Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as "approximates," "believes," "expects," "anticipates," "estimates," "intends," "plans," "would," "may" or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019.
One of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on our financial condition, results of operations, cash flows, performance, tenants, the real estate market and the global economy and financial markets. The extent to which the COVID-19 pandemic continues to impact us and our tenants depends on future developments, many of which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.
For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
Organization and Basis of Presentation
JBG SMITH Properties ("JBG SMITH") is a Maryland real estate investment trust ("REIT"), which owns and operates a portfolio of high-growth commercial and multifamily assets, many of which are amenitized with ancillary retail. JBG SMITH's portfolio reflects its longstanding strategy of owning and operating assets within Metro-served submarkets in the Washington, D.C. metropolitan area that have high barriers to entry and key urban amenities, including being within walking distance of a Metro station. Substantially all of JBG SMITH's assets are held by, and its operations are conducted through, JBG SMITH Properties LP, its operating partnership. JBG SMITH is hereinafter referred to as "we," "us," "our" or other similar terms. References to "our share" refer to our ownership percentage of consolidated and unconsolidated assets in real estate ventures.
We were organized for the purpose of receiving, via the spin-off on July 17, 2017 (the "Separation"), substantially all of the assets and liabilities of Vornado Realty Trust's ("Vornado") Washington, D.C. segment. On July 18, 2017, we acquired the management business and certain assets and liabilities of The JBG Companies ("JBG") (the "Combination"). The Separation and the Combination are collectively referred to as the "Formation Transaction."
References to our financial statements refer to our unaudited condensed consolidated financial statements as of June 30, 2020 and December 31, 2019, and for the three and six months ended June 30, 2020 and 2019. References to our balance sheets refer to our condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019. References to our statements of operations refer to our condensed consolidated statements of operations for the three and six months
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ended June 30, 2020 and 2019. References to our statements of cash flows refer to our condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019.
The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
We have elected to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). Under those sections, a REIT which distributes at least 90% of its REIT taxable income as dividends to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We intend to adhere to these requirements and maintain our REIT status in future periods. We also participate in the activities conducted by subsidiary entities which have elected to be treated as taxable REIT subsidiaries under the Code. As such, we are subject to federal, state, and local taxes on the income from these activities.
We aggregate our operating segments into three reportable segments (commercial, multifamily, and third-party asset management and real estate services) based on the economic characteristics and nature of our assets and services.
Our revenues and expenses are, to some extent, subject to seasonality during the year, which impacts quarterly net earnings, cash flows and funds from operations that affects the sequential comparison of our results in individual quarters over time. We have historically experienced higher utility costs in the first and third quarters of the year.
We compete with a large number of property owners and developers. Our success depends upon, among other factors, trends affecting national and local economies, the financial condition and operating results of current and prospective tenants, the availability and cost of capital, interest rates, construction and renovation costs, taxes, governmental regulations and legislation, population trends, zoning laws, and our ability to lease, sublease or sell our assets at profitable levels. Our success is also subject to our ability to refinance existing debt on acceptable terms as it comes due.
Overview
As of June 30, 2020, our Operating Portfolio consisted of 63 operating assets comprising 43 commercial assets totaling 13.3 million square feet (11.2 million square feet at our share) and 20 multifamily assets totaling 7,367 units (5,583 units at our share). Additionally, we have (i) three assets under construction comprising one wholly owned commercial asset totaling 274,000 square feet and two multifamily assets totaling 755 units (577 units at our share); and (ii) 35 future development assets totaling approximately 19.4 million square feet (16.6 million square feet at our share) of estimated potential development density.
Since mid-2017, we have been focused on a comprehensive plan to reposition our holdings in National Landing in Northern Virginia through a broad array of Placemaking strategies. Our Placemaking strategies include the delivery of new multifamily and office developments, locally sourced amenity retail, and thoughtful improvements to the streetscape, sidewalks, parks and other outdoor gathering spaces. In keeping with our dedication to Placemaking, each new project is intended to contribute to authentic and distinct neighborhoods by creating a vibrant street environment with a robust offering of amenity retail and improved public spaces.
In November 2018, Amazon.com ("Amazon") announced it had selected sites that we own in National Landing as the location of an additional headquarters. In February 2019, the Commonwealth of Virginia enacted an incentives bill, which provides tax incentives to Amazon if it creates up to 37,850 full-time jobs with average salaries of $150,000 or higher in National Landing. As part of the incentive package, we expect $1.8 billion in infrastructure and education investments led by state and local governments.
To date, we have executed leases with Amazon totaling approximately 857,000 square feet at five office buildings in our National Landing portfolio. In March 2019, we executed purchase and sale agreements with Amazon for two of our National Landing development sites, Metropolitan Park and Pen Place, which will serve as the initial phase of new construction
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associated with Amazon's new headquarters at National Landing. Subject to customary closing conditions, Amazon contracted to acquire these two development sites for an estimated aggregate $293.9 million, or $72.00 per square foot based on their combined estimated potential development density of up to approximately 4.1 million square feet. In December 2019, Arlington County approved the plans submitted by Amazon to construct two new office buildings, totaling 2.1 million square feet, inclusive of over 50,000 square feet of street-level retail with new shops and restaurants, on the Metropolitan Park land sites. In January 2020, we sold Metropolitan Park to Amazon for $155.0 million, which represented an $11.0 million increase over the previously estimated contract value resulting from an increase in the approved development density on the site. The sale of Pen Place to Amazon is expected to close in 2021. We are the developer, property manager and retail leasing agent for Amazon's new headquarters at National Landing.
2020 Outlook
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, a National Emergency was declared in the United States in response to COVID-19. The efforts made by federal, state and local governments to mitigate the spread of COVID-19 included orders requiring the temporary closure of or imposed limitations on the operations of certain non-essential businesses, which have affected certain of our tenants, in particular tenants in the retail industry. While the unfolding economic downturn threatens to be significant, we expect the D.C. metropolitan area will prove to be more recession-resilient than other markets, as it has been in past recessions. While it is difficult to determine the long-term impact of COVID-19 on our business, it has adversely impacted our operations to date in 2020, and we expect it to negatively impact our operations during 2020 and into 2021.
The key areas that have been and we expect will continue to be negatively impacted include:
● significantly decreased retail revenue from rent deferral accommodations offered to certain of our tenants that are unable to pay rent while stores are closed or not operating at full capacity, resulting in increased credit losses and write-offs against both billed and deferred (straight-line) rent receivables;
● an increase in apartment rental defaults as certain of our tenants become unable to pay their rent;
● a decline in parking revenue as office tenants work from home and transient parking declines (for the three months ended June 30, 2020, parking revenue declined by $3.3 million or 41.2% compared to the second quarter of 2019);
● depressed near-term leasing activity in both our commercial and multifamily portfolios, including the delay in the lease-up of our recently delivered multifamily assets;
● likely distress among coworking tenants, which comprised approximately 2.9% of our total square feet on a consolidated basis and 3.3% at our share as of June 30, 2020;
● increased cleaning costs to address specific COVID-19 exposure at some of our commercial and multifamily assets, partially offset by an overall decrease in operating expenses in our commercial buildings as many of our tenants' employees work from home;
● decreased income from the Crystal City Marriott hotel in National Landing due to its temporary closure during this crisis. The hotel reopened in mid-June. Net operating income (“NOI”) from this asset was $1.8 million for the year ended December 31, 2019; and
● increased interest expense from borrowings to provide additional liquidity and financial flexibility.
While we are always focused on the long term, we are providing the following data to provide additional information regarding the impact of the pandemic on rent collections for the three months ended June 30, 2020. This data is unaudited and we make no assurances that our experience to date will be indicative of future performance. In the future, we plan to return to providing only our customary metrics, and we undertake no obligation to continue to provide such information on a going forward basis.
● rent collections for our commercial office tenants were 98.5% (1) on a consolidated basis and 98.6% at our share (2019 historical average rate is 99.7%);
● rent collections for our multifamily tenants were 98.5% both on a consolidated basis and at our share (2019 historical average rate is 99.9%); and
● rent collections for our commercial retail tenants were 61.8% (1) on a consolidated basis and 58.0% at our share (2019 historical average rate is 98.4%).
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(1) Excludes $1.2 million of deferred rents, consisting of $0.2 million and $1.0 million for commercial office tenants and retail tenants. Including these deferred rents, our rent collections for the second quarter of 2020 would have been 98.2% and 54.4% for commercial office tenants and retail tenants on a consolidated basis.
