Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as "approximates," "believes," "expects," "anticipates," "estimates," "intends," "plans," "would," "may" or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 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, 2020.
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 ("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 significance, extent and duration of the impact of COVID-19 on us and our tenants remains largely uncertain and dependent on near-term and future developments that cannot be accurately predicted at this time, such as the continued severity, duration, transmission rate and geographic spread of COVID-19, the distribution, effectiveness and willingness of people to take COVID-19 vaccines, the extent and effectiveness of the containment measures taken, and the response of the overall economy, the financial markets and the population, particularly in the area in which we operate. 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, 2020 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"), a Maryland real estate investment trust ("REIT"), owns and operates a portfolio of commercial and multifamily assets 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 vibrant urban amenities. Over half of our portfolio is in National Landing where we serve as the exclusive developer for Amazon.com, Inc.'s ("Amazon") new headquarters and where Virginia Tech's under-construction $1 billion Innovation Campus is located. In addition, our third-party asset management and real estate services business provides fee-based real estate services to the Washington Housing Initiative ("WHI") Impact Pool, Amazon, the legacy funds formerly organized by The JBG Companies ("JBG") (the "JBG Legacy Funds") and other third parties. Substantially all our assets are held by, and our operations are conducted through, JBG SMITH Properties LP ("JBG SMITH LP"), our operating partnership. JBG SMITH is 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 JBG (the "Combination"). The Separation and the Combination are collectively referred to as the "Formation Transaction."
30
Table of Contents
References to our financial statements refer to our unaudited condensed consolidated financial statements as of September 30, 2021 and December 31, 2020, and for the three and nine months ended September 30, 2021 and 2020. References to our balance sheets refer to our condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020. References to our statements of operations refer to our condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020. References to our statements of cash flows refer to our condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020.
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 disclosure 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 currently adhere and intend to continue to adhere to these requirements and to maintain our REIT status in future periods. We also participate in the activities conducted by our subsidiary entities that 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 many 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, 2021, our Operating Portfolio consisted of 63 operating assets comprising 42 commercial assets totaling 13.1 million square feet (11.3 million square feet at our share) and 21 multifamily assets totaling 7,776 units (6,125 units at our share). Additionally, we have: (i) one under-construction multifamily asset with 808 units (808 units at our share); (ii) 11 near-term development assets totaling 5.3 million square feet (5.0 million square feet at our share) of estimated potential development density; and (iii) 25 future development assets totaling 14.3 million square feet (11.6 million square feet at our share) of estimated potential development density. In 2021, we achieved carbon neutrality across our Operating Portfolio through the purchase of verified carbon offsets and renewable energy credits.
We continue to focus on our comprehensive plan to reposition our holdings in National Landing in Northern Virginia by executing 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 robust retail offerings and other amenities including improved public spaces. We have also invested in Citizens Broadband Radio Service ("CBRS") wireless spectrum in National Landing as part of our efforts to make National Landing among the first 5G-operable submarkets in the nation.
In November 2018, Amazon announced it had selected sites that we own in National Landing as the location of its new headquarters. We currently have leases with Amazon totaling approximately 1.0 million square feet at six office buildings
31
Table of Contents
in National Landing. 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 construction associated with Amazon's new headquarters at National Landing. In January 2020, we sold Metropolitan Park to Amazon for $155.0 million and began constructing two new office buildings thereon, totaling 2.1 million square feet, inclusive of over 50,000 square feet of street-level retail with new shops and restaurants. We are the developer, property manager and retail leasing agent for Amazon's new headquarters at National Landing.
2021 Outlook
A fundamental component of our strategy to maximize long-term net asset value per share is active capital allocation. Since our inception in 2017, we have completed the sale, recapitalization and/or ground lease of $1.7 billion of primarily office assets, and we intend to opportunistically sell at least another $1.4 billion of non-core office assets and land. We are currently targeting dispositions primarily of office assets in submarkets where we have less concentration and where we anticipate lower growth rates going forward relative to other opportunities within our portfolio. Additionally, we may market select land assets where ground lease or joint venture execution may represent the clearest path to maximizing value. Redeploying the proceeds from any such sales and recapitalizations will not only help fund our planned growth but will also further advance the strategic shift of our portfolio to majority multifamily.
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 adversely affected many tenants, especially tenants in the retail industry.
The pandemic continues to evolve, and while we are optimistic about the future, we remain cautious about the medium-term implications for office assets. Vacancy is still at record highs across the region, and most companies are still not fully back in the office. Occupancy of our commercial portfolio declined by 180 basis points from June 30, 2021, the majority of which was related to pre-pandemic decision making, although we had two civilian agency Government Services Administration tenants that reduced their leased square footage due to a planned shift toward working from home. We expect continued pressure on our office occupancy through the end of the year and into 2022. Although parking revenue increased during the three months ended September 30, 2021 as compared to the same period in 2020, parking revenue in our commercial portfolio was approximately 60% below pre-pandemic levels of approximately $30 million annually due to delayed return-to-the-office plans for many of our office tenants.
We are seeing improvements in our multifamily portfolio, with a 390 basis point increase in the occupancy of our operating multifamily portfolio from June 30, 2021 and an increase in market rents due to increased demand and limited new supply.
