JBG SMITH Properties 10-Q

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 COVID-19 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, the direct and indirect economic effects of the pandemic and containment measures, and whether the residential market in the Washington, D.C. region and any of our properties will be materially impacted by the expiration of various moratoriums on residential evictions, 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 COVID-19. 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 National Landing where it serves as the exclusive developer for Amazon’s new headquarters. 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 September 30, 2020 and December 31, 2019, and for the three and nine months ended September 30, 2020 and 2019. References to our balance sheets refer to our condensed consolidated balance sheets as of September 30, 2020 and 29 Table of Contents December 31, 2019. References to our statements of operations refer to our condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019. References to our statements of cash flows refer to our condensed consolidated statements of cash flows for the nine months ended September 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. For instance, 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 September 30, 2020, our Operating Portfolio consisted of 64 operating assets comprising 43 commercial assets totaling 13.3 million square feet (11.2 million square feet at our share) and 21 multifamily assets totaling 7,800 units (5,999 units at our share). Additionally, we have (i) two under-construction assets comprising one wholly owned commercial asset totaling 274,000 square feet and one multifamily asset totaling 322 units (161 units at our share); (ii) 10 wholly owned near-term development assets totaling 5.6 million square feet of estimated potential development density; and (iii) 28 future development assets totaling 14.2 million square feet (11.5 million square feet at our share) of estimated potential development density. During the second quarter, we modified the definition of near-term development assets in our disclosures to include select projects that will be in a position to start construction over the next three years, subject to receipt of full entitlements and market conditions. 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, Inc. ("Amazon") announced it had selected sites that we own in National Landing as the location of an additional headquarters. 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 associated with Amazon's new headquarters at National Landing. Subject to 30 Table of Contents 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 adversely affected many tenants, especially tenants in the retail industry. While the current economic downturn continues to be significant, we expect the D.C. metropolitan area will prove to be more recession-resilient than other markets, as it has historically 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 continue to negatively impact our operations during the remainder of 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 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, as discussed below; ● an increase in apartment rental defaults as certain tenants become unable to pay their rent; ● a decline in parking revenue as employees of office tenants work from home and transient parking declines (for the three and nine months ended September 30, 2020, parking revenue declined by $3.2 million, or 41.6%, and $6.7 million, or 28.0%, compared to the same periods in 2019); ● depressed near-term leasing activity in our commercial and multifamily portfolios, including delays in the lease-up of our recently delivered multifamily assets, resulting in higher concessions and lower rents in our multifamily assets; ● likely distress among coworking tenants, which comprised approximately 2.9% of our total square feet on a consolidated basis and 3.2% at our share as of September 30, 2020 and the potential failure on their part to pay rent; ● 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 tenants' employees work from home; ● decreased income from the Crystal City Marriott hotel in National Landing due to its temporary closure and lower occupancy. The hotel closed in late-March 2020 and reopened in mid-June 2020. Net operating income ("NOI") from this asset decreased $0.9 million and $2.0 million for the three and nine months ended September 30, 2020 compared to the same periods in 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 September 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 99.3% (1) on a consolidated basis and 99.4% at our share (2019 annual historical average rate is 99.7%); ● rent collections for our multifamily tenants were 98.6% on a consolidated basis and 98.5% at our share (2019 annual historical average rate is 99.9%); and ● rent collections for our commercial retail tenants were 66.5% (1) on a consolidated basis and 63.1% at our share (2019 annual historical average rate is 98.4%). 31 Table of Contents (1) Excludes $681,000 of deferred and abated rents, consisting of $580,000 for commercial office tenants and $101,000 for retail tenants. Including these deferred and abated rents, our rent collections for the third quarter of 2020 on a consolidated basis would have been 98.6% for commercial office tenants and 65.5% for retail tenants. Our rent collections for October kept pace with our third quarter of 2020 rent collections. During the three and nine months ended September 30, 2020, we recorded $3.2 million and $7.9 million of credit losses against billed rent receivables and $935,000 and $4.5 million against deferred (straight-line) rent receivables. These losses are due to the effects of COVID-19 primarily on retail tenants, that are unable to pay rent while businesses are closed or not operating at full capacity. During the second quarter of 2020, we also recorded $2.4 million of reserves against receivables from a parking operator that filed for bankruptcy protection. Additionally, during the second quarter of 2020, 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. On October 1, 2020, we transferred our interest in this venture to our venture partner. Although we are experiencing supply chain and labor delays as a result of new job site procedures due to the effects of COVID-19, as of September 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. 