During the three and six months ended June 30, 2020, we recorded $3.6 million and $4.7 million of credit losses against billed rent receivables and $2.0 million and $3.6 million against deferred (straight-line) rent receivables due to the effects of COVID-19 related to certain of our tenants, primarily our retail tenants, that are unable to pay rent while businesses are closed or not operating at full capacity. During the three months ended June 30, 2020, we also recorded $2.4 million of reserves against receivables from one of our parking operators that filed for bankruptcy protection. Additionally, in connection with the preparation and review of our second quarter 2020 financial statements, we determined that our investment in the venture that owns The Marriott Wardman Park hotel was impaired due to a decline in the fair value of the underlying asset and recorded an impairment charge of $6.5 million, reducing the net book value of our investment to zero.
Although we are experiencing supply chain and labor delays as a result of new job site procedures, as of June 30, 2020, all of our construction projects are active and on schedule with the exception of 7900 Wisconsin Avenue, for which we revised the delivery date earlier this year to the first quarter of 2021, a delay of two quarters from the originally estimated completion date. We are not aware of any material impact on the construction timeline for Amazon’s new headquarters. For predevelopment projects that are in various stages of entitlement, many of these processes have slowed due to reduced or eliminated public meetings. We obtained entitlements associated with approximately 820,000 square feet in National Landing immediately prior to Virginia’s stay-at-home order in March 2020. These entitlements added approximately 65,000 square feet of potential development density to our future development pipeline.
We anticipate the COVID-19 pandemic to significantly impact the real estate industry for years to come. Over the short term, uncertainty surrounding the pandemic will likely suppress net new demand for office space and bias multifamily leasing to renewals. Retail failures are likely to accelerate, and an already competitive marketplace will favor tenants with experience and capital. Over the longer term, however, the story is likely to be more nuanced. We believe the maturation of teleworking and the continuing trend to workplace flexibility are here to stay and will likely be felt through an increase in office workers served per square foot of space. We believe this will be a headwind for office rent growth, much as densification served as a headwind over the past decade.
While the unfolding economic downturn continues to be significant, we take solace in the fact that in past recessions, the D.C. metropolitan area has historically proven to be more resilient than other gateway markets. Our concentration in this market, where a high percentage of demand for our businesses is driven by the federal government, government contractors and Amazon-related activity, should soften the anticipated impact of a recession on our business, and has the potential to translate into countercyclical growth. We expect our heavy concentration in Amazon’s path of growth at a time like this to bear fruit on multiple fronts. First and foremost, Amazon has historically increased its hiring pace during economic downturns. Recent announcements from Amazon indicate that it intends to accelerate hiring for its additional headquarters in National Landing in the years ahead, and that the organization remains fully committed to its planned occupancies in National Landing. In addition, the potential for construction cost reductions, an expected decline in the supply pipeline and limited disruptions to permitting and construction, should facilitate pursuit of our multifamily growth plans, especially those related to new development in National Landing. Finally, we expect increased government spending in response to the pandemic to drive more agency and contractor spending locally, which should limit the effects of the downturn on our market, and may also provide stimulus for future growth. Though we remain cautious on the short-term outlook for our business, as the impact of COVID-19 is difficult to predict, we see the potential for strong demand and growth in our market over the medium and long term.
During 2019, we sold or recapitalized approximately $426 million of assets, which included approximately $270 million of operating assets, that we believed were valued in excess of their net asset value. The assets sold or recapitalized generated approximately $10 million of NOI during the year ended December 31, 2019. We expected to continue this opportunistic strategy in 2020 by marketing over $500 million of assets for sale with an expectation to transact on at least $200 million. Given the impact of COVID-19 on the investment sales market, we believe it will be difficult to achieve the $200 million target. Although the investment sales market was frozen for most of the second quarter, we have recently resumed our marketing efforts of certain assets and if we can transact at or above net asset value or at pricing that is accretive relative to other uses of capital, we intend to do so.
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The significance, extent and duration of the impact of COVID-19 on our business remains largely uncertain and dependent on future developments that cannot be accurately predicted at this time. These developments include: the continued severity, duration, transmission rate and geographic spread, and possible resurgence, of COVID-19 in the United States; the extent and effectiveness of the containment measures taken; and the response of the overall economy, the financial markets and the population, particularly in areas in which we operate, once the current containment measures are lifted. These uncertainties make it difficult to predict operating results for our business for the remainder of 2020. Therefore, there can be no assurances that we will not experience material declines in revenues, net income, NOI or Funds from Operations ("FFO"). For more information, see “Part II – Item 1A. Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.
Operating Results
Key highlights of operating results for the three and six months ended June 30, 2020 included:
● net loss attributable to common shareholders of $36.8 million, or $0.28 per diluted common share, for the three months ended June 30, 2020 compared to $3.0 million, or $0.03 per diluted common share, for the three months ended June 30, 2019. Net income attributable to common shareholders of $6.1 million, or $0.04 per diluted common share, for the six months ended June 30, 2020 compared to $21.8 million, or $0.16 per diluted common share, for the six months ended June 30, 2019. Net income attributable to common shareholders for the six months ended June 30, 2020 and 2019 included gains on the sale of real estate of $59.5 million and $39.0 million;
● third-party real estate services revenue, including reimbursements, of $27.2 million and $56.9 million for the three and six months ended June 30, 2020 compared to $29.5 million and $57.2 million for the three and six months ended June 30, 2019;
● operating commercial portfolio leased and occupied percentages at our share of 90.4% and 88.1% as of June 30, 2020 compared to 91.0% and 88.7% as of March 31, 2020 and 90.3% and 86.0% as of June 30, 2019;
● operating multifamily portfolio leased and occupied percentages at our share of 85.8% and 82.3% as of June 30, 2020 compared to 87.0% and 84.5% as of March 31, 2020 and 98.0% and 95.0% as of June 30, 2019;
● the leasing of 223,000 square feet, or 206,000 square feet at our share, at an initial rent (1) of $47.34 per square foot and a GAAP-basis weighted average rent per square foot (2) of $47.06 for the three months ended June 30, 2020, and the leasing of 549,000 square feet, or 505,000 square feet at our share, at an initial rent (1) of $46.01 per square foot and a GAAP-basis weighted average rent per square foot (2) of $46.17 for the six months ended June 30, 2020; and
● a decrease in same store (3) NOI of 3.0% to $74.5 million for the three months ended June 30, 2020 compared to $76.8 million for the three months ended June 30, 2019, and an increase in same store (3) NOI of 0.4% to $150.4 million for the six months ended June 30, 2020 compared to $149.8 million for the six months ended June 30, 2019.
(1) Represents the cash basis weighted average starting rent per square foot, which excludes free rent and fixed escalations.
(2) Represents the weighted average rent per square foot recognized over the term of the respective leases, including the effect of free rent and fixed escalations.
(3) Includes the results of the properties that are owned, operated and in-service for the entirety of both periods being compared except for properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
Additionally, investing and financing activity during the six months ended June 30, 2020 included:
● the sale of Metropolitan Park to Amazon for the gross sales price of $155.0 million, which represented an $11.0 million increase over the previously estimated contract value, resulting from an increase in the approved development density on the site;
● the sale of 11333 Woodglen Drive/NoBe II Land/Woodglen ("Woodglen"), commercial and future development assets located in Rockville, Maryland, by our unconsolidated real estate venture with Landmark for $17.8 million. In connection with the sale, we recognized our proportionate share of the loss from the sale of $3.0 million;
● borrowings of $500.0 million under our revolving credit facility;
● the amendment of the credit facility to extend the maturity date of our revolving credit facility to January 2025;
● a $100.0 million draw under our unsecured term loan;
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● the closing of a mortgage loan with a principal balance of $175.0 million collateralized by 4747 Bethesda Avenue;
● the refinancing of the mortgage loan collateralized by RTC-West, increasing the principal balance by $20.2 million;
● a mortgage loan entered into by our real estate venture with CPPIB with a maximum principal balance of $160.0 million collateralized by 1900 N Street. The venture initially received proceeds from the mortgage loan of $134.5 million ($74.0 million at our share), with an additional $25.5 million available in the future;
● the payment of dividends totaling $60.3 million and distributions to our noncontrolling interests of $7.6 million;
● the repurchase and retirement of 1.4 million of our common shares for $41.2 million, an average purchase price of $29.01 per share; and
● the investment of $181.2 million in development, construction in progress and real estate additions.