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 of COVID-19 in the United States, the continued speed of the vaccine distribution, the effectiveness and willingness of people to take COVID-19 vaccines, the duration of associated immunity and the efficacy of vaccines against variants of COVID-19, the extent and effectiveness of other containment measures taken, and the response of the overall economy, the financial markets and the population, particularly in areas in which we operate, as containment measures continue to be lifted, and whether the residential market in the Washington, D.C. region and any of our properties will be materially impacted by the moratoriums on residential evictions, among others. These uncertainties make it difficult to predict operating results for our business for 2021. Therefore, we could experience material declines in revenue, net income, NOI and/or Funds from Operations ("FFO"). For more information, see "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Operating Results
Key highlights for the three and nine months ended September 30, 2021 included:
● net income attributable to common shareholders of $893,000, or $0.00 per diluted common share, for the three months ended September 30, 2021 compared to a net loss attributable to common shareholders of $22.8 million, or $0.18 per
32
Table of Contents
diluted common share, for the three months ended September 30, 2020. Net loss attributable to common shareholders of $22.8 million, or $0.18 per diluted common share, for the nine months ended September 30, 2021 compared to $16.6 million, or $0.14 per diluted common share, for the nine months ended September 30, 2020;
● third-party real estate services revenue, including reimbursements, of $25.8 million and $90.7 million for the three and nine months ended September 30, 2021 compared to $27.0 million and $83.9 million for the three and nine months ended September 30, 2020;
● operating commercial portfolio leased and occupied percentages at our share of 84.9% and 82.6% as of September 30, 2021 compared to 85.9% and 84.4% as of June 30, 2021, and 88.4% and 85.3% as of September 30, 2020;
● operating multifamily portfolio leased and occupied percentages at our share of 92.9% and 90.2% as of September 30, 2021 compared to 91.6% and 86.3% as of June 30, 2021, and 83.0% and 76.6% as of September 30, 2020. The in-service operating multifamily portfolio was 95.1% leased and 92.1% occupied as of September 30, 2021, compared to 95.0% leased and 89.8% occupied as of June 30, 2021, and 92.8% leased and 88.1% occupied as of September 30, 2020;
● the leasing of 159,000 square feet, or 126,000 square feet at our share, at an initial rent (1) of $44.82 per square foot and a GAAP-basis weighted average rent per square foot (2) of $45.87 for the three months ended September 30, 2021, and the leasing of 1.2 million square feet on a consolidated basis and at our share, at an initial rent (1) of $46.04 per square foot and a GAAP-basis weighted average rent per square foot (2) of $45.43 for the nine months ended September 30, 2021; and
● same store (3) NOI of $72.7 million for the three months ended September 30, 2021 was unchanged compared to the three months ended September 30, 2020, and a decrease in same store (3) NOI of 3.3% to $223.3 million for the nine months ended September 30, 2021 compared to $231.0 million for the nine months ended September 30, 2020.
(1) Represents the cash basis weighted average starting rent per square foot at our share, 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, which excludes properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
Additionally, investing and financing activity during the nine months ended September 30, 2021 included:
● the lease of the land underlying 1900 Crystal Drive located in National Landing to a lessee, which plans to construct an 808-unit multifamily asset comprising two towers with ground floor retail. Through the structure of the 1900 Crystal Drive transaction, we have the ability to facilitate an exchange out of an asset into 1900 Crystal Drive . The ground lessee has engaged us to be the development manager for the construction of 1900 Crystal Drive, and separately, we are the lessee in a master lease of the asset. We have an option to acquire the asset until a specified period after completion. See Note 5 to the financial statements for additional information;
● an investment in two real estate ventures, in which we have 50% ownership interests, to design, develop, manage and own approximately 2.0 million square feet of new mixed-use development located in Potomac Yard, the southern portion of National Landing. We recognized an $11.3 million gain on the land contributed to one of the real estate ventures based on the cash received and the remeasurement of our retained interest in the asset. See Note 4 to the financial statements for additional information;
● recognition of an aggregate gain of $28.3 million from the sale of various assets by our unconsolidated real estate ventures. See Note 4 to the financial statements for additional information;
● the execution of an agreement to acquire The Batley, a 432-unit multifamily asset in the Union Market submarket of Washington, D.C., for a purchase price of approximately $205 million, which we intend to use as a replacement property in a like-kind exchange for the proceeds from the sale of Pen Place to Amazon. See Note 3 to the financial statements for additional information;
● a new mortgage loan with a principal balance of $85.0 million, collateralized by 1225 S. Clark Street. The mortgage loan has a seven-year term and an interest rate of LIBOR plus 1.60% per annum;
33
Table of Contents
● the payment of dividends to our common shareholders totaling $88.9 million and distributions to our noncontrolling interests of $13.7 million;
● the repurchase and retirement of 2.9 million of our common shares for $88.1 million, an average purchase price of $29.99 per share; and
● the investment of $108.4 million in development, construction in progress and real estate additions.
Activity subsequent to September 30, 2021 included:
● the declaration of a quarterly dividend of $0.225 per common share, payable on November 24, 2021 to shareholders of record as of November 10, 2021.
Critical Accounting Policies and Estimates
Our Annual Report on Form 10-K for the year ended December 31, 2020 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 the nine months ended September 30, 2021.
Recent Accounting Pronouncements
See Note 2 to the financial statements for a description of recent accounting pronouncements.
Results of Operations
In January 2020, we sold Metropolitan Park. In December 2020, we acquired the Americana Portfolio, which consists of a 1.4-acre future development parcel in National Landing that was formerly occupied by the Americana Hotel and three other parcels. In April 2021, we contributed Potomac Yard Landbay G to an unconsolidated real estate venture.