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. Earlier this year, we temporarily paused our plans to commence construction on 1900 Crystal Drive, a planned 800-unit multifamily asset in National Landing; however, we expect to commence construction in 2021. We anticipate COVID-19 to significantly impact the real estate industry for years to come. Over the short term, uncertainty surrounding the pandemic has and will likely continue to 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, 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, especially if the pandemic were to worsen, 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. Given the impact of COVID-19 on the investment sales market, we believe it will be difficult to achieve the $200 million sale or recapitalization target we had set for 2020. Although the investment sales market was mostly inactive in the second quarter, during the third quarter we have 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. 32 Table of Contents 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 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 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 for the three and nine months ended September 30, 2020 included: ● net loss attributable to common shareholders of $22.8 million, or $0.18 per diluted common share, for the three months ended September 30, 2020 compared to net income of $9.4 million, or $0.06 per diluted common share, for the three months ended September 30, 2019. Net loss attributable to common shareholders of $16.6 million, or $0.14 per diluted common share, for the nine months ended September 30, 2020 compared to net income of $31.2 million, or $0.23 per diluted common share, for the nine months ended September 30, 2019. Net income attributable to common shareholders for the nine months ended September 30, 2020 and 2019 included gains on the sale of real estate of $59.5 million and $47.1 million; ● third-party real estate services revenue, including reimbursements, of $27.0 million and $83.9 million for the three and nine months ended September 30, 2020 compared to $34.6 million and $91.8 million for the three and nine months ended September 30, 2019; ● operating commercial portfolio leased and occupied percentages at our share of 88.4% and 85.3% as of September 30, 2020 compared to 90.4% and 88.1% as of June 30, 2020 and 90.2% and 86.8% as of September 30, 2019; ● operating multifamily portfolio leased and occupied percentages at our share of 83.0% and 76.6% as of September 30, 2020 compared to 85.8% and 82.3% as of June 30, 2020 and 96.5% and 94.9% as of September 30, 2019. These decreases are due in part to the movement of The Wren (formerly referred to as 965 Florida Avenue) into our recently delivered operating multifamily portfolio during the three months ended September 30, 2020, and the movement of The Wren, 901 W Street and 900 W Street into our recently delivered operating multifamily portfolio during the nine months ended September 30, 2020. The in-service operating multifamily portfolio was 92.8% leased and 88.1% occupied as of September 30, 2020, compared to 93.3% leased and 90.2% occupied as of June 30, 2020; ● the leasing of 117,000 square feet, or 98,000 square feet at our share, at an initial rent (1) of $49.51 per square foot and a GAAP-basis weighted average rent per square foot (2) of $49.33 for the three months ended September 30, 2020, and the leasing of 667,000 square feet, or 603,000 square feet at our share, at an initial rent (1) of $46.57 per square foot and a GAAP-basis weighted average rent per square foot (2) of $46.68 for the nine months ended September 30, 2020; and ● a decrease in same store (3) NOI of 4.4% to $72.0 million for the three months ended September 30, 2020 compared to $75.4 million for the three months ended September 30, 2019, and a decrease in same store (3) NOI of 1.7% to $220.1 million for the nine months ended September 30, 2020 compared to $223.9 million for the nine months ended September 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. 33 Table of Contents Additionally, investing and financing activity during the nine months ended September 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 Partners for $17.8 million. 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, which were repaid in July 2020; ● 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; ● the closing of four separate mortgage loans with an aggregate principal balance of $560.0 million, collateralized by 4747 Bethesda Avenue, The Bartlett, 1221 Van Street and 220 20 th Street; ● 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 Canadian Pension Plan Investment Board with a maximum principal balance of $160.0 million collateralized by 1900 N Street. The venture initially received proceeds of $134.5 million ($74.0 million at our share) from the mortgage loan, with an additional $25.5 million available in the future. We received a $70.8 million distribution from the venture; ● the payment of dividends totaling $90.3 million and distributions to our noncontrolling interests of $11.3 million; ● the repurchase and retirement of 2.9 million of our common shares for $79.6 million, an average purchase price of $27.82 per share; ● the investment of $245.5 million in development, construction in progress and real estate additions; and ● the investment of $25.3 million to acquire between 30 and 40 megahertz of 5G wireless spectrum licenses across National Landing. Activity subsequent to September 30, 2020 included: ● the transfer of our interest in the venture that owns The Marriott Wardman Park hotel to our venture partner; and ● the declaration of a quarterly dividend of $0.225 per common share, payable on November 30, 2020 to shareholders of record as of November 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. 