Activity subsequent to June 30, 2020 included:
● the closing of three separate mortgage loans with an aggregate principal balance of $385.0 million, collateralized by The Bartlett, 1221 Van Street and 220 20 th Street;
● the repayment of the $500.0 million outstanding balance on our revolving credit facility; and
● the declaration of a quarterly dividend of $0.225 per common share, payable on August 27, 2020 to shareholders of record as of August 13, 2020.
Critical Accounting Policies and Estimates
Our Annual Report on Form 10-K for the year ended December 31, 2019 contains a description of our critical accounting policies, including asset acquisitions and business combinations, real estate, investments in real estate ventures, revenue recognition and share-based compensation. There have been no significant changes to our policies during 2020.
Recent Accounting Pronouncements
See Note 2 to the financial statements for a description of recent accounting pronouncements.
Results of Operations
During 2019 and 2020, we sold Commerce Executive/Commerce Executive Metro Land, 1600 K Street, Vienna Retail, a 50.0% interest in the entity that owns Central Place Tower, and Metropolitan Park (collectively, the “Disposed Properties”). In December 2019, we acquired F1RST Residences.
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Comparison of the Three Months Ended June 30, 2020 to 2019
The following summarizes certain line items from our statements of operations that we believe are important in understanding our operations and/or those items which significantly changed in the three months ended June 30, 2020 compared to the same period in 2019:
Three Months Ended June 30,
2020
2019
% Change
(In thousands)
Property rental revenue
$
115,459
$
122,326
(5.6)
%
Third-party real estate services revenue, including reimbursements
27,167
29,487
(7.9)
%
Depreciation and amortization expense
52,616
45,995
14.4
%
Property operating expense
33,792
32,113
5.2
%
Real estate taxes expense
17,869
18,266
(2.2)
%
General and administrative expense:
Corporate and other
13,216
11,559
14.3
%
Third-party real estate services
29,239
28,710
1.8
%
Share-based compensation related to Formation Transaction and special equity awards
8,858
9,523
(7.0)
%
Transaction and other costs
1,372
2,974
(53.9)
%
Loss from unconsolidated real estate ventures, net
13,485
1,810
645.0
%
Interest expense
15,770
13,107
20.3
%
Property rental revenue decreased by approximately $6.9 million, or 5.6%, to $115.5 million in 2020 from $122.3 million in 2019. The decrease was primarily due to a $9.2 million decrease related to the Disposed Properties and a $7.5 million decrease in property rental revenue due to the deferral of rent for tenants that were placed on the cash basis of accounting and an increase in uncollectable operating lease receivables attributable to the COVID-19 pandemic. The decrease in property rental revenue was partially offset by a $3.6 million increase related to 4747 Bethesda Avenue and West Half, both of which were placed into service during the second half of 2019, a $2.8 million increase related to properties with spaces leased to Amazon beginning in 2019 (1800 South Bell and 241 18 th Street South) and a $2.3 million increase related to F1RST Residences.
Third-party real estate services revenue, including reimbursements, decreased by approximately $2.3 million, or 7.9%, to $27.2 million in 2020 from $29.5 million in 2019. The decrease was primarily due to a $1.2 million decrease in asset management fees and a $1.0 million decrease in property management fees primarily due to the sale of assets within the legacy funds formerly organized by The JBG Companies (the "JBG Legacy Funds"), and a $489,000 decrease in reimbursements revenue. The decrease in third-party real estate services revenue was partially offset by a $515,000 increase in development fee income, primarily from Amazon.
Depreciation and amortization expense increased by approximately $6.6 million, or 14.4%, to $52.6 million in 2020 from $46.0 million in 2019. The increase was primarily due to a $3.8 million increase related to 4747 Bethesda Avenue and West Half, a $1.6 million increase related to two under construction buildings (965 Florida Avenue and 901 W Street) that were placed into service in the first half of 2020, a $1.3 million increase related to F1RST Residences and a $1.2 million increase related to properties with spaces leased to Amazon beginning in 2019. The increase in depreciation and amortization expense was partially offset by a $3.6 million decrease related to the Disposed Properties.
Property operating expense increased by approximately $1.7 million, or 5.2%, to $33.8 million in 2020 from $32.1 million in 2019. The increase was primarily due to a $1.1 million increase related to 4747 Bethesda Avenue and West Half, a $862,000 increase related to F1RST Residences and an increase in property operating expenses across various properties throughout the portfolio. The increase in property operating expense was partially offset by a $2.8 million decrease related to the Disposed Properties.
Real estate tax expense decreased by approximately $397,000, or 2.2%, to $17.9 million in 2020 from $18.3 million in 2019. The decrease was primarily due to a $1.2 million decline related to the Disposed Properties and a decrease in real estate tax expense for various properties throughout the portfolio. The decrease in real estate tax expense was partially
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offset by a $750,000 increase at 4747 Bethesda Avenue and West Half due to a reduction in capitalized real estate taxes as those assets were placed in service and a $337,000 increase related to FIRST Residences.
General and administrative expense: corporate and other increased by approximately $1.7 million, or 14.3%, to $13.2 million in 2020 from $11.6 million in 2019. The increase was primarily due to an increase in share-based compensation expense from the issuance of the 2020 equity awards, which were partially offset by a decrease in consulting costs, professional fees and rent expense.
General and administrative expense: third-party real estate services increased by approximately $529,000, or 1.8%, to $29.2 million in 2020 from $28.7 million in 2019. The increase was primarily due to an increase in share-based compensation expense from the issuance of the 2020 equity awards, partially offset by a decrease in consulting costs and rent expense.
General and administrative expense: share-based compensation related to Formation Transaction and special equity awards decreased by approximately $665,000, or 7.0%, to $8.9 million in 2020 from $9.5 million in 2019. The decrease was primarily due to the application of the graded vesting approach to certain awards issued in prior years, which results in higher expense recognition in periods nearest to the date of grant.
Transaction and other costs of $1.4 million in 2020 consist primarily of costs incurred in connection with the Formation Transaction (including integration and severance costs). Transaction and other costs of $3.0 million in 2019 consist primarily of $1.8 million of demolition costs related to 1900 Crystal Drive and $1.2 million of costs incurred in connection with the Formation Transaction (including integration and severance costs).
Loss from unconsolidated real estate ventures increased by approximately $11.7 million, or 645.0%, to $13.5 million for 2020 from $1.8 million in 2019. The increase was primarily due to a $6.5 million impairment charge related to an investment in an unconsolidated real estate venture due to a decline in the fair value of the underlying asset, The Marriott Wardman Park hotel, and losses incurred during the quarter resulting from its closure in March 2020 due to the effects of COVID-19, and a $3.0 million loss from the sale of Woodglen by an unconsolidated real estate venture.
Interest expense increased by approximately $2.7 million, or 20.3%, to $15.8 million in 2020 from $13.1 million in 2019. The increase was primarily due to higher average outstanding balances under our revolving credit facility and our unsecured term loans, and a new mortgage loan collateralized by 4747 Bethesda Avenue. The increase was also due to a $4.7 million decrease in capitalized interest primarily due to a reduction in the capitalization of interest for 4747 Bethesda Avenue, West Half and 1900 N Street as those assets were placed in service. The increase in interest expense was partially offset by a $2.9 million decrease related to the Disposed Properties and the repayment of several mortgages payable during 2019.
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Comparison of the Six Months Ended June 30, 2020 to 2019
The following summarizes certain line items from our statements of operations that we believe are important in understanding our operations and/or those items which significantly changed in the six months ended June 30, 2020 compared to the same period in 2019:
Six Months Ended June 30,
2020
2019
% Change
(In thousands)
Property rental revenue
$
235,839
$
241,739
(2.4)
%
Third-party real estate services revenue, including reimbursements
56,883
57,178
(0.5)
%
Depreciation and amortization expense
101,105
94,714
6.7
%
Property operating expense
68,295
64,287
6.2
%
Real estate taxes expense
36,068
35,501
1.6
%
General and administrative expense:
Corporate and other
26,392
23,873
10.6
%
Third-party real estate services
58,053
56,776
2.2
%
Share-based compensation related to Formation Transaction and special equity awards
18,299
20,654
(11.4)
%
Transaction and other costs
6,681
7,869
(15.1)
%
Income (loss) from unconsolidated real estate ventures, net
(16,177)
1,791
*
Interest expense
27,775
30,281
(8.3)
%
Gain on sale of real estate
59,477
39,033
52.4
%
* Not meaningful.