Comparison of the Three Months Ended September 30, 2021 to 2020
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, 2021 compared to the same period in 2020:
Three Months Ended September 30,
2021
2020
% Change
(Dollars in thousands)
Property rental revenue
$
125,900
$
118,680
6.1
%
Third-party real estate services revenue, including reimbursements
25,842
26,987
(4.2)
%
Depreciation and amortization expense
56,726
56,481
0.4
%
Property operating expense
40,198
37,572
7.0
%
Real estate taxes expense
18,259
17,354
5.2
%
General and administrative expense:
Corporate and other
12,105
11,086
9.2
%
Third-party real estate services
25,542
28,207
(9.4)
%
Share-based compensation related to Formation Transaction and special equity awards
3,480
7,133
(51.2)
%
Transaction and other costs
2,951
845
249.2
%
Income (loss) from unconsolidated real estate ventures, net
20,503
(965)
*
Interest expense
17,243
16,885
2.1
%
* Not meaningful.
Property rental revenue increased by approximately $7.2 million, or 6.1%, to $125.9 million in 2021 from $118.7 million in 2020. The increase was primarily due to (i) a $5.1 million increase related to the deferral of rent and the write-off of deferred rent receivables for tenants that were placed on the cash basis of accounting in 2020 and a decrease in uncollectable operating lease receivables attributable to COVID-19 in 2021, (ii) a $4.7 million increase related to 4747 Bethesda Avenue,
34
Table of Contents
West Half, The Wren, 900 W Street and 901 W Street as these properties placed additional space into service, (iii) a $2.6 million increase related to 1770 Crystal Drive, which was placed into service in the fourth quarter of 2020, and (iv) a $1.8 million increase related to the commencement of the lease with Amazon at 2100 Crystal Drive. The increase in property rental revenue was partially offset by a $6.4 million decrease related to lower occupancy at the Universal Buildings, 2011 Crystal Drive, 2101 L Street and RTC-West.
Third-party real estate services revenue, including reimbursements, decreased by approximately $1.1 million, or 4.2%, to $25.8 million in 2021 from $27.0 million in 2020. The decrease was primarily due to a $2.0 million decrease in reimbursements revenue, a $705,000 decrease in other service revenue and a $584,000 decrease in construction management fees, partially offset by a $1.4 million increase in development fee revenue primarily related to the timing of development projects and a $736,000 increase in leasing fees.
Depreciation and amortization expense increased by approximately $245,000, or 0.4%, to $56.7 million in 2021 from $56.5 million in 2020. The increase was primarily due to (i) a $1.9 million increase related to 2345 Crystal Drive due to an increase in tenant improvements, (ii) a $1.7 million increase related to 4747 Bethesda Avenue, West Half, The Wren, 900 W Street and 901 W Street as these properties placed additional space into service, and (iii) a $924,000 increase due to 1770 Crystal Drive being placed into service. The increase in depreciation and amortization expense was partially offset by a $4.0 million decrease related to 2000 South Bell Street and 2001 South Bell Street as we commenced construction on two new buildings in 2021.
Property operating expense increased by approximately $2.6 million, or 7.0%, to $40.2 million in 2021 from $37.6 million in 2020. The increase was primarily due to (i) a $1.2 million increase related to 2451 Crystal Drive for costs incurred for construction management services provided to tenants, (ii) an $885,000 increase related to 4747 Bethesda Avenue, West Half, The Wren, 900 W Street and 901 W Street as these properties placed additional space into service, (iii) a $576,000 increase due to 1770 Crystal Drive being placed into service and (iv) $535,000 related to 2221 South Clark Street due to higher operating expenses. The increase in property operating expense was partially offset by a $1.5 million decrease related to 1901 South Bell Street due to costs incurred in 2020 for construction management services provided to tenants.
Real estate tax expense increased by approximately $905,000, or 5.2%, to $18.3 million in 2021 from $17.4 million in 2020. The increase was primarily due to a $548,000 increase related to 4747 Bethesda Avenue and The Wren as these properties placed additional space into service, and a $543,000 increase related to 5 M Street Southwest due to an increase in its applicable tax rate in 2021.
General and administrative expense: corporate and other increased by approximately $1.0 million, or 9.2%, to $12.1 million in 2021 from $11.1 million in 2020. The increase was primarily due to a decrease in capitalizable payroll costs related to development projects.
General and administrative expense: third-party real estate services decreased by approximately $2.7 million, or 9.4%, to $25.5 million in 2021 from $28.2 million in 2020. The decrease was primarily due to a decrease in reimbursable expenses.
General and administrative expense: share-based compensation related to Formation Transaction and special equity awards decreased by approximately $3.7 million, or 51.2%, to $3.5 million in 2021 from $7.1 million in 2020. The decrease was primarily due to the graded vesting of certain awards issued in prior years, which resulted in lower expense as portions of the awards vested.
Transaction and other costs of $3.0 million in 2021 primarily included $1.4 million of demolition costs related to 2000 South Bell Street and 2001 South Bell Street and $1.4 million of expenses related to completed, potential and pursued transactions. Transaction and other costs of $845,000 in 2020 consisted of $406,000 of integration and severance costs, $260,000 of expenses related to completed, potential and pursued transactions, and $179,000 of demolition costs related to 223 23rd Street and 2300 Crystal Drive.
Income from unconsolidated real estate ventures increased by approximately $21.5 million to $20.5 million for 2021 from a loss of $965,000 in 2020. The increase was primarily due to the recognition of our proportionate share of the gain from the sale of 500 L'Enfant Plaza of $23.1 million. The increase in income from unconsolidated real estate ventures was
35
Table of Contents
partially offset by a $1.4 million impairment of our investment in an unconsolidated real estate venture due to a decrease in the value of the underlying asset.