34 Table of Contents Comparison of the Three Months Ended September 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 September 30, 2020 compared to the same period in 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ 2020 2019 % Change ​ ​ (Dollars in thousands) Property rental revenue ​ $ 118,680 ​ $ 123,963 (4.3) % Third-party real estate services revenue, including reimbursements ​ 26,987 ​ 34,587 (22.0) % Depreciation and amortization expense ​ 56,481 ​ 46,862 20.5 % Property operating expense ​ 37,572 ​ 35,800 4.9 % Real estate taxes expense ​ 17,354 ​ 16,740 3.7 % General and administrative expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate and other ​ 11,086 ​ 11,015 0.6 % Third-party real estate services ​ 28,207 ​ 29,809 (5.4) % Share-based compensation related to Formation Transaction and special equity awards ​ 7,133 ​ 9,549 (25.3) % Transaction and other costs ​ 845 ​ 2,059 (59.0) % Loss from unconsolidated real estate ventures, net ​ 965 ​ 1,144 (15.6) % Interest expense ​ 16,885 ​ 10,583 59.5 % Gain on sale of real estate ​ — ​ 8,088 (100.0) % ​ Property rental revenue decreased by approximately $5.3 million, or 4.3%, to $118.7 million in 2020 from $124.0 million in 2019. The decrease was primarily due to a $9.4 million decrease related to the Disposed Properties, a $2.6 million decrease in our same-store multifamily assets due to lower occupancy and lower rents attributable to COVID-19 and a $3.1 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 COVID-19. The decrease in property rental revenue was partially offset by a $4.8 million increase related to 4747 Bethesda Avenue and West Half, both of which were placed into service during the second half of 2019, a $2.9 million increase related to properties with spaces leased to Amazon (1800 South Bell Street and 241 18 th Street South) and a $2.4 million increase related to F1RST Residences, which was acquired in December 2019. Third-party real estate services revenue, including reimbursements, decreased by approximately $7.6 million, or 22.0%, to $27.0 million in 2020 from $34.6 million in 2019. The decrease was primarily due to a $4.2 million decrease in development fee income primarily related to fees from Amazon recognized during 2019, a $1.4 million decrease in reimbursements revenue, a $1.3 million decrease in asset management fees and a $1.1 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 $947,000 decrease in leasing fees. The decrease in third-party real estate services revenue was partially offset by a $1.0 million increase in other service revenue. Depreciation and amortization expense increased by approximately $9.6 million, or 20.5%, to $56.5 million in 2020 from $46.9 million in 2019. The increase was primarily due to a $3.8 million increase related to 4747 Bethesda Avenue and West Half, a $3.6 million increase related to 2001 Richmond Highway due to the shortening of the building’s useful life as a result of its anticipated redevelopment, a $1.8 million increase related to properties with spaces leased to Amazon, a $1.7 million increase related to The Wren and 901 W Street, which were placed into service in 2020, and a $1.3 million increase related to F1RST Residences. The increase in depreciation and amortization expense was partially offset by a $3.3 million decrease related to the Disposed Properties. Property operating expense increased by approximately $1.8 million, or 4.9%, to $37.6 million in 2020 from $35.8 million in 2019. The increase was primarily due to a $1.7 million increase related to 4747 Bethesda Avenue, West Half, The Wren and 901 W Street which were recently placed into service, an $893,000 increase related to F1RST Residences and an $866,000 increase related to 1901 South Bell Street due to costs incurred for construction services. The increase in property operating expense was partially offset by a $1.6 million decrease related to the Disposed Properties. 35 Table of Contents Real estate tax expense increased by approximately $614,000, or 3.7%, to $17.4 million in 2020 from $16.7 million in 2019. The increase was primarily due to a $904,000 increase at 4747 Bethesda Avenue, West Half and 901 W Street due to a reduction in capitalized real estate taxes as those assets were placed into service, a $337,000 increase related to F1RST Residences and an increase in real estate tax assessments for various properties across the portfolio. The increase in real estate tax expense was partially offset by a $1.5 million decline related to the Disposed Properties. General and administrative expense: corporate and other increased by approximately $71,000, or 0.6%, to $11.1 million in 2020 from $11.0 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 professional fees, rent expense, and travel and entertainment expense. General and administrative expense: third-party real estate services decreased by approximately $1.6 million, or 5.4%, to $28.2 million in 2020 from $29.8 million in 2019. The decrease was primarily due to a decrease in reimbursable expenses and rent expense, partially offset by an increase in share-based compensation expense from the issuance of the 2020 equity awards. General and administrative expense: share-based compensation related to Formation Transaction and special equity awards decreased by approximately $2.4 million, or 25.3%, to $7.1 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 lower expense as portions of the awards begin to vest. Transaction and other costs of $845,000 in 2020 consist of $406,000 of integration and severance costs, $260,000 of completed, potential and pursued transactions and $179,000 of demolition costs related to 223 23 rd Street and 2300 Crystal Drive. Transaction and other costs of $2.1 million in 2019 consist primarily of $1.0 million of integration and severance costs, $535,000 of completed, potential and pursued transactions, and $503,000 of demolition costs related to 1900 Crystal Drive. Loss from unconsolidated real estate ventures decreased by approximately $179,000, or 15.6%, to $965,000 for 2020 from $1.1 million in 2019. The decrease was primarily due to $1.3 million of additional income attributable to the recapitalization of Central Place Tower in 2019. The decrease was partially offset by an $885,000 decrease in income related to The Marriott Wardman Park hotel. Interest expense increased by approximately $6.3 million, or 59.5%, to $16.9 million in 2020 from $10.6 million in 2019. The increase was primarily due to higher average outstanding balances under our revolving credit facility and our unsecured term loans, and new mortgage loans collateralized by 4747 Bethesda Avenue, The Bartlett, 1221 Van Street and 220 20 th Street. The increase was also due to a $5.3 million decrease in capitalized interest primarily due to a reduction in the capitalization of interest for 4747 Bethesda Avenue, West Half, 901 W Street and The Wren as those assets were placed into service. The increase in interest expense was partially offset by a $2.8 million decrease related to the Disposed Properties, lower interest rates and the repayment of several mortgages payable during 2019. Gain