Property rental revenue decreased by approximately $5.9 million, or 2.4%, to $235.8 million in 2020 from $241.7 million in 2019. The decrease was primarily due to an $18.7 million decrease related to the Disposed Properties and an $8.6 million decrease in property rental revenue due to the deferral of rent for tenants that were placed on the cash basis of accounting and an increase in uncollectable operating lease receivables attributable to the COVID-19 pandemic. The decrease in property rental revenue was partially offset by a $7.1 million increase related to 4747 Bethesda Avenue and West Half, both of which were placed into service during the second half of 2019, a $5.0 million increase related to properties with spaces leased to Amazon beginning in 2019 (1800 South Bell and 241 18 th Street South), a $4.8 million increase related to F1RST Residences, a $1.8 million increase primarily due to tenant reimbursements for construction services at 1901 South Bell Street and a $1.8 million increase related to an increase in occupancy at 2200 Crystal Drive.
Third-party real estate services revenue, including reimbursements, decreased by approximately $295,000, or 0.5%, to $56.9 million in 2020 from $57.2 million in 2019. The decrease was primarily due to a $1.9 million decrease in asset management fees due to the sale of assets within the JBG Legacy Funds and a $757,000 decrease in leasing fees. The decrease in third-party real estate services revenue was partially offset by a $1.7 million increase in development fee income, primarily from Amazon and an $831,000 increase in other service revenue.
Depreciation and amortization expense increased by approximately $6.4 million, or 6.7%, to $101.1 million in 2020 from $94.7 million in 2019. The increase was primarily due to a $7.0 million increase related to 4747 Bethesda Avenue and West Half, a $2.8 million increase related to properties with spaces leased to Amazon beginning in 2019, a $2.7 million increase related to F1RST Residences and a $1.9 million increase related to two under construction buildings (965 Florida Avenue and 901 W Street) that were placed into service in the first half of 2020. The increase in depreciation and amortization expense was partially offset by a $7.3 million decrease related to the Disposed Properties and a $2.6 million decrease related to several properties in National Landing as certain tenant improvements fully amortized.
Property operating expense increased by approximately $4.0 million, or 6.2%, to $68.3 million in 2020 from $64.3 million in 2019. The increase was primarily due to a $2.4 million increase related to 4747 Bethesda Avenue and West Half, a $1.5 million increase related to F1RST Residences and an increase in property operating expenses across various properties throughout the portfolio. The increase in property operating expense was partially offset by a $6.0 million decrease related to the Disposed Properties.
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Real estate tax expense increased by approximately $567,000, or 1.6%, to $36.1 million in 2020 from $35.5 million in 2019. The increase was primarily due to a $1.6 million increase at 4747 Bethesda Avenue and West Half due to a reduction in capitalized real estate taxes as those assets were placed in service, a $678,000 increase related to F1RST Residences and an increase in real estate taxes related to various properties located in National Landing. The increase in real estate tax expense was partially offset by a $2.6 million decline related to the Disposed Properties.
General and administrative expense: corporate and other increased by approximately $2.5 million, or 10.6%, to $26.4 million in 2020 from $23.9 million in 2019. The increase was primarily due to an increase in share-based compensation expense from the issuance of the 2020 equity awards and an increase in compensation costs, partially offset by a decrease in professional fees and rent expense.
General and administrative expense: third-party real estate services increased by approximately $1.3 million, or 2.2%, to $58.1 million in 2020 from $56.8 million in 2019. The increase was primarily due to an increase in share-based compensation expense from the issuance of the 2020 equity awards, partially offset by a decrease in rent expense.
General and administrative expense: share-based compensation related to Formation Transaction and special equity awards decreased by approximately $2.4 million, or 11.4%, to $18.3 million in 2020 from $20.7 million in 2019. The decrease was primarily due to the application of the graded vesting approach to certain awards issued in prior years, which results in higher expense recognition in periods nearest to the date of grant.
Transaction and other costs of $6.7 million in 2020 includes $4.0 million of costs related to a charitable commitment to the Washington Housing Conservancy, a non-profit that acquires and owns affordable workforce housing in the Washington D.C. metropolitan region, and $2.7 million of costs incurred in connection with the Formation Transaction (including integration and severance costs). Transaction and other costs of $7.9 million in 2019 includes $4.1 million of demolition costs related to 1900 Crystal Drive, $3.3 million of costs incurred in connection with the Formation Transaction (including integration and severance costs) and $480,000 of expenses related to completed, potential and pursued transactions.
Income (loss) from unconsolidated real estate ventures decreased by approximately $18.0 million to a net loss of $16.2 million for 2020 from net income of $1.8 million in 2019. The decrease was primarily due to a $6.5 million impairment charge related to an investment in an unconsolidated real estate venture due to a decline in the fair value of the underlying asset, The Marriott Wardman Park hotel, and losses incurred during the quarter resulting from its closure in March 2020 due to the effects of COVID-19, and a $3.0 million loss from the sale of Woodglen by an unconsolidated real estate venture. The decrease was also due to the recognition of $6.4 million of income, during the first quarter of 2019, primarily related to distributions from the real estate venture that owns 1101 17th Street.
Interest expense decreased by approximately $2.5 million, or 8.3%, to $27.8 million in 2020 from $30.3 million in 2019. The decrease was primarily due to a $5.7 million decrease related to the Disposed Properties and the repayment of several mortgages payable during 2019. The decrease in interest expense was partially offset by higher average outstanding balances under our revolving credit facility and unsecured term loans, and a new mortgage loan collateralized by 4747 Bethesda Avenue. The decrease in interest expense was partially offset by a $6.3 million decrease in capitalized interest primarily due to a reduction in the capitalization of interest for 4747 Bethesda Avenue, West Half and 1900 N Street as those assets were placed in service.
Gain on the sale of real estate of $59.5 million in 2020 was due to the sale of Metropolitan Park. Gain on the sale of real estate of $39.0 million in 2019 was due to the sale of Commerce Executive/Commerce Metro Land.
FFO
FFO is a non-GAAP financial measure computed in accordance with the definition established by the National Association of Real Estate Investment Trusts ("NAREIT") in the NAREIT FFO White Paper - 2018 Restatement issued in 2018. NAREIT defines FFO as net income (loss) (computed in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable
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to decreases in the value of depreciable real estate held by the entity, including our share of such adjustments for unconsolidated real estate ventures.
We believe FFO is a meaningful non-GAAP financial measure useful in comparing our levered operating performance from period-to-period and as compared to similar real estate companies because FFO excludes real estate depreciation and amortization expense and other non-comparable income and expenses, which implicitly assumes that the value of real estate diminishes predictably over time rather than fluctuating based on market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures used by other companies.
The following is the reconciliation of net income (loss) attributable to common shareholders, the most directly comparable GAAP measure, to FFO:
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
(In thousands, except per share amounts)
Net income (loss) attributable to common shareholders
$
(36,780)
$
(3,040)
$
6,145
$
21,821
Net income (loss) attributable to redeemable noncontrolling interests
(3,483)
(288)
1,767
3,099
Net income (loss)
(40,263)
(3,328)
7,912
24,920
Gain on sale of real estate
—
—
(59,477)
(39,033)
Loss (gain) on sale from unconsolidated real estate ventures
2,952
(335)
2,952
(335)
Real estate depreciation and amortization
49,924
43,308
95,586
89,343
Impairment of investment in unconsolidated real estate venture (1)
6,522
—
6,522
—
Pro rata share of real estate depreciation and amortization from unconsolidated real estate ventures
7,498
4,804
14,380
9,457
FFO attributable to noncontrolling interests in consolidated real estate ventures
(6)
(4)
(3)
(5)
FFO attributable to common limited partnership units
("OP Units")
26,627
44,445
67,872
84,347
FFO attributable to redeemable noncontrolling interests
(2,911)
(5,014)
(7,408)
(9,797)
FFO attributable to common shareholders
$
23,716
$
39,431
$
60,464
$
74,550
FFO per common share — basic and diluted
$
0.18
$
0.30
0.45
$
0.59
Weighted average number of common shares outstanding — basic and diluted
133,613
131,754
134,078
127,189
(1)
In connection with the preparation and review of our second quarter 2020 financial statements, we determined that our investment in the venture that owns The Marriott Wardman Park hotel was impaired due to a decline in the fair value of the underlying asset and recorded an impairment charge of $6.5 million, reducing the net book value of our investment to zero.