Interest expense increased by approximately $358,000, or 2.1%, to $17.2 million in 2021 from $16.9 million in 2020. The increase was primarily due to a $1.3 million decrease in capitalized interest primarily due to the placing of additional space into service at 4747 Bethesda Avenue, West Half, The Wren, 901 W Street and 1770 Crystal Drive, and a $293,000 increase due to a new mortgage loan at 1225 S. Clark Street. The increase in interest expense was partially offset by a $1.2 million decrease related to the repayment of a mortgage loan at WestEnd25 in 2020.
Comparison of the Nine Months Ended September 30, 2021 to 2020
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, 2021 compared to the same period in 2020:
Nine Months Ended September 30,
2021
2020
% Change
(Dollars in thousands)
Property rental revenue
$
370,960
$
354,519
4.6
%
Third-party real estate services revenue, including reimbursements
90,694
83,870
8.1
%
Depreciation and amortization expense
178,130
157,586
13.0
%
Property operating expense
109,929
105,867
3.8
%
Real estate taxes expense
55,127
53,422
3.2
%
General and administrative expense:
Corporate and other
38,475
37,478
2.7
%
Third-party real estate services
80,035
86,260
(7.2)
%
Share-based compensation related to Formation Transaction and special equity awards
12,866
25,432
(49.4)
%
Transaction and other costs
8,911
7,526
18.4
%
Income (loss) from unconsolidated real estate ventures, net
23,513
(17,142)
237.2
%
Interest expense
50,312
44,660
12.7
%
Gain on sale of real estate
11,290
59,477
(81.0)
%
Property rental revenue increased by approximately $16.4 million, or 4.6%, to $371.0 million in 2021 from $354.5 million in 2020. The increase was primarily due to (i) a $12.8 million increase related to 4747 Bethesda Avenue, West Half, The Wren, 900 W Street and 901 W Street as these properties placed additional space into service, (ii) an $11.1 million increase due to the deferral of rent and the write-off of deferred rent receivable for tenants that were placed on the cash basis of accounting in 2020 and a decrease in uncollectable operating lease receivables attributable to COVID-19, (iii) a $7.4 million increase related to 1770 Crystal Drive, which was placed into service in the fourth quarter of 2020, (iv) a $3.9 million increase related to 1225 S. Clark Street due to the commencement of a lease and (v) a $3.2 million increase related to the additional space leased by Amazon at 2345 Crystal Drive. The increase in property rental revenue was partially offset by (i) a $14.1 million decrease related to lower occupancy at the Universal Buildings, 2011 Crystal Drive, 2101 L Street and RTC-West, (ii) a $4.2 million decrease related to RiverHouse Apartments and The Bartlett due to increased rent concessions and lower market rents, and (iii) a $3.4 million decrease related to 1901 South Bell Street due to tenant reimbursements for construction services in 2020.
Third-party real estate services revenue, including reimbursements, increased by approximately $6.8 million, or 8.1%, to $90.7 million in 2021 from $83.9 million in 2020. The increase was primarily due to a $14.2 million increase in development fees related to the timing of development projects. The increase in third-party real estate services revenue was partially offset by a $3.8 million decrease in reimbursements revenue, a $1.7 million decrease in property and asset management fees due to the sale of assets within the JBG Legacy Funds and a $1.7 million decrease in construction management fees due to the timing of construction projects.
Depreciation and amortization expense increased by approximately $20.5 million, or 13.0%, to $178.1 million in 2021 from $157.6 million in 2020. The increase was primarily due to (i) an $8.1 million increase related to 4747 Bethesda Avenue, West Half, The Wren, 900 W Street and 901 W Street as these properties placed additional space into service, (ii) a $6.8 million increase related to the Universal Buildings due to the write-off of certain tenant improvements, (iii) a $6.0 million increase related to 2345 Crystal Drive due to an increase in tenant improvements, (iv) a $2.5 million increase due to 1770
36
Table of Contents
Crystal Drive being placed into service, (v) a $1.5 million increase related to 1550 Crystal Drive as additional space was placed into service and (vi) a $1.3 million increase related to RTC-West due to the acceleration of depreciation of certain assets. The increase in depreciation and amortization expense was partially offset by a $5.1 million decrease related to 2000 South Bell Street and 2001 South Bell Street as we commenced construction on two new buildings in 2021.
Property operating expense increased by approximately $4.1 million, or 3.8%, to $109.9 million in 2021 from $105.9 million in 2020. The increase was primarily due to (i) a $3.3 million increase related to 4747 Bethesda Avenue, West Half, The Wren, 900 W Street and 901 W Street as these properties placed additional space into service, (ii) a $2.8 million increase related to 2451 Crystal Drive due to costs incurred for construction management services provided to tenants, (iii) a $1.4 million increase due to 1770 Crystal Drive being placed into service and (iv) an $832,000 increase at Courthouse Plaza 1 and 2 related to ground rent expense. The increase in property operating expense was partially offset by a $4.3 million decrease related to 1901 South Bell Street due to costs incurred in 2020 for construction management services provided to tenants.
Real estate tax expense increased by approximately $1.7 million, or 3.2%, to $55.1 million in 2021 from $53.4 million in 2020. The increase was primarily due to (i) a $1.8 million increase at 4747 Bethesda Avenue, West Half, The Wren, 900 W Street and 901 W Street as these properties placed additional space into service, (ii) a $701,000 increase related to 5 M Street Southwest due to an increase in its applicable tax rate in 2021 and (iii) an increase of $533,000 due to 1770 Crystal Drive being placed into service. The increase in real estate tax expense was partially offset by a decrease in real estate tax assessments for various properties located in National Landing.
