JBG SMITH Properties 10-Q

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk We have exposure to fluctuations in interest rates, which are sensitive to many factors that are beyond our control. The following is a summary of our annual exposure to a change in interest rates: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2022 ​ December 31, 2021 ​ ​ ​ Weighted ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ Average ​ ​ Annual ​ ​ ​ ​ Average ​ ​ ​ ​ ​ Effective ​ ​ Effect of 1% ​ ​ ​ ​ Effective ​ ​ ​ ​ ​ Interest ​ ​ Change in ​ ​ ​ ​ Interest ​ ​ Balance ​ Rate ​ Base Rates ​ Balance ​ Rate ​ ​ (Dollars in thousands) Debt (contractual balances): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Mortgages payable: ​ ​ ​ ​ ​ ​ ​ Variable rate (1) ​ $ 846,432 ​ 4.60% ​ ​ $ 8,582 ​ $ 867,246 2.01% ​ Fixed rate (2) ​ 907,516 ​ 4.40% ​ ​ — ​ 921,013 4.32% ​ ​ ​ $ 1,753,948 ​ ​ ​ ​ ​ $ 8,582 ​ $ 1,788,259 ​ ​ ​ Credit facility: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Revolving credit facility (3) ​ $ 100,000 ​ 4.19% ​ ​ $ 1,014 ​ $ 300,000 1.15% ​ Tranche A-1 Term Loan (4) ​ 200,000 ​ 2.61% ​ ​ — ​ 200,000 2.59% ​ Tranche A-