NOI and Same Store NOI
We utilize NOI, which is a non-GAAP financial measure, to assess a segment's performance. The most directly comparable GAAP measure is net income (loss) attributable to common shareholders. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only property related revenue (which includes base rent, tenant reimbursements and other operating revenue, net of free rent and payments associated with assumed lease liabilities) less operating expenses and ground rent, if applicable. NOI also excludes deferred rent, related party management fees, interest expense, and certain other non-cash adjustments, including the accretion of acquired below-market leases and amortization of acquired above-market leases and below-market ground lease intangibles. Management uses NOI as a supplemental performance measure for our assets and believes it provides useful information to investors because it reflects only those revenue and expense items that are incurred at the asset level, excluding non-cash items. In addition, NOI is considered by many in the real estate industry to be a useful starting point for determining the value of a real estate asset or group of assets. However, because NOI excludes depreciation and amortization and captures neither the changes in the value of our assets that result from use or market conditions, nor
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the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our assets, all of which have real economic effect and could materially impact the financial performance of our assets, the utility of NOI as a measure of the operating performance of our assets is limited. NOI presented by us may not be comparable to NOI reported by other REITs that define these measures differently. We believe that to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income (loss) attributable to common shareholders as presented in our financial statements. NOI should not be considered as an alternative to net income (loss) attributable to common shareholders as an indication of our performance or to cash flows as a measure of liquidity or our ability to make distributions.
We also provide certain information on a "same store" basis. Information provided on a same store basis includes the results of properties that are owned, operated and in-service for the entirety of both periods being compared except for properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared. While there is judgment surrounding changes in designations, a property is removed from the same store pool when the property is considered to be under construction because it is undergoing significant redevelopment or renovation pursuant to a formal plan or is being repositioned in the market and such renovation or repositioning is expected to have a significant impact on property NOI. A development property or property under construction is moved to the same store pool once a substantial portion of the growth expected from the development or redevelopment is reflected in both the current and comparable prior year period. Acquisitions are moved into the same store pool once we have owned the property for the entirety of the comparable periods and the property is not under significant development or redevelopment.
During the three months ended June 30, 2020, our same store pool changed due to the inclusion of 1800 South Bell and 1221 Van Street, and the exclusion of Woodglen, which was sold by an unconsolidated real estate venture during the second quarter of 2020. During the six months ended June 30, 2020, our same store pool changed due to the inclusion of our 50% interest in Central Place Tower and 1700 M Street, and the exclusion of Woodglen.
Same store NOI decreased by $2.3 million, or 3.0%, and increased $558,000 and 0.4%, for the three and six months ended June 30, 2020, as compared to the three and six months ended June 30, 2019. The decrease in same store NOI for the three months ended June 30, 2020 was driven by (i) lower occupancy, a reduction in revenue and higher operating costs at our multifamily properties, which were all related to the COVID-19 pandemic, and (ii) a reduction in revenue in our commercial portfolio due to the deferral of rent, an increase in uncollectable operating lease receivables, and a decline in parking revenue, all attributable to the COVID-19 pandemic, offset by the burn-off of rent abatements. The increase in same store NOI for the six months ended June 30, 2020 was largely due to the burn off of rent abatements and increase in occupancy in our commercial portfolio, which was partially offset by higher operating costs and a reduction in revenue due to the deferral of rent and an increase in uncollectable operating lease receivables attributable to the COVID-19 pandemic.
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The following is the reconciliation of net income (loss) attributable to common shareholders to NOI and same store NOI:
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
(Dollars in thousands)
Net income (loss) attributable to common shareholders
$
(36,780)
$
(3,040)
$
6,145
$
21,821
Add:
Depreciation and amortization expense
52,616
45,995
101,105
94,714
General and administrative expense:
Corporate and other
13,216
11,559
26,392
23,873
Third-party real estate services
29,239
28,710
58,053
56,776
Share-based compensation related to Formation Transaction and special equity awards
8,858
9,523
18,299
20,654
Transaction and other costs
1,372
2,974
6,681
7,869
Interest expense
15,770
13,107
27,775
30,281
Loss on extinguishment of debt
—
1,889
33
1,889
Income tax expense (benefit)
(888)
51
(3,233)
(1,121)
Net income (loss) attributable to redeemable noncontrolling interests
(3,483)
(288)
1,767
3,099
Less:
Third-party real estate services, including reimbursements
27,167
29,487
56,883
57,178
Other revenue (1)
1,516
2,114
3,146
3,755
Income (loss) from unconsolidated real estate ventures, net
(13,485)
(1,810)
(16,177)
1,791
Interest and other income, net
114
2,052
1,021
3,003
Gain on sale of real estate
—
—
59,477
39,033
Consolidated NOI
64,608
78,637
138,667
155,095
NOI attributable to unconsolidated real estate ventures at our share
7,495
5,089
16,073
10,252
Non-cash rent adjustments (2)
(1,419)
(8,738)
(4,964)
(15,544)
Other adjustments (3)
3,516
3,760
6,330
7,091
Total adjustments
9,592
111
17,439
1,799
NOI
74,200
78,748
156,106
156,894
Less: out-of-service NOI loss (4)
(1,475)
(1,057)
(2,857)
(2,122)
Operating Portfolio NOI
75,675
79,805
158,963
159,016
Non-same store NOI (5)
1,204
2,992
8,567
9,178
Same store NOI (6)
$
74,471
$
76,813
$
150,396
$
149,838
Change in same store NOI
(3.0%)
0.4%
Number of properties in same store pool
55
53
(1) Excludes parking revenue of $810,000 and $7.2 million for the three and six months ended June 30, 2020, and $6.7 million and $13.1 million for the three and six months ended June 30, 2019.
(2) Adjustment to exclude straight-line rent, above/below market lease amortization and lease incentive amortization.
(3) Adjustment to include other revenue and payments associated with assumed lease liabilities related to operating properties and to exclude commercial lease termination revenue and allocated corporate general and administrative expenses to operating properties.
(4) Includes the results of our under construction assets and future development pipeline.
(5) Includes the results of properties that were not in-service for the entirety of both periods being compared and properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
(6) Includes the results of the properties that are owned, operated and in-service for the entirety of both periods being compared except for properties that are being phased out of service for future development.
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Reportable Segments
We review operating and financial data for each property on an individual basis; therefore, each of our individual properties is a separate operating segment. We defined our reportable segments to be aligned with our method of internal reporting and the way our Chief Executive Officer, who is also our Chief Operating Decision Maker ("CODM"), makes key operating decisions, evaluates financial results, allocates resources and manages our business. Accordingly, we aggregate our operating segments into three reportable segments (commercial, multifamily, and third-party asset management and real estate services) based on the economic characteristics and nature of our assets and services.
The CODM measures and evaluates the performance of our operating segments, with the exception of the third-party asset management and real estate services business, based on the NOI of properties within each segment. NOI includes property rental revenue and other property revenue, and deducts property operating expenses and real estate taxes.
With respect to the third-party asset management and real estate services business, the CODM reviews revenue streams generated by this segment ("Third-party real estate services, including reimbursements"), as well as the expenses attributable to the segment ("General and administrative: third-party real estate services"), which are both disclosed separately in our statements of operations and discussed in the preceding pages under "Results of Operations." The following represents the components of revenue from our third-party real estate services business:
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
(In thousands)
Property management fees
$
4,735
$
5,687
$
10,759
$
11,115
Asset management fees
2,375
3,547
5,099
7,035
Leasing fees
794
1,085
2,541
3,298
Development fees
3,048
2,533
5,860
4,129
Construction management fees
460
470
1,473
1,099
Other service revenue
1,817
1,738
3,452
2,621
Third-party real estate services revenue, excluding reimbursements
13,229
15,060
29,184
29,297
Reimbursements revenue (1)
13,938
14,427
27,699
27,881
Third-party real estate services revenue, including reimbursements
27,167
29,487
56,883
57,178
Third-party real estate services expenses
29,239
28,710
58,053
56,776
Third-party real estate services revenue less expenses
$
(2,072)
$
777
$
(1,170)
$
402
(1) Represents reimbursements of expenses incurred by us on behalf of third parties, including allocated payroll costs and amounts paid to third-party contractors for construction management projects.