General and administrative expense: corporate and other increased by approximately $997,000, or 2.7%, to $38.5 million in 2021 from $37.5 million in 2020. The increase was primarily due to a decrease in capitalizable payroll costs related to development projects.
General and administrative expense: third-party real estate services decreased by approximately $6.2 million, or 7.2%, to $80.0 million in 2021 from $86.3 million in 2020. This decrease was primarily due to a decrease in reimbursable expenses and a decrease in share-based compensation expense.
General and administrative expense: share-based compensation related to Formation Transaction and special equity awards decreased by approximately $12.6 million, or 49.4%, to $12.9 million in 2021 from $25.4 million in 2020. The decrease was primarily due to the graded vesting of certain awards issued in prior years, which resulted in lower expense as portions of the awards vested.
Transaction and other costs of $8.9 million in 2021 consisted of $5.4 million of expenses related to completed, potential and pursued transactions, $2.9 million of demolition costs related to 2000 South Bell Street and 2001 South Bell Street and $616,000 of integration and severance costs. Transaction and other costs of $7.5 million in 2020 primarily included $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 area, and $3.1 million of integration and severance costs.
Income from unconsolidated real estate ventures increased by approximately $40.7 million, or 237.2%, to $23.5 million for 2021 from a loss of $17.1 million in 2020. The increase was primarily due to (i) the recognition of our proportionate share of the gain from the sale of various assets totaling $28.3 million as compared to a $3.0 million loss from the sale of Woodglen in 2020 and (ii) a $6.5 million impairment charge recognized in 2020 related to our investment in a venture that owned The Marriott Wardman Park hotel, and $2.7 million for losses incurred from its COVID-19 related closure. The increase in income from unconsolidated real estate ventures was partially offset by a $1.4 million impairment of our investment in an unconsolidated real estate venture due to a decrease in the value of the underlying asset.
Interest expense increased by approximately $5.7 million, or 12.7%, to $50.3 million in 2021 from $44.7 million in 2020. The increase was primarily due to a $6.7 million decrease in capitalized interest primarily due to the placing of additional space into service at 4747 Bethesda Avenue, West Half, The Wren, 901 W Street and 1770 Crystal Drive and a $5.7 million increase due to new mortgage loans entered into in 2020 at 1221 Van Street, The Bartlett and 220 20 th Street. The increase was also due to higher average outstanding balances under our unsecured term loans. The increase in interest expense was
37
Table of Contents
partially offset by a lower outstanding balance under our revolving credit facility and a $3.6 million decrease related to the repayment of a mortgage loan at WestEnd25 in 2020.
Gain on the sale of real estate of $11.3 million in 2021 was based on the cash received and the remeasurement of our retained interest in the land we contributed to one of our unconsolidated real estate ventures. See Note 4 to the financial statements for additional information. Gain on the sale of real estate of $59.5 million in 2020 was due to the sale of Metropolitan Park.
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,
2021
2020
X
2021
2020
(In thousands)
Net income (loss) attributable to common shareholders
$
893
$
(22,793)
$
(22,811)
$
(16,648)
Net income (loss) attributable to redeemable noncontrolling interests
103
(2,212)
(2,472)
(445)
Net loss attributable to noncontrolling interests
—
—
(1,108)
—
Net income (loss)
996
(25,005)
(26,391)
(17,093)
Gain on sale of real estate
—
—
(11,290)
(59,477)
(Gain) loss on sale of unconsolidated real estate assets
(23,137)
—
(28,326)
2,952
Real estate depreciation and amortization
54,547
54,004
171,522
149,590
Impairment of investments in unconsolidated real estate ventures (1)
1,380
—
1,380
6,522
Pro rata share of real estate depreciation and amortization from unconsolidated real estate ventures
7,002
7,350
21,590
21,730
FFO attributable to noncontrolling interests
(54)
(4)
976
(7)
FFO attributable to OP Units
40,734
36,345
129,461
104,217
FFO attributable to redeemable noncontrolling interests
(4,703)
(3,945)
(13,242)
(11,353)
FFO attributable to common shareholders
$
36,031
$
32,400
$
116,219
$
92,864
(1) Related to decreases in the value of the underlying assets.
NOI and Same Store NOI
NOI is a non-GAAP financial measure management uses to assess a segment's performance. The most directly comparable GAAP measure is net income (loss) attributable to common shareholders. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only property related revenue (which includes base rent, tenant reimbursements and other operating revenue, net
38
Table of Contents
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 the amortization of acquired above-market leases and below-market ground lease intangibles. Management uses NOI as a supplemental performance measure of 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 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.
During the three months ended September 30, 2021, our same store pool decreased to 55 properties from 56 properties due to the exclusion of 500 L'Enfant Plaza, which was sold by an unconsolidated real estate venture during the period. During the nine months ended September 30, 2021, our same store pool increased from 52 properties to 55 properties due to the inclusion of 1800 South Bell Street, F1RST Residences, 1221 Van Street and the commercial portion of 2221 S. Clark Street, and the exclusion of Fairway Apartments, which was sold during the period. 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, which excludes 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.