on the sale of real estate of $8.1 million in 2019 is related to the sale of 1600 K Street. ​ 36 Table of Contents Comparison of the Nine Months Ended September 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 nine months ended September 30, 2020 compared to the same period in 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ 2020 2019 % Change ​ (Dollars in thousands) Property rental revenue ​ $ 354,519 ​ $ 365,702 (3.1) % Third-party real estate services revenue, including reimbursements ​ 83,870 ​ 91,765 (8.6) % Depreciation and amortization expense ​ 157,586 ​ 141,576 11.3 % Property operating expense ​ 105,867 ​ 100,087 5.8 % Real estate taxes expense ​ 53,422 ​ 52,241 2.3 % General and administrative expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate and other ​ 37,478 ​ 34,888 7.4 % Third-party real estate services ​ 86,260 ​ 86,585 (0.4) % Share-based compensation related to Formation Transaction and special equity awards ​ 25,432 ​ 30,203 (15.8) % Transaction and other costs ​ 7,526 ​ 9,928 (24.2) % Income (loss) from unconsolidated real estate ventures, net ​ (17,142) ​ 647 * ​ Interest expense ​ 44,660 ​ 40,864 9.3 % Gain on sale of real estate ​ 59,477 ​ 47,121 26.2 % * Not meaningful. Property rental revenue decreased by approximately $11.2 million, or 3.1%, to $354.5 million in 2020 from $365.7 million in 2019. The decrease was primarily due to a $28.1 million decrease related to the Disposed Properties, a $3.6 million decrease in our same-store multifamily assets due to lower occupancy and lower rents attributable to COVID-19 and an $11.7 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 COVID-19. The decrease in property rental revenue was partially offset by an $11.9 million increase related to 4747 Bethesda Avenue and West Half, both of which were placed into service during the second half of 2019, a $7.8 million increase related to properties with spaces leased to Amazon (1800 South Bell Street and 241 18th Street South), a $7.7 million increase related to F1RST Residences, which was acquired in December 2019, a $2.8 million increase related to 2200 Crystal Drive due to increased occupancy and a $2.5 million increase at 1901 South Bell Street due to higher tenant reimbursements for construction services. ​ Third-party real estate services revenue, including reimbursements, decreased by approximately $7.9 million, or 8.6%, to $83.9 million in 2020 from $91.8 million in 2019. The decrease was primarily due to a $3.2 million decrease in asset management fees and a $1.4 million decrease in property management fees due to the sale of assets within the JBG Legacy Funds, a $2.4 million decrease in development fee income primarily related to fees from Amazon recognized during 2019, a $1.7 million decrease in leasing fees due to the impact of COVID-19 and a $1.5 million decrease in reimbursements revenue. The decrease in third-party real estate services revenue was partially offset by a $1.8 million increase in other service revenue. Depreciation and amortization expense increased by approximately $16.0 million, or 11.3%, to $157.6 million in 2020 from $141.6 million in 2019. The increase was primarily due to a $10.8 million increase related to 4747 Bethesda Avenue and West Half which were recently placed into service, a $4.9 million increase related to properties with spaces leased to Amazon, a $4.0 million increase related to F1RST Residences, a $3.7 million increase related to 2001 Richmond Highway due to the shortening of the building’s useful life as a result of its anticipated redevelopment and a $3.7 million increase related to The Wren and 901 W Street, which were placed into service in the first half of 2020. The increase in depreciation and amortization expense was partially offset by a $10.6 million decrease related to the Disposed Properties. 37 Table of Contents Property operating expense increased by approximately $5.8 million, or 5.8%, to $105.9 million in 2020 from $100.1 million in 2019. The increase was primarily due to a $5.2 million increase related to 4747 Bethesda Avenue, West Half, The Wren and 901 W Street which were recently placed into service, a $3.3 million increase related to 1901 South Bell Street due to costs incurred for construction services, a $2.4 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 $7.5 million decrease related to the Disposed Properties. Real estate tax expense increased by approximately $1.2 million, or 2.3%, to $53.4 million in 2020 from $52.2 million in 2019. The increase was primarily due to a $2.5 million increase at 4747 Bethesda Avenue, West Half and 901 W Street due to a reduction in capitalized real estate taxes as those assets were placed into service, a $1.0 million increase related to F1RST Residences and an increase in real estate tax assessments for various properties throughout the portfolio. The increase in real estate tax expense was partially offset by a $4.1 million decline related to the Disposed Properties. General and administrative expense: corporate and other increased by approximately $2.6 million, or 7.4%, to $37.5 million in 2020 from $34.9 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, rent expense, and travel and entertainment expense. General and administrative expense: third-party real estate services decreased by approximately $325,000, or 0.4%, to $86.3 million in 2020 compared to $86.6 million in 2019. The decrease was primarily due to a decrease in reimbursable expenses and rent expense, partially offset by an increase in share-based compensation expense from the issuance of the 2020 equity awards. General and administrative expense: share-based compensation related to Formation Transaction and special equity awards decreased by approximately $4.8 million, or 15.8%, to $25.4 million in 2020 from $30.2 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 lower expense as portions of the awards begin to vest. Transaction and other costs of $7.5 million in 2020 primarily 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 $3.1 million of integration and severance costs. Transaction and other costs of $9.9 million in 2019 includes $4.7 million of demolition costs related to 1900 Crystal Drive, $4.3 million of integration and severance costs and $1.0 million of expenses related to completed, potential and pursued transactions. Income (loss) from unconsolidated real estate ventures decreased by approximately $17.8 million to a net loss of $17.1 million for 2020 from net