Third-party real estate services revenue, including reimbursements, decreased by approximately $2.3 million, or 7.9%, to $27.2 million for the three months ended June 30, 2020 from $29.5 million for the same period in 2019. The decrease was primarily due to a $1.2 million decrease in asset management fees, and a $1.0 million decrease in property management fees primarily due to the sale of assets within the JBG Legacy Funds, and a $489,000 decrease in reimbursements revenue. The decrease in third-party real estate services revenue was partially offset by a $515,000 increase in development fee income, primarily from Amazon. Third-party real estate services expenses increased by approximately $529,000, or 1.8%, to $29.2 million for the three months ended June 30, 2020 from $28.7 million for the same period in 2019. The increase was primarily due to an increase in share-based compensation expense from the issuance of the 2020 equity awards, partially offset by a decrease in consulting costs and rent expense.
Third-party real estate services revenue, including reimbursements, decreased by approximately $295,000, or 0.5%, to $56.9 million for the six months ended June 30, 2020 from $57.2 million for the same period in 2019. The decrease was primarily due to a $1.9 million decrease in asset management fees due to the sale of assets within the JBG Legacy Funds and a $757,000 decrease in leasing fees. The decrease in third-party real estate services revenue was partially offset by a $1.7 million increase in development fee income, primarily from Amazon, and an $831,000 increase in other service revenue. Third-party real estate services expenses increased by approximately $1.3 million, or 2.2%, to $58.1 million for the six months ended June 30, 2020 from $56.8 million for the same period in 2019. The increase was primarily due to an
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increase in share-based compensation expense from the issuance of the 2020 equity awards, partially offset by a decrease in rent expense.
Consistent with internal reporting presented to our CODM and our definition of NOI, the third-party asset management and real estate services operating results are excluded from the NOI data below.
Property revenue is calculated as property rental revenue plus other property revenue (primarily parking revenue). Property expense is calculated as property operating expenses plus real estate taxes. Consolidated NOI is calculated as total property revenue less total property expense. See Note 16 to the financial statements for the reconciliation of net income (loss) attributable to common shareholders to consolidated NOI for the three and six months ended June 30, 2020 and 2019. The following is a summary of NOI by segment:
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
(In thousands)
Property revenue:
Commercial
$
86,347
$
101,226
$
183,789
$
203,847
Multifamily
31,656
28,963
64,596
57,293
Other (1)
(1,734)
(1,173)
(5,355)
(6,257)
Total property revenue
116,269
129,016
243,030
254,883
Property expense:
Commercial
36,025
39,148
76,340
82,141
Multifamily
15,399
12,347
30,444
23,864
Other (1)
237
(1,116)
(2,421)
(6,217)
Total property expense
51,661
50,379
104,363
99,788
Consolidated NOI:
Commercial
50,322
62,078
107,449
121,706
Multifamily
16,257
16,616
34,152
33,429
Other (1)
(1,971)
(57)
(2,934)
(40)
Consolidated NOI
$
64,608
$
78,637
$
138,667
$
155,095
(1) Includes activity related to future development assets and corporate entities and the elimination of intersegment activity.
Comparison of the Three Months Ended June 30, 2020 to 2019
Commercial: Property rental revenue decreased by $14.9 million, or 14.7%, to $86.3 million in 2020 from $101.2 million in 2019. Consolidated NOI decreased by $11.8 million, or 18.9%, to $50.3 million in 2020 from $62.1 million in 2019 . The decrease in property revenue and consolidated NOI was primarily due to the sale of the Disposed Properties, a decrease in property rental revenue due to the deferral of rent for tenants that were placed on the cash basis of accounting and an increase in uncollectable operating lease receivables attributable to the COVID-19 pandemic, and a $2.4 million decrease due to bad debt reserves recorded in connection with the filing for bankruptcy by one of our parking operators. The decrease in property revenues and consolidated NOI was partially offset by an increase in revenue from 4747 Bethesda Avenue, which we placed into service during the fourth quarter of 2019, and to properties with spaces leased to Amazon beginning in 2019 (1800 South Bell and 241 18th Street South).
Multifamily: Property rental revenue increased by $2.7 million, or 9.3%, to $31.7 million in 2020 from $29.0 million in 2019. Consolidated NOI decreased by $359,000, or 2.2%, to $16.3 million in 2020 from $16.6 million in 2019. The increase in property revenue was primarily due the acquisition of F1RST Residences and placing West Half into service in the second half of 2019. The decrease in NOI was primarily due to increased payroll costs related to the COVID-19 pandemic and to no longer capitalizing expenses at 901 W Street as the property was placed into service in the first quarter of 2020.
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Comparison of the Six Months Ended June 30, 2020 to 2019
Commercial: Property rental revenue decreased by $20.1 million, or 9.8%, to $183.8 million in 2020 from $203.8 million in 2019. Consolidated NOI decreased by $14.3 million, or 11.7%, to $107.4 million in 2020 from $121.7 million in 2019. The decrease in property revenue and consolidated NOI was primarily due to the sale of the Disposed Properties, a decrease in property rental revenue due to the deferral of rent for tenants that were placed on the cash basis of accounting and an increase in uncollectable operating lease receivables attributable to the COVID-19 pandemic, and a $2.4 million decrease due to bad debt reserves recorded in connection with the filing for bankruptcy by one of our parking operators. The decrease in property revenues and consolidated NOI was partially offset by an increase in revenue from 4747 Bethesda Avenue, which we placed into service during the fourth quarter of 2019, and to properties with spaces leased to Amazon beginning in 2019 (1800 South Bell and 241 18 th Street South).
Multifamily: Property rental revenue increased by $7.3 million, or 12.7%, to $64.6 million in 2020 from $57.3 million in 2019. Consolidated NOI increased by $723,000, or 2.2%, to $34.2 million in 2020 from $33.4 million in 2019. The increase in property revenue and consolidated NOI was primarily due to the acquisition of F1RST Residences and increased occupancy at 1221 Van Street. Property rental revenue also increased due to the placing of West Half into service in the second half of 2019.
Liquidity and Capital Resources
Property rental income is our primary source of operating cash flow and is dependent on a number of factors including occupancy levels and rental rates, as well as our tenants' ability to pay rent. In addition, our third-party asset management and real estate services business provides fee-based real estate services to third parties, the Washington Housing Initiative ("WHI") Impact Pool, Amazon and the JBG Legacy Funds. Our assets provide a relatively consistent level of cash flow that enables us to pay operating expenses, debt service, recurring capital expenditures, dividends to shareholders and distributions to holders of OP Units. Other sources of liquidity to fund cash requirements include proceeds from financings, asset sales and the issuance and sale of equity securities. We anticipate that cash flows from continuing operations and proceeds from financings, recapitalizations and asset sales, together with existing cash balances, will be adequate to fund our business operations, debt amortization, capital expenditures, any dividends to shareholders and distributions to holders of OP Units over the next 12 months.
Financing Activities
The following is a summary of mortgages payable:
Weighted Average
Effective
Interest Rate (1)
June 30, 2020
December 31, 2019
(In thousands)
Variable rate (2)
1.57%
$
294,500
$
2,200
Fixed rate (3)
4.38%
1,024,068
1,125,648
Mortgages payable
1,318,568
1,127,848
Unamortized deferred financing costs and premium/discount, net
(6,044)
(2,071)
Mortgages payable, net
$
1,312,524
$
1,125,777
(1) Weighted average effective interest rate as of June 30, 2020.
(2) Includes variable rate mortgages payable with interest rate cap agreements.
(3) Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements.
As of June 30, 2020 and December 31, 2019, the net carrying value of real estate collateralizing our mortgages payable totaled $1.6 billion and $1.4 billion. Our mortgages payable contain covenants that limit our ability to incur additional indebtedness on these properties and, in certain circumstances, require lender approval of tenant leases and/or yield maintenance upon repayment prior to maturity. Certain of our mortgages payable are recourse to us. See Note 17 to the financial statements for additional information.
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During the six months ended June 30, 2020, we entered into a mortgage loan with a principal balance of $175.0 million collateralized by 4747 Bethesda Avenue, and refinanced the mortgage loan collateralized by RTC-West, increasing the principal balance by $20.2 million. In July 2020, we entered into three separate mortgage loans with an aggregate principal balance of $385.0 million, collateralized by The Bartlett, 1221 Van Street and 220 20 th Street.
As of June 30, 2020 and December 31, 2019, we had various interest rate swap and cap agreements on certain of our mortgages payable with an aggregate notional value of $945.4 million and $867.6 million. See Note 15 to the financial statements for additional information.