Same store NOI remained at $72.7 million for the three months ended September 30, 2021 compared to the same period in 2020. Same Store NOI was positively impacted by a decrease in uncollectable operating lease receivables and rent deferrals, which was offset by lower occupancy in our commercial portfolio, and lower rents and higher concessions for certain of our multifamily assets.
Same store NOI decreased $7.7 million, or 3.3%, to $223.3 million for the nine months ended September 30, 2021 from $231.0 million for the same period in 2020. The decrease was substantially attributable to the COVID-19 pandemic, which commenced at the end of the first quarter of 2020, including (i) higher concessions and lower rents in our multifamily portfolio and (ii) lower occupancy and a decline in parking revenue in our commercial portfolio. These declines were partially offset by a decrease in cleaning expenses across our commercial portfolio.
39
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,
2021
2020
2021
2020
(Dollars in thousands)
Net income (loss) attributable to common shareholders
$
893
$
(22,793)
$
(22,811)
$
(16,648)
Add:
Depreciation and amortization expense
56,726
56,481
178,130
157,586
General and administrative expense:
Corporate and other
12,105
11,086
38,475
37,478
Third-party real estate services
25,542
28,207
80,035
86,260
Share-based compensation related to Formation Transaction and special equity awards
3,480
7,133
12,866
25,432
Transaction and other costs
2,951
845
8,911
7,526
Interest expense
17,243
16,885
50,312
44,660
Loss on extinguishment of debt
—
—
—
33
Income tax expense (benefit)
217
(488)
4,527
(3,721)
Net income (loss) attributable to redeemable noncontrolling interests
103
(2,212)
(2,472)
(445)
Net loss attributable to noncontrolling interests
—
—
(1,108)
—
Less:
Third-party real estate services, including reimbursements revenue
25,842
26,987
90,694
83,870
Other revenue
1,568
2,292
5,658
5,438
Income (loss) from unconsolidated real estate ventures, net
20,503
(965)
23,513
(17,142)
Interest and other income, net
192
—
163
1,021
Gain on sale of real estate
—
—
11,290
59,477
Consolidated NOI
71,155
66,830
215,547
205,497
NOI attributable to unconsolidated real estate ventures at our share
7,336
7,130
22,951
23,206
Non-cash rent adjustments (1)
(3,701)
(4,934)
(12,554)
(9,898)
Other adjustments (2)
4,683
2,881
14,608
9,236
Total adjustments
8,318
5,077
25,005
22,544
NOI
79,473
71,907
240,552
228,041
Less: out-of-service NOI loss (3)
(2,019)
(442)
(4,638)
(2,774)
Operating Portfolio NOI
81,492
72,349
245,190
230,815
Non-same store NOI (4)
8,777
(388)
21,868
(165)
Same store NOI (5)
$
72,715
$
72,737
$
223,322
$
230,980
Change in same store NOI
0.0%
(3.3)%
Number of properties in same store pool
55
55
(1) Adjustment to exclude straight-line rent, above/below market lease amortization and lease incentive amortization.
(2) 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.
(3) Includes the results of our under-construction assets, and near-term and future development pipelines.
(4) 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.
(5) Includes the results of the properties that are owned, operated and in-service for the entirety of both periods being compared.
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.
40
Table of Contents
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.
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. 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,
2021
2020
X
2021
2020
(In thousands)
Property management fees
$
4,831
$
4,694
$
14,549
$
15,453
Asset management fees
2,145
2,301
6,602
7,400
Development fees (1)
4,032
2,614
22,705
8,474
Leasing fees
1,822
1,086
4,106
3,627
Construction management fees
—
584
375
2,057
Other service revenue
1,295
2,000
4,783
5,452
Third-party real estate services revenue, excluding reimbursements
14,125
13,279
53,120
42,463
Reimbursement revenue (2)
11,717
13,708
37,574
41,407
Third-party real estate services revenue, including reimbursements
25,842
26,987
90,694
83,870
Third-party real estate services expenses
25,542
28,207
80,035
86,260
Third-party real estate services revenue less expenses
$
300
$
(1,220)
$
10,659
$
(2,390)
(1) Estimated development fee revenue totaling $51.2 million as of September 30, 2021 is expected to be recognized over the next six years as unsatisfied performance obligations are completed.
(2) 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.
See discussion of third-party real estate services revenue, including reimbursements, and third-party real estate services expenses for the three and nine months ended September 30, 2021 in the preceding pages under "Results of Operations."
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.
41
Table of Contents
Property revenue is calculated as property rental revenue plus parking revenue. Property expense is calculated as property operating expenses plus real estate taxes. Consolidated NOI is calculated as property revenue less 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, 2021 and 2020. The following is a summary of NOI by segment:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
X
2021
2020
(In thousands)
Property revenue:
Commercial
$
96,042
$
93,052
$
284,905
$
276,841
Multifamily
35,131
30,526
100,610
95,122
Other (1)
(1,561)
(1,822)
(4,912)
(7,177)
Total property revenue
129,612
121,756
380,603
364,786
Property expense:
Commercial
39,166
38,837
112,173
115,177
Multifamily
19,142
17,882
53,689
48,326
Other (1)
149
(1,793)
(806)
(4,214)
Total property expense
58,457
54,926
165,056
159,289
Consolidated NOI:
Commercial
56,876
54,215
172,732
161,664
Multifamily
15,989
12,644
46,921
46,796
Other (1)
(1,710)
(29)
(4,106)
(2,963)
Consolidated NOI
$
71,155
$
66,830
$
215,547
$
205,497
(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, 2021 to 2020
Commercial: Property rental revenue increased by $3.0 million, or 3.2%, to $96.0 million in 2021 from $93.1 million in 2020. Consolidated NOI increased by $2.7 million, or 4.9%, to $56.9 million in 2021 from $54.2 million in 2020. The increase in property revenue and consolidated NOI was due to (i) a decline in rent deferrals and uncollectable operating lease receivables related to tenants impacted by COVID-19, (ii) increases related to 1770 Crystal Drive as the property was placed into service, and (iii) increases related to 2100 Crystal Drive, 1225 South Clark Street and 2345 Crystal Drive due to higher occupancy. These increases were partially offset by a decrease related to the Universal Buildings and 2101 L Street due to lower occupancy.