income of $647,000 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 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 our 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 increased by approximately $3.8 million, or 9.3%, to $44.7 million in 2020 from $40.9 million in 2019. The increase was primarily due to higher average outstanding balances under our revolving credit facility and our unsecured term loans, and new mortgage loans collateralized by 4747 Bethesda Avenue, The Bartlett, 1221 Van Street and 220 20 th Street. The increase was also due to an $11.7 million decrease in capitalized interest primarily due to a reduction in the capitalization of interest for 4747 Bethesda Avenue, West Half, 901 W Street and The Wren as those assets were placed into service. The increase in interest expense was partially offset by an $8.5 million decrease related to the Disposed Properties, lower interest rates and the repayment of several mortgages payable during 2019. 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 $47.1 million in 2019 was due to the sale of Commerce Executive/Commerce Metro Land and 1600 K Street. 38 Table of Contents 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. 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 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 September 30, ​ Nine Months Ended September 30, ​ 2020 2019 2020 2019 ​ ​ (In thousands, except per share amounts) Net income (loss) attributable to common shareholders ​ $ (22,793) ​ $ 9,360 ​ $ (16,648) ​ $ 31,181 Net income (loss) attributable to redeemable noncontrolling interests ​ (2,212) ​ 1,172 ​ (445) ​ 4,271 Net income (loss) ​ (25,005) ​ 10,532 ​ (17,093) ​ 35,452 Gain on sale of real estate ​ — ​ (8,088) ​ (59,477) ​ (47,121) Loss (gain) on sale from unconsolidated real estate ventures ​ — ​ — ​ 2,952 ​ (335) Real estate depreciation and amortization ​ 54,004 ​ 44,164 ​ 149,590 ​ 133,507 Impairment of investment in unconsolidated real estate venture (1) ​ ​ — ​ — ​ 6,522 ​ — Pro rata share of real estate depreciation and amortization from unconsolidated real estate ventures ​ 7,350 ​ 4,713 ​ 21,730 ​ 14,170 FFO attributable to noncontrolling interests in consolidated real estate ventures ​ (4) ​ — ​ (7) ​ (5) FFO attributable to common limited partnership units ("OP Units") ​ 36,345 ​ 51,321 ​ 104,217 ​ 135,668 FFO attributable to redeemable noncontrolling interests ​ (3,945) ​ (5,705) ​ (11,353) ​ (15,502) FFO attributable to common shareholders ​ $ 32,400 ​ $ 45,616 ​ $ 92,864 ​ $ 120,166 (1) During the second quarter of 2020, 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, which reduced the net book value of our investment to zero, and we suspended equity loss recognition for the venture after June 30, 2020. On October 1, 2020, we transferred our interest in this venture to our venture partner . ​ ​ ​ 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 39 Table of Contents 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 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 under-construction property 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 September 30, 2020, there were no changes to our same store pool from the prior quarter. During the nine months ended September 30, 2020, our same store pool changed from the prior year period due to the inclusion of our 50% interest in Central Place Tower and 1700 M Street, and the exclusion of Woodglen, which was sold by our unconsolidated real estate venture in June 2020. Same store NOI decreased by $3.4 million, or 4.4%, and $3.8 million, or 1.7%, for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019. The decrease in same store NOI for the three and nine months ended September 30, 2020 was substantially all attributable to COVID-19, including (i) lower occupancy, higher concessions, lower rents, higher operating costs, and an increase in uncollectable operating lease receivables at our multifamily properties, (ii) rent deferrals and a decline in parking revenue at our commercial properties, and (iii) lower occupancy at the Crystal City Marriott. These declines were partially offset by the burn-off of rent abatement across our commercial portfolio, which led to same store NOI growth for the same store pool of commercial assets. 40 Table of Contents The following is the reconciliation of net income (loss) attributable to common shareholders to NOI and same store NOI: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ 2020 2019 2020 2019 ​ ​ (Dollars in thousands) Net income (loss) attributable to common shareholders ​ $ (22,793) ​ $ 9,360 ​ $ (16,648) ​ $ 31,181 Add: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Depreciation and amortization expense ​ 56,481 ​ 46,862 ​ 157,586 ​ 141,576 General and administrative expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate and other ​ 11,086 ​ 11,015 ​ 37,478 ​ 34,888 Third-party real estate services ​ 28,207 ​ 29,809 ​ 86,260 ​ 86,585 Share-based compensation related to Formation Transaction and special equity awards ​ 7,133 ​ 9,549 ​ 25,432 ​ 30,203 Transaction and other costs ​ 845 ​ 2,059 ​ 7,526 ​ 9,928 Interest expense ​ 16,885 ​ 10,583 ​ 44,660 ​ 40,864 Loss on extinguishment of debt ​ — ​ — ​ 33 ​ 1,889 Income tax expense (benefit) ​ (488) ​ 432 ​ (3,721) ​ (689) Net income (loss) attributable to redeemable noncontrolling interests ​ (2,212) ​ 1,172 ​ (445) ​ 4,271 Less: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Third-party real estate services, including reimbursements revenue ​ 26,987 ​ 34,587 ​ 83,870 ​ 91,765 Other revenue (1) ​ 2,292 ​ 2,196 ​ 5,438 ​ 5,951 Income (loss) from unconsolidated real estate ventures, net ​ (965) ​ (1,144) ​ (17,142) ​ 647 Interest and other income (loss), net ​ — ​ (640) ​ 1,021 ​ 2,363 Gain on sale of real estate ​ — ​ 8,088 ​ 59,477 ​ 47,121 Consolidated NOI ​ 66,830 ​ 77,754 ​ 205,497 ​ 232,849 NOI attributable to unconsolidated real estate ventures at our share ​ 7,130 ​ 5,500 ​ 23,206 ​ 15,745 Non-cash rent adjustments (2) ​ (4,934) ​ (10,348) ​ (9,898) ​ (25,894) Other adjustments (3) ​ 2,881 ​ 3,181 ​ 9,236 ​ 10,120 Total adjustments ​ 5,077 ​ (1,667) ​ 22,544 ​ (29) NOI ​ 71,907 ​ 76,087 ​ 228,041 ​ 232,820 Less: out-of-service NOI loss (4) ​ (442) ​ (1,342) ​ (2,774) ​ (3,603) Operating Portfolio NOI ​ 72,349 ​ 77,429 ​ 230,815 ​ 236,423 Non-same store NOI (5) ​ 303 ​ 2,031 ​ 10,689 ​ 12,518 Same store NOI (6) ​ $ 72,046 ​ $ 75,398 ​ $ 220,126 ​ $ 223,905 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change in same store NOI ​ (4.4%) ​ ​ ​ ​ (1.7%) ​ ​ ​ Number of properties in same store pool ​ 55 ​ ​ ​ ​ 53 ​ ​ ​ (1) Excludes parking revenue of $3.1 million and $10.3 million for the three and nine months ended September 30, 2020, and $6.3 million and $19.5 million for the three and nine months ended September 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 near-term and future development pipelines. (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. 