Credit Facility
As of June 30, 2020, our $1.4 billion credit facility consisted of a $1.0 billion revolving credit facility maturing in January 2025, a $200.0 million unsecured term loan ("Tranche A-1 Term Loan") maturing in January 2023, and a $200.0 million unsecured term loan ("Tranche A-2 Term Loan") maturing in July 2024. The following is a summary of amounts outstanding under the credit facility:
Effective
Interest Rate (1)
June 30, 2020
December 31, 2019
(In thousands)
Revolving credit facility (2) (3) (4)
1.21%
$
500,000
$
200,000
Tranche A-1 Term Loan (5)
2.34%
$
200,000
$
100,000
Tranche A-2 Term Loan (6)
2.49%
200,000
200,000
Unsecured term loans
400,000
300,000
Unamortized deferred financing costs, net
(2,363)
(2,705)
Unsecured term loans, net
$
397,637
$
297,295
(1) Effective interest rate as of June 30, 2020.
(2) As of both June 30, 2020 and December 31, 2019, letters of credit with an aggregate face amount of $1.5 million were outstanding under our revolving credit facility.
(3) As of June 30, 2020 and December 31, 2019, net deferred financing costs related to our revolving credit facility totaling $7.5 million and $3.1 million were included in "Other assets, net."
(4) The interest rate for our revolving credit facility excludes a 0.15% facility fee. In July 2020, we repaid the $500.0 million outstanding on our revolving credit facility.
(5) As of both June 30, 2020 and December 31, 2019, $100.0 million of the outstanding balance was fixed by interest rate swap agreements. As of June 30, 2020, the interest rate swaps mature concurrently with the term loan and provide a weighted average interest rate of 1.14%. As of June 30, 2020, we had a forward-starting swap that became effective on July 20, 2020 with a notional value of $100.0 million, which effectively converted the variable interest rate applicable to the remaining $100.0 million drawn in April 2020 under our Tranche A-1 Loan to a fixed interest rate upon the effective date of the swap.
(6) As of June 30, 2020 and December 31, 2019, $200.0 million and $137.6 million of the outstanding balance was fixed by interest rate swap agreements. As of June 30, 2020, the interest rate swaps mature concurrently with the term loan and provide a weighted average interest rate of 1.34%.
Our existing variable rate debt instruments, including our credit facility, and our hedging arrangements, currently use LIBOR as a reference rate, and we expect a transition from LIBOR to another reference rate in the near term. In July 2017, due to a decline in the quantity of loans used to calculate LIBOR, the United Kingdom regulator that regulates LIBOR announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021, and LIBOR is expected to be phased out accordingly. In April 2018, the New York Federal Reserve commenced publishing an alternative reference rate for the U.S. dollar, the SOFR, proposed by a group of major market participants convened by the U.S. Federal Reserve with participation by SEC Staff and other regulators, the ARRC. ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry-wide and company-specific transition plans related to derivatives and cash markets exposed to LIBOR, but there remains uncertainty in the timing and details of this transition.
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Common Shares Repurchased
In March 2020, our Board of Trustees authorized the repurchase of up to $500 million of our outstanding common shares. During the six months ended June 30, 2020, we repurchased and retired 1.4 million common shares for $41.2 million, an average purchase price of $29.01 per share.
Purchases, to the extent made pursuant to the program, will be made either in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will be subject to economic and market conditions, share price, applicable legal requirements and other factors. The program may be suspended or discontinued at our discretion without prior notice.
Liquidity Requirements
Our principal liquidity needs for the next 12 months and beyond include:
● normal recurring expenses;
● debt service and principal repayment obligations, including balloon payments on maturing debt;
● capital expenditures, including major renovations, tenant improvements and leasing costs;
● development expenditures;
● dividends to shareholders and distributions to holders of OP Units;
● common share repurchases; and
● acquisitions of properties, either directly or indirectly through the acquisition of equity interests therein.
We expect to satisfy these needs using one or more of the following:
● cash and cash equivalent balances;
● cash flows from operations;
● distributions from real estate ventures;
● proceeds from financings, recapitalizations and asset sales; and
● proceeds from the issuance and sale of equity securities.
While we have not experienced a significant impact to date in this regard, we expect the COVID-19 pandemic to continue to have an adverse impact on our liquidity and capital resources. Future decreases in cash flows from operations resulting from tenant defaults, rent deferrals or decreases in our rents or occupancy, would decrease the cash available for the capital uses described above.
In light of the current lack of visibility regarding the long-term impact of COVID-19 on our revenue, we have taken various steps to mitigate the adverse effect of COVID-19 on our liquidity, including deferral of approximately $69 million on a consolidated basis and $73 million at our share of planned discretionary capital expenditures for our operating assets for 2020 and 2021. Because we believe construction costs will likely decline over the next several months, we have also paused our plans to commence construction on 1900 Crystal Drive to optimize pricing. During the three months ended June 30, 2020, we increased our cash balances through $500.0 million of draws under our revolving credit facility, which we repaid in July 2020, in part with the proceeds from three separate mortgage loans with an aggregate principal balance of $385.0 million, collateralized by The Bartlett, 1221 Van Street and 220 20th Street. As of July 30, 2020, we have $998.5 million of remaining availability under our credit facility (net of outstanding letters of credit totaling $1.5 million). We also made a $100 million draw on our Tranche A-1 Term Loan in April 2020. As of June 30, 2020, $97.6 million on a consolidated basis and $212.5 million at our share is scheduled to mature before the end of 2021.
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Contractual Obligations and Commitments
During the six months ended June 30, 2020, there were no material changes to the contractual obligation information presented in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2019. The only significant change was a $590.7 million increase in outstanding debt primarily from an additional $300.0 million drawn under our revolving credit facility, a $175.0 million mortgage payable collateralized by 4747 Bethesda Avenue and the remaining $100.0 million draw under our Tranche A-1 Term Loan.
As of June 30, 2020, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures totaling $57.2 million.
The WHI was launched by us and the Federal City Council in June 2018 as a scalable market-driven model that uses private capital to help address the scarcity of housing for middle income families. We are the manager for the WHI Impact Pool, which is the social impact investment vehicle of the WHI. As of June 30, 2020, the WHI Impact Pool had completed closings of capital commitments totaling $106.5 million, which included a commitment from us of $10.4 million.
On July 30, 2020, our Board of Trustees declared a quarterly dividend of $0.225 per common share.
Summary of Cash Flows
The following summary discussion of our cash flows is based on our statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows:
Six Months Ended June 30,
2020
2019
(In thousands)
Net cash provided by operating activities
$
85,519
$
52,783
Net cash provided by (used in) investing activities
33,346
(68,708)
Net cash provided by (used in) financing activities
469,652
(86,829)
Cash Flows for the Six Months Ended June 30, 2020
Cash and cash equivalents, and restricted cash increased $588.5 million to $731.0 million as of June 30, 2020, compared to $142.5 million as of December 31, 2019. This increase resulted from $469.7 million of net cash provided by financing activities, $85.5 million of net cash provided by operating activities and $33.3 million of net cash provided by investing activities. Our outstanding debt was $2.2 billion and $1.6 billion as of June 30, 2020 and December 31, 2019. The $590.7 million increase in outstanding debt was primarily from an additional $300.0 million drawn under our revolving credit facility, a $175.0 million mortgage payable collateralized by 4747 Bethesda Avenue and the remaining $100.0 million draw under our Tranche A-1 Term Loan.
Net cash provided by operating activities of $85.5 million primarily comprised: (i) $107.9 million of net income (before $159.5 million of non-cash items and a $59.5 million gain on sale of real estate) and (ii) $1.9 million of return on capital from unconsolidated real estate ventures, partially offset by (iii) $24.3 million of net change in operating assets and liabilities. Non-cash income adjustments of $159.5 million primarily include depreciation and amortization expense, share-based compensation expense, net loss from unconsolidated real estate ventures, deferred rent and losses on operating lease and other receivables.
Net cash provided by investing activities of $33.3 million primarily comprised: (i) $154.5 million of proceeds from the sale of real estate and (ii) $70.8 million of distributions of capital from unconsolidated real estate ventures, partially offset by (iii) $181.2 million of development costs, construction in progress and real estate additions and (iv) $10.7 million of investments in unconsolidated real estate ventures.