Multifamily: Property rental revenue increased by $4.6 million, or 15.1%, to $35.1 million in 2021 from $30.5 million in 2020. Consolidated NOI increased by $3.3 million, or 26.5%, to $16.0 million in 2021 from $12.6 million in 2020. The increase in property revenue and consolidated NOI was due to The Wren, 900 W Street, 901 W Street and West Half as these properties placed additional units into service. These increases were partially offset by lower rents and higher concessions at RiverHouse Apartments and 2221 South Clark Street.
Comparison of the Nine Months Ended September 30, 2021 to 2020
Commercial: Property rental revenue increased by $8.1 million, or 2.9%, to $284.9 million in 2021 from $276.8 million in 2020. Consolidated NOI increased by $11.1 million, or 6.8%, to $172.7 million in 2021 from $161.7 million in 2020. The increase in property revenue and consolidated NOI was due to (i) a decline in rent deferrals and uncollectable operating lease receivables related to tenants impacted by COVID-19, (ii) increases in revenues related to 4747 Bethesda Avenue and 1770 Crystal Drive as these properties were placed into service, and (iii) increases related to 2100 Crystal Drive, 1225 South Clark Street and 2345 Crystal Drive due to higher occupancy. These increases were partially offset by a decrease in parking revenue due to reduced transient and office parking and decreases related to the Universal Buildings, 2101 L Street and RTC-West due to lower occupancy.
42
Table of Contents
Multifamily: Property rental revenue increased by $5.5 million, or 5.8%, to $100.6 million in 2021 from $95.1 million in 2020. Consolidated NOI increased by $125,000, or 0.3%, to $46.9 million in 2021 from $46.8 million in 2020. The increase in property revenue and consolidated NOI was due to The Wren, 900 W Street, 901 W Street and West Half as these properties placed additional units into service. These increases were partially offset by lower rents and higher concessions at RiverHouse Apartments and The Bartlett.
Liquidity and Capital Resources
Property rental income is our primary source of operating cash flow and is dependent on many 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 the WHI, Amazon, the JBG Legacy Funds and other third parties. 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, recapitalizations, asset sales and the issuance and sale of 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, 2021
December 31, 2020
(In thousands)
Variable rate (2)
2.08%
$
762,246
$
678,346
Fixed rate (3)
4.32%
922,161
925,523
Mortgages payable
1,684,407
1,603,869
Unamortized deferred financing costs and premium/discount, net (4)
(10,122)
(10,131)
Mortgages payable, net
$
1,674,285
$
1,593,738
(1) Weighted average effective interest rate as of September 30, 2021.
(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.
(4) As of September 30, 2021, net deferred financing costs related to an unfunded mortgage loan totaling $4.0 million were included in "Other assets, net."
As of September 30, 2021 and December 31, 2020, the net carrying value of real estate collateralizing our mortgages payable totaled $1.8 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.
In July 2021, we entered into a mortgage loan with a principal balance of $85.0 million, collateralized by 1225 S. Clark Street. The mortgage loan has a seven-year term and an interest rate of LIBOR plus 1.60% per annum.
As of September 30, 2021 and December 31, 2020, we had various interest rate swap and cap agreements on certain mortgages payable with an aggregate notional value of $1.3 billion. See Note 15 to the financial statements for additional information.
43
Table of Contents
Credit Facility
As of September 30, 2021 and December 31, 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, 2021
December 31, 2020
(In thousands)
Revolving credit facility (2) (3) (4)
1.13%
$
—
$
—
Tranche A-1 Term Loan (5)
2.59%
$
200,000
$
200,000
Tranche A-2 Term Loan (5)
2.49%
200,000
200,000
Unsecured term loans
400,000
400,000
Unamortized deferred financing costs, net
(1,507)
(2,021)
Unsecured term loans, net
$
398,493
$
397,979
(1) Effective interest rate as of September 30, 2021.
(2) As of September 30, 2021 and December 31, 2020, letters of credit with an aggregate face amount of $1.4 million and $1.5 million were outstanding under our revolving credit facility.
(3) As of September 30, 2021 and December 31, 2020, net deferred financing costs related to our revolving credit facility totaling $5.4 million and $6.7 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, 2021 and December 31, 2020, the outstanding balance was fixed by interest rate swap agreements. The interest rate swaps mature concurrently with the respective term loan and provide a weighted average interest rate of 1.39% for the Tranche A-1 Term Loan and 1.34% for the Tranche A-2 Term Loan.