41 Table of Contents 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 September 30, ​ Nine Months Ended September 30, ​ 2020 2019 ​ 2020 2019 ​ ​ (In thousands) Property management fees ​ $ 4,694 ​ $ 5,758 ​ $ 15,453 ​ $ 16,873 Asset management fees ​ 2,301 ​ 3,577 ​ 7,400 ​ 10,612 Development fees ​ 2,614 ​ 6,783 ​ 8,474 ​ 10,912 Leasing fees ​ 1,086 ​ 2,033 ​ 3,627 ​ 5,331 Construction management fees ​ 584 ​ 370 ​ 2,057 ​ 1,469 Other service revenue ​ 2,000 ​ 1,005 ​ 5,452 ​ 3,626 Third-party real estate services revenue, excluding reimbursements ​ 13,279 ​ 19,526 ​ 42,463 ​ 48,823 Reimbursements revenue (1) ​ 13,708 ​ 15,061 ​ 41,407 ​ 42,942 Third-party real estate services revenue, including reimbursements ​ ​ 26,987 ​ ​ 34,587 ​ ​ 83,870 ​ ​ 91,765 Third-party real estate services expenses ​ ​ 28,207 ​ ​ 29,809 ​ ​ 86,260 ​ ​ 86,585 Third-party real estate services revenue less expenses ​ $ (1,220) ​ $ 4,778 ​ $ (2,390) ​ $ 5,180 (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 $7.6 million, or 22.0%, to $27.0 million for the three months ended September 30, 2020 from $34.6 million for the same period in 2019. The decrease was primarily due to a $4.2 million decrease in development fee income primarily related to fees from Amazon recognized during 2019, a $1.4 million decrease in reimbursements revenue, a $1.3 million decrease in asset management fees and a $1.1 million decrease in property management fees primarily due to the sale of assets within the JBG Legacy Funds and a $947,000 decrease in leasing fees. The decrease in third-party real estate services revenue was partially offset by a $1.0 million increase in other service revenue. Third-party real estate services expenses decreased by approximately $1.6 million, or 5.4%, to $28.2 million for the three months ended September 30, 2020 from $29.8 million for the same period in 2019. The decrease was primarily due to a decrease in reimbursable expenses and rent expense, partially offset by an increase in share-based compensation expense from the issuance of the 2020 equity awards. Third-party real estate services revenue, including reimbursements, decreased by approximately $7.9 million, or 8.6%, to $83.9 million for the nine months ended September 30, 2020 from $91.8 million for the same period in 2019. The decrease was primarily due to a $3.2 million decrease in asset management fees and a $1.4 million decrease in property management fees due to the sale of assets within the JBG Legacy Funds, a $2.4 million decrease in development fee income primarily related to fees from Amazon recognized during 2019, a $1.7 million decrease in leasing fees due to the impact of COVID- 42 Table of Contents 19 and a $1.5 million decrease in reimbursements revenue. The decrease in third-party real estate services revenue was partially offset by a $1.8 million increase in other service revenue. General and administrative expense: third-party real estate services decreased by approximately $325,000, or 0.4%, to $86.3 million for the nine months ended September 30, 2020 compared to $86.6 million for the same period in 2019. The decrease was primarily due to a decrease in reimbursable expenses and rent expense, partially offset by an increase in share-based compensation expense from the issuance of the 2020 equity awards. 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 nine months ended September 30, 2020 and 2019. The following is a summary of NOI by segment: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ 2020 2019 ​ 2020 2019 ​ ​ (In thousands) Property revenue: ​ ​ ​ ​ ​ Commercial ​ $ 93,052 ​ $ 100,915 ​ $ 276,841 ​ $ 304,763 Multifamily ​ 30,526 ​ 29,040 ​ 95,122 ​ 86,332 Other (1) ​ (1,822) ​ 339 ​ (7,177) ​ (5,918) Total property revenue ​ 121,756 ​ 130,294 ​ 364,786 ​ 385,177 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Property expense: ​ ​ ​ ​ Commercial ​ 38,837 ​ 39,204 ​ 115,177 ​ 121,346 Multifamily ​ 17,882 ​ 13,042 ​ 48,326 ​ 36,905 Other (1) ​ (1,793) ​ 294 ​ (4,214) ​ (5,923) Total property expense ​ 54,926 ​ 52,540 ​ 159,289 ​ 152,328 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated NOI: ​ ​ ​ ​ Commercial ​ 54,215 ​ 61,711 ​ 161,664 ​ 183,417 Multifamily ​ 12,644 ​ 15,998 ​ 46,796 ​ 49,427 Other (1) ​ (29) ​ 45 ​ (2,963) ​ 5 Consolidated NOI ​ $ 66,830 ​ $ 77,754 ​ $ 205,497 ​ $ 232,849 (1) Includes activity related to future development assets and corporate entities and the elimination of intersegment activity. Comparison of the Three Months Ended September 30, 2020 to 2019 Commercial: Property rental revenue decreased by $7.9 million, or 7.8%, to $93.1 million in 2020 from $100.9 million in 2019. Consolidated NOI decreased by $7.5 million, or 12.1%, to $54.2 million in 2020 from $61.7 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 COVID-19. 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 from properties with spaces leased to Amazon beginning in 2019 (1800 South Bell Street and 241 18th Street South). Multifamily: Property rental revenue increased by $1.5 million, or 5.1%, to $30.5 million in 2020 from $29.0 million in 2019. Consolidated NOI decreased by $3.4 million, or 21.0%, to $12.6 million in 2020 from $16.0 million in 2019. The increase in property revenue was primarily due to the acquisition of F1RST Residences, placing West Half into service in 43 Table of Contents the second half of 2019, and placing The Wren and 901 W Street into service in 2020, partially offset by a decrease in our same store multifamily assets due to lower occupancy, higher concessions and lower rents. The decrease in consolidated NOI was primarily due to lower revenue in our same store multifamily assets attributable to COVID-19, increased payroll and cleaning costs attributable to COVID-19 and to a reduction in capitalized expenses at The Wren and 901 W Street, which were placed into service in 2020. Comparison of the Nine Months Ended September 30, 2020 to 2019 Commercial: Property rental revenue decreased by $27.9 million, or 9.2%, to $276.8 million in 2020 from $304.8 million in 2019. Consolidated NOI decreased by $21.8 million, or 11.9%, to $161.7 million in 2020 from $183.4 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 COVID-19, and a $2.4 million decrease due to bad debt reserves recorded in connection with the filing for bankruptcy by a parking operator. 