Net cash provided by financing activities of $469.7 million primarily comprised: (i) $500.0 million of proceeds from borrowings under our revolving credit facility, (ii) $195.2 million of proceeds from borrowings under mortgages payable
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and (iii) $100.0 million of proceeds from borrowings under unsecured term loans, partially offset by (iv) $200.0 million of repayments of our revolving credit facility, (v) $60.3 million of dividends paid to common shareholders, (vi) $41.2 million of common shares repurchased, (vii) $9.8 million of debt issuance costs and (viii) $7.6 million of distributions to redeemable noncontrolling interests.
Cash Flows for the Six Months Ended June 30, 2019
Cash and cash equivalents, and restricted cash decreased $102.8 million to $296.8 million as of June 30, 2019, compared to $399.5 million as of December 31, 2018. This decrease resulted from $86.8 million of net cash used in financing activities and $68.7 million of net cash used in investing activities, partially offset by $52.8 million of net cash provided by operating activities.
Net cash provided by operating activities of $52.8 million primarily comprised: (i) $101.1 million of net income (before $115.3 million of non-cash items and a $39.0 million gain on sale of real estate) and (ii) $1.5 million of return on capital from unconsolidated real estate ventures, partially offset by (iii) $49.9 million of net change in operating assets and liabilities. Non-cash income adjustments of $115.3 million primarily include depreciation and amortization expense, share-based compensation expense, deferred rent, amortization of lease incentives and net income from unconsolidated real estate ventures.
Net cash used in investing activities of $68.7 million primarily comprised: (i) $181.0 million of development costs, construction in progress and real estate additions, partially offset by (ii) $117.7 million of proceeds from sale of real estate.
Net cash used in financing activities of $86.8 million primarily comprised: (i) $480.7 million of repayments of mortgages payable, (ii) $69.5 million of dividends paid to common shareholders and (iii) $9.7 million of distributions to redeemable noncontrolling interests, partially offset by (iv) $473.5 million of net proceeds from the issuance of common stock.
Off-Balance Sheet Arrangements
Unconsolidated Real Estate Ventures
We consolidate entities in which we have a controlling interest or are the primary beneficiary in a variable interest entity. From time to time, we may have off-balance-sheet unconsolidated real estate ventures and other unconsolidated arrangements with varying structures.
As of June 30, 2020, we have investments in unconsolidated real estate ventures totaling $464.4 million. For the majority of these investments, we exercise significant influence over but do not control these entities and, therefore, account for these investments using the equity method of accounting. For a more complete description of our real estate ventures, see Note 4 to the financial statements.
From time to time, we (or ventures in which we have an ownership interest) have agreed, and may in the future agree with respect to unconsolidated real estate ventures, to (1) guarantee portions of the principal, interest and other amounts in connection with borrowings, (2) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) in connection with borrowings or (3) provide guarantees to lenders and other third parties for the completion of development projects. We customarily have agreements with our outside venture partners whereby the partners agree to reimburse the real estate venture or us for their share of any payments made under certain of these guarantees. At times, we also have agreements with certain of our outside venture partners whereby we agree to either indemnify the partners and/or the associated ventures with respect to certain contingent liabilities associated with operating assets or to reimburse our partner for its share of any payments made by them under certain guarantees. Guarantees (excluding environmental) customarily terminate either upon the satisfaction of specified circumstances or repayment of the underlying debt. Amounts that we may be required to pay in future periods in relation to guarantees associated with budget overruns or operating losses are not estimable.
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As of June 30, 2020, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures totaling $57.2 million. As of June 30, 2020, we had no principal payment guarantees related to our unconsolidated real estate ventures.
Reconsideration events could cause us to consolidate these unconsolidated real estate ventures in the future or deconsolidate a consolidated entity. We evaluate reconsideration events as we become aware of them. Reconsideration events include additional contributions being required by each partner and each partner's ability to make those contributions. Under certain circumstances, we may purchase our partner's interest. Our unconsolidated real estate ventures are held in entities which appear sufficiently stable to meet their capital requirements; however, if market conditions worsen and our partners are unable to meet their commitments, we may have to consolidate these entities.
Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $150.0 million per occurrence and in the aggregate, and property and rental value insurance coverage with limits of $1.5 billion per occurrence, with sub-limits for certain perils such as floods and earthquakes on each of our properties. We also maintain coverage, through our wholly owned captive insurance subsidiary, for a portion of the first loss on the above limits and for both terrorist acts and for nuclear, biological, chemical or radiological terrorism events with limits of $2.0 billion per occurrence. These policies are partially reinsured by third-party insurance providers.
We will continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. We cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for deductibles and losses in excess of the insurance coverage, which could be material.
Our debt, consisting of mortgages payable secured by our properties, a revolving credit facility and unsecured term loans, contains customary covenants requiring adequate insurance coverage. Although we believe that we currently have adequate insurance coverage, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. If lenders insist on greater coverage than we are able to obtain, it could adversely affect the ability to finance or refinance our properties.
Construction Commitments
As of June 30, 2020, we had construction in progress that will require an additional $52.6 million to complete ($35.3 million related to our consolidated entities and $17.3 million related to our unconsolidated real estate ventures at our share), based on our current plans and estimates, which we anticipate will be primarily expended over the next one to two years. These capital expenditures are generally due as the work is performed, and we expect to finance them with debt proceeds, proceeds from asset recapitalizations and sales, issuance and sale of equity securities and available cash.
Other
There are various legal actions against us in the ordinary course of business. In our opinion, the outcome of such matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
With respect to borrowings of our consolidated entities, we have agreed, and may in the future agree, to (1) guarantee portions of the principal, interest and other amounts, (2) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) or (3) provide guarantees to lenders, tenants and other third parties for the completion of development projects. As of June 30, 2020, the aggregate amount of principal payment guarantees was $8.3 million for our consolidated entities.
In connection with the Formation Transaction, we have an agreement with Vornado regarding tax matters (the "Tax Matters Agreement") that provides special rules that allocate tax liabilities if the distribution of JBG SMITH shares by Vornado, together with certain related transactions, is determined not to be tax-free. Under the Tax Matters Agreement, we may be
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required to indemnify Vornado against any taxes and related amounts and costs resulting from a violation by us of the Tax Matters Agreement.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on such real estate. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of remediation or removal of such substances may be substantial and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner's ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of our assets, we may be potentially liable for such costs. The operations of current and former tenants at our assets have involved, or may have involved, the use of hazardous materials or generated hazardous wastes. The release of such hazardous materials and wastes could result in us incurring liabilities to remediate any resulting contamination. The presence of contamination or the failure to remediate contamination at our properties may (1) expose us to third-party liability (e.g., for cleanup costs, natural resource damages, bodily injury or property damage), (2) subject our properties to liens in favor of the government for damages and costs the government incurs in connection with the contamination, (3) impose restrictions on the manner in which a property may be used or which businesses may be operated, or (4) materially adversely affect our ability to sell, lease or develop the real estate or to borrow using the real estate as collateral. In addition, our assets are exposed to the risk of contamination originating from other sources. While a property owner may not be responsible for remediating contamination that has migrated onsite from an identifiable and viable offsite source, the contaminant's presence can have adverse effects on operations and the redevelopment of our assets. To the extent we send contaminated materials to other locations for treatment or disposal, we may be liable for cleanup of those sites if they become contaminated.
Most of our assets have been subject, at some point, to environmental assessments that are intended to evaluate the environmental condition of the subject and surrounding assets. These environmental assessments generally have included a historical review, a public records review, a visual inspection of the site and surrounding assets, visual or historical evidence of underground storage tanks, and the preparation and issuance of a written report. Soil and/or groundwater subsurface testing is conducted at our assets, when necessary, to further investigate any issues raised by the initial assessment that could reasonably be expected to pose a material concern to the property or result in us incurring material environmental liabilities as a result of redevelopment. They may not, however, have included extensive sampling or subsurface investigations. In each case where the environmental assessments have identified conditions requiring remedial actions required by law, we have initiated appropriate actions. The environmental assessments did not reveal any material environmental contamination that we believe would have a material adverse effect on our overall business, financial condition or results of operations, or that have not been anticipated and remediated during site redevelopment as required by law. Nevertheless, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites or changes in cleanup requirements would not result in significant cost to us. As disclosed in Note 17 to the financial statements, environmental liabilities totaled $17.9 million as of both June 30, 2020 and December 31, 2019 and are included in "Other liabilities, net" in our balance sheets.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.