Our existing floating rate debt instruments, including our credit facility, with a principal balance totaling $1.6 billion and our hedging arrangements with a notional value totaling $1.7 billion currently use as a reference rate the U.S. dollar London Interbank Offered Rate ("LIBOR"), and we expect a transition from LIBOR to another reference rate due to plans to phase out the reference rate by the end of 2021, after which point its continuation cannot be assured. Though an alternative reference rate for LIBOR, the Secured Overnight Financing Rate ("SOFR"), exists, significant uncertainties still remain. We can provide no assurance regarding the future of LIBOR and when our LIBOR-based instruments will transition from LIBOR as a reference rate to SOFR or another reference rate. The discontinuation of a benchmark rate or other financial metric, changes in a benchmark rate or other financial metric, or changes in market perceptions of the acceptability of a benchmark rate or other financial metric, including LIBOR, could, among other things, result in increased interest payments, changes to our risk exposures, or require renegotiation of previous transactions. In addition, any such discontinuation or changes, whether actual or anticipated, could result in market volatility, adverse tax or accounting effects, increased compliance, legal and operational costs, and risks associated with contract negotiations.
Common Shares Repurchased
In March 2020, our Board of Trustees authorized the repurchase of up to $500 million of our outstanding common shares. During three and nine months ended September 30, 2021, we repurchased and retired 2.3 million and 2.9 million common shares for $68.9 million and $88.1 million, an average purchase price of $29.73 and $29.99 per share. 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. Since we began the share repurchase program, we have repurchased and retired 6.7 million common shares for $192.9 million, an average purchase price of $28.71 per share.
Purchases under 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,
44
Table of Contents
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 the need to do so during the next 12 months, we also can issue securities to raise funds.
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.
As of September 30, 2021, we had $998.6 million of availability under our credit facility (net of outstanding letters of credit totaling $1.4 million). As of September 30, 2021, we had no debt on a consolidated basis and at our share scheduled to mature in 2021.
Contractual Obligations and Commitments
During the nine months ended September 30, 2021, 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, 2020.
As of September 30, 2021, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures totaling $66.1 million.
As of September 30, 2021, we had committed tenant-related obligations totaling $76.9 million ($73.6 million related to our consolidated entities and $3.3 million related to our unconsolidated real estate ventures at our share). The timing and amounts of payments for tenant-related obligations are uncertain and may only be due upon satisfactory performance of certain conditions.
We launched the WHI with 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 debt financing vehicle of the WHI. As of September 30, 2021, the WHI Impact Pool had
45
Table of Contents
completed closings of capital commitments totaling $114.4 million, which included a commitment from us of $11.2 million. As of September 30, 2021, our remaining commitment was $8.3 million.
On October 27, 2021, 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,
2021
2020
(In thousands)
Net cash provided by operating activities
$
154,412
$
127,855
Net cash used in investing activities
(96,751)
(57,696)
Net cash (used in) provided by financing activities
(91,820)
280,038
Cash Flows for the Nine Months Ended September 30, 2021
Cash and cash equivalents, and restricted cash decreased $34.2 million to $229.2 million as of September 30, 2021, compared to $263.3 million as of December 31, 2020. This decrease resulted from $91.8 million of net cash used in financing activities and $96.8 million of net cash used in investing activities, partially offset by $154.4 million of net cash provided by operating activities. Our outstanding debt was $2.1 billion and $2.0 billion as of September 30, 2021 and December 31, 2020.
Net cash provided by operating activities of $154.4 million primarily comprised: (i) $147.7 million of net income (before $185.4 million of non-cash items and $11.3 million gain on sale of real estate), (ii) $13.2 million of return on capital from unconsolidated real estate ventures and (iii) $6.5 million of net change in operating assets and liabilities. Non-cash income adjustments of $185.4 million primarily include depreciation and amortization expense, share-based compensation expense, net income from unconsolidated real estate ventures, deferred rent and amortization of lease incentives.
Net cash used in investing activities of $96.8 million comprised: (i) $108.4 million of development costs, construction in progress and real estate additions, (ii) $32.7 million of investments in unconsolidated real estate ventures and other, and (iii) $10.3 million of deposits for real estate and other acquisitions, partially offset by (iv) $40.2 million of distributions of capital from unconsolidated real estate ventures and (v) $14.4 million of proceeds from the sale of real estate.
Net cash used in financing activities of $91.8 million primarily comprised: (i) $88.9 million of dividends paid to common shareholders, (ii) $82.3 million of common shares repurchased, (iii) $13.7 million of distributions to redeemable noncontrolling interests, (iv) $5.7 million of debt issuance costs, and (v) $4.5 million of repayments of mortgages payable, partially offset by (vi) $85.0 million of borrowings under mortgages payable and (vii) $17.5 million of contributions from noncontrolling interests.
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, 2021, we have investments in unconsolidated real estate ventures totaling $486.1 million. For 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.
46
Table of Contents
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 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, 2021, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures totaling $66.1 million. As of September 30, 2021, we had no principal payment guarantees related to our unconsolidated real estate ventures.
A reconsideration event could cause us to consolidate an unconsolidated real estate venture 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 our ability to finance or refinance our properties.
Construction Commitments
As of September 30, 2021, we had assets under construction that will, based on our current plans and estimates, require an additional $320.3 million to complete, which we anticipate will be primarily expended over the next three 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 securities, and available cash.
Other
As of September 30, 2021, we had committed tenant-related obligations totaling $76.9 million ($73.6 million related to our consolidated entities and $3.3 million related to our unconsolidated real estate ventures at our share). The timing and
47
Table of Contents
amounts of payments for tenant-related obligations are uncertain and may only be due upon satisfactory performance of certain conditions.
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, 2021, the aggregate amount of principal payment guarantees was $8.3 million for our consolidated entities.
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 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 $18.2 million as of September 30, 2021 and December 31, 2020 and are included in "Other liabilities, net" in our balance sheets.
48
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.