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 Street and 241 18 th Street South). Multifamily: Property rental revenue increased by $8.8 million, or 10.2%, to $95.1 million in 2020 from $86.3 million in 2019. Consolidated NOI decreased by $2.6 million, or 5.3%, to $46.8 million in 2020 from $49.4 million in 2019. The increase in property revenue was primarily due to the acquisition of F1RST Residences, the placing of West Half into service in the second half of 2019, and placing The Wren and 901 W Street into service in 2020, partially offset by a decrease in our same store multifamily assets due to lower occupancy, higher concessions and lower rents. The decrease in consolidated NOI was primarily due to lower revenue in our same store multifamily assets attributable to COVID-19, increased payroll and cleaning costs attributable to COVID-19 and a reduction in capitalized expenses at The Wren and 901 W Street, which were placed into service in 2020. 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) September 30, 2020 December 31, 2019 ​ ​ ​ ​ ​ (In thousands) ​ Variable rate (2) 2.18% ​ $ 679,446 ​ $ 2,200 ​ Fixed rate (3) 4.37% ​ 1,021,825 ​ 1,125,648 ​ Mortgages payable ​ ​ 1,701,271 ​ 1,127,848 ​ Unamortized deferred financing costs and premium/discount, net ​ ​ (10,548) ​ (2,071) ​ Mortgages payable, net ​ ​ ​ $ 1,690,723 ​ $ 1,125,777 ​ 44 Table of Contents (1) Weighted average effective interest rate as of September 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 September 30, 2020 and December 31, 2019, the net carrying value of real estate collateralizing our mortgages payable totaled $2.0 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 mortgages payable are recourse to us. See Note 17 to the financial statements for additional information. During the nine months ended September 30, 2020, we entered into four separate mortgage loans with an aggregate principal balance of $560.0 million, collateralized by 4747 Bethesda Avenue, The Bartlett, 1221 Van Street and 220 20 th Street, and refinanced the mortgage loan collateralized by RTC-West, increasing the principal balance by $20.2 million. As of September 30, 2020 and December 31, 2019, we had various interest rate swap and cap agreements on certain mortgages payable with an aggregate notional value of $1.3 billion and $867.6 million. See Note 15 to the financial statements for additional information. Credit Facility As of September 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) September 30, 2020 December 31, 2019 ​ ​ ​ ​ ​ (In thousands) ​ Revolving credit facility (2) (3) (4) 1.20% ​ $ — ​ $ 200,000 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tranche A-1 Term Loan (5) 2.59% ​ $ 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 ​ ​ (2,192) ​ (2,705) ​ Unsecured term loans, net ​ ​ ​ $ 397,808 ​ $ 297,295 ​ (1) Effective interest rate as of September 30, 2020. (2) As of both September 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 September 30, 2020 and December 31, 2019, net deferred financing costs related to our revolving credit facility totaling $7.1 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. (5) As of September 30, 2020 and December 31, 2019, $200.0 million and $100.0 million of the outstanding balance was fixed by interest rate swap agreements. The interest rate swaps mature concurrently with the term loan and provide a weighted average interest rate of 1.39%. (6) As of September 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 September 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 the Alternative Reference Rates Committee ( the "ARRC"), a group of major market participants convened by the U.S. Federal Reserve with participation by SEC Staff and other regulators. ARRC has 45 Table of Contents 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. 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 three and nine months ended September 30, 2020, we repurchased and retired 1.4 million and 2.9 million common shares for $38.4 million and $79.6 million, an average purchase price of $26.64 and $27.82 per share. Purchases, made pursuant to the program, are 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; and ● proceeds from financings, recapitalizations and asset sales. While we do not expect to need to do so over the next 12 months, we also have the ability to issue equity securities to raise funds if necessary. While we have not experienced a significant impact to date in this regard, we expect COVID-19 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. During the three months ended September 30, 2020, we repaid $500.0 million of draws under our revolving credit facility, 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 September 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 $100.0 million draw on our Tranche A-1 Term Loan in April 2020. As of September 30, 2020, mortgages payable 46 Table of Contents totaling $97.1 million on a consolidated basis and $211.8 million at our share are scheduled to mature before the end of 2021. Contractual Obligations and Commitments During the nine months ended September 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 $473.4 million increase in outstanding debt primarily from four separate mortgage loans with an aggregate principal balance of $560.0 million and the remaining $100.0 million draw under our Tranche A-1 Term Loan, partially offset by the repayment of the revolving credit facility. As of September 30, 2020, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures totaling $56.9 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 September 30, 2020, the WHI Impact Pool had completed closings of capital commitments totaling $112.0 million, which included a commitment from us of $10.9 million. On October 29, 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ 2020 2019 ​ ​ (In thousands) Net cash provided by operating activities ​ $ 127,855 ​ $ 112,639 Net cash used in investing activities ​ (57,696) ​ (145,438) Net cash provided by (used in) financing activities ​ 280,038 ​ (123,013) ​ Cash Flows for the Nine Months Ended September 