivery, debt refinancing and interest rates, availability and cost of insurance, environmental remediation, and possible partner funding shortfalls. Environmental liabilities were $17.9 million; the company disclosed $8.3 million of principal guarantees for consolidated entities and no principal-payment guarantees for unconsolidated ventures. Some guarantee exposures are not estimable.
- In July, the company amended its credit facility: the Tranche A-1 delayed-draw period was extended to July 2020 and the Tranche A-2 loan spread was reduced by 40 basis points to LIBOR plus 1.15%. It also sold 1600 K Street for $43.0 million in July. The board declared a quarterly dividend of $0.225 per share in August.
- The company adopted the new lease-accounting standard on January 1, 2019. Adoption did not materially change rental-revenue recognition but added right-of-use assets and lease liabilities and changed internal leasing-cost capitalization. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether and when the Amazon development-site sale closes, and the related proceeds and use of funds.
- Drivers and persistence of the same-store NOI decline, rental abatements, commercial occupancy, and Marriott renovation impacts.
- Timing, remaining cost, leasing and expected returns of the construction pipeline, including the $362.8 million completion estimate.
- Debt maturities, covenant and refinancing capacity, interest-rate exposure, and liquidity after development spending, dividends and planned asset sales.
- Whether asset-recycling targets and management’s H2 2020 NOI expectation are achieved; FFO and NOI are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.