JBG SMITH Properties — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Amounts are in U.S. dollars. JBG SMITH is a Washington, D.C.-area REIT focused on commercial and multifamily properties. Its portfolio included 61 operating assets, nine assets under construction, and 40 future development assets.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date | Change or context |
|---|---|---|---|
| Total revenue | $155.2 million | $163.0 million | Down 4.8%; property rentals fell 9.0% to $119.4 million, partly offset by higher third-party services revenue. |
| Net income (loss) attributable to common shareholders | $24.9 million; $0.20 per diluted share | $(4.2) million; $(0.04) per diluted share | Q1 2019 included a $39.0 million real estate sale gain. |
| Consolidated NOI | $76.5 million | $82.8 million | Down 7.7%. |
| Same-store NOI | $73.6 million | $81.9 million | Down 10.1%, largely due to rental abatements and lower base rent at certain commercial properties. |
| FFO attributable to common shareholders | $35.1 million; $0.28 per diluted share | $40.7 million; $0.35 per diluted share | Non-GAAP measure; decreased despite the GAAP return to profitability. |
| Net cash from operating activities | $17.9 million | $34.7 million | Lower year over year. |
| Cash and restricted cash | $413.5 million | $399.5 million at Dec. 31, 2018 | Includes $395.6 million of cash and cash equivalents and $17.9 million restricted cash. |
| Debt | About $2.1 billion outstanding | About $2.1 billion at Dec. 31, 2018 | Includes $1.842 billion of mortgage principal and $300 million of unsecured term loans; no revolver borrowings. |
Investing activities provided $44.2 million, primarily from $117.7 million of real estate sale proceeds, offset by $68.7 million of development and property additions. Financing activities used $48.2 million, including $39.3 million of common dividends. The $1.0 billion revolving credit facility was undrawn at quarter-end; it is part of a $1.4 billion credit facility. The company stated that operating cash flow, existing cash, financings, recapitalizations, and asset sales should fund its anticipated needs for the next 12 months.
Material changes and business developments
- Q1 property rental revenue declined primarily because of dispositions and higher vacancy or rent reductions at several commercial properties. Commercial NOI fell 16.2%; multifamily NOI rose 11.4%, supported by improved occupancy at 1221 Van Street.
- The company sold Commerce Executive/Commerce Metro Land for a gross price of $115.0 million and recorded a $39.0 million gain.
- In March, JBG SMITH agreed to sell National Landing development sites Pen Place and Mets 6, 7 and 8 to Amazon for approximately $293.9 million, subject to customary conditions. The company expected the Mets sale as early as 2019 and Pen Place as early as 2020; proceeds from the Mets sale were intended for a 1031 exchange replacement multifamily property.
- Amazon had leases for approximately 537,000 square feet in three existing National Landing buildings; in April 2019 it agreed to lease a further approximately 48,000 square feet at 2345 Crystal Drive.
- After quarter-end, the company completed an 11.5 million-share offering at $42 per share, netting approximately $472.3 million for development opportunities and general corporate purposes. It also repaid approximately $293.6 million of mortgage debt in April.
Outlook, risks, and unusual items
- Management said early renewals executed in 2017 and 2018 are expected to reduce 2019 NOI, primarily through free rent. It expects NOI to grow as free-rent periods expire and developments deliver, surpassing 2018 levels by the second half of 2020. This is management’s outlook, not formal earnings guidance.
- Subject to market conditions, management set a 2019 goal to sell or recapitalize $400 million of assets. Completion and timing of the Amazon land sales remain subject to customary closing conditions.
- Construction in progress required an estimated additional $456.9 million to complete, expected to be spent primarily over the next two to three years. The company also expected to contribute approximately $48.6 million to unconsolidated investments.
- Key exposures include leasing and occupancy, Washington-area market conditions, interest rates and debt refinancing, development costs and execution, partner funding at unconsolidated ventures, and the availability and cost of insurance. Environmental liabilities were $17.9 million, primarily related to remediation at Potomac Yard Land Bay H. The company reported no principal-payment guarantees for unconsolidated ventures and $8.3 million of such guarantees for consolidated entities.
- Q1 results included a $6.4 million income item from a venture for which equity-method accounting had been suspended, and $4.9 million of transaction and other costs, including demolition and Formation Transaction-related costs. Adoption of the new lease standard added right-of-use assets and lease liabilities and changed presentation; management said it did not materially change rental revenue recognition.
- The board declared a $0.225-per-share quarterly dividend in May 2019. Management reported effective disclosure controls and no material changes to internal control during the quarter; it reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Progress, closing conditions, timing, and net proceeds of the Amazon site sales, and whether the intended 1031 exchange is completed.
- Whether commercial leasing, occupancy, rental concessions, and same-store NOI stabilize after the reported declines.
- Development budgets and delivery schedules against the remaining $456.9 million estimated completion cost, and funding sources for commitments.
- Debt maturities, covenant headroom, interest-rate exposure, and the use of equity-offering proceeds, including the effect of the post-quarter debt repayment.
- The sustainability of operating cash flow and dividends, and the reconciliation of GAAP earnings to FFO and NOI, which are non-GAAP measures.