30, 2020 Cash and cash equivalents, and restricted cash increased $350.2 million to $492.7 million as of September 30, 2020, compared to $142.5 million as of December 31, 2019. This increase resulted from $280.0 million of net cash provided by financing activities, $127.9 million of net cash provided by operating activities, partially offset by $57.7 million of net cash used in investing activities. Our outstanding debt was $2.1 billion and $1.6 billion as of September 30, 2020 and December 31, 2019. The $473.4 million increase in outstanding debt was primarily from four separate mortgage loans with an aggregate principal balance of $560.0 million, collateralized by 4747 Bethesda Avenue, The Bartlett, 1221 Van Street and 220 20 th Street, and the remaining $100.0 million draw under our Tranche A-1 Term Loan, partially offset by the repayment of the revolving credit facility. Net cash provided by operating activities of $127.9 million primarily comprised: (i) $154.9 million of net income (before $231.4 million of non-cash items and a $59.5 million gain on sale of real estate) and (ii) $3.7 million of return on capital from unconsolidated real estate ventures, partially offset by (iii) $30.7 million of net change in operating assets and liabilities. Non-cash income adjustments of $231.4 million primarily include depreciation and amortization expense, share-based compensation expense, deferred rent, net loss from unconsolidated real estate ventures and losses on operating lease and other receivables. Net cash used in investing activities of $57.7 million primarily comprised: (i) $245.5 million of development costs, construction in progress and real estate additions, (ii) $25.3 million of deposits for the purchase of wireless spectrum licenses and (iii) $12.3 million of investments in unconsolidated real estate ventures, partially offset by (iv) $154.5 million 47 Table of Contents of proceeds from the sale of real estate and (v) $70.8 million of distributions of capital from unconsolidated real estate ventures. Net cash provided by financing activities of $280.0 million primarily comprised: (i) $580.1 million of proceeds from borrowings under mortgages payable, (ii) $500.0 million of proceeds from borrowings under our revolving credit facility and (iii) $100.0 million of proceeds from borrowings under unsecured term loans, partially offset by (iv) $700.0 million of repayments of our revolving credit facility, (v) $90.3 million of dividends paid to common shareholders, (vi) $74.4 million of common shares repurchased, (vii) $14.9 million of debt issuance costs and (viii) $11.3 million of distributions to redeemable noncontrolling interests. Cash Flows for the Nine Months Ended September 30, 2019 Cash and cash equivalents, and restricted cash decreased $155.8 million to $243.7 million as of September 30, 2019, compared to $399.5 million as of December 31, 2018. This decrease resulted from $145.4 million of net cash used in investing activities and $123.0 million of net cash used in financing activities, partially offset by $112.6 million of net cash provided by operating activities. Net cash provided by operating activities of $112.6 million primarily comprised: (i) $157.9 million of net income (before $169.6 million of non-cash items and a $47.1 million gain on sale of real estate) and (ii) $1.8 million of return on capital from unconsolidated real estate ventures, partially offset by (iii) $47.1 million of net change in operating assets and liabilities. Non-cash income adjustments of $169.6 million primarily include depreciation and amortization expense, share-based compensation expense, deferred rent and amortization of lease incentives. Net cash used in investing activities of $145.4 million primarily comprised: (i) $294.4 million of development costs, construction in progress and real estate additions, partially offset by (ii) $157.8 million of proceeds from sale of real estate. Net cash used in financing activities of $123.0 million primarily comprised: (i) $482.8 million of repayments of mortgages payable, (ii) $99.7 million of dividends paid to common shareholders and (iii) $13.6 million of distributions to redeemable noncontrolling interests, partially offset by (iv) $472.8 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 September 30, 2020, we have investments in unconsolidated real estate ventures totaling $463.0 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 (i) guarantee portions of the principal, interest and other amounts in connection with borrowings, (ii) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) in connection with borrowings or (iii) 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 48 Table of Contents 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. As of September 30, 2020, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures totaling $56.9 million. As of September 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 amendments to real estate venture agreements and changes in our partner's ability to make contributions to the venture. Under certain circumstances, we may purchase our partner's interest. 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 September 30, 2020, we had construction in progress that will require an additional $34.0 million to complete ($20.2 million related to our consolidated entities and $13.8 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 (i) guarantee portions of the principal, interest and other amounts, (ii) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) or (iii) provide guarantees to lenders, tenants and other third parties for the completion of development projects. As of September 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, 49 Table of Contents together with certain related transactions, is determined not to be tax-free. Under the Tax Matters Agreement, we may be 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 (i) expose us to third-party liability (e.g., for cleanup costs, natural resource damages, bodily injury or property damage), (ii) subject our properties to liens in favor of the government for damages and costs the government incurs in connection with the contamination, (iii) impose restrictions on the manner in which a property may be used or which businesses may be operated, or (iv) 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 September 30, 2020 and December 31, 2019 and are included in "Other liabilities, net" in our balance sheets. ​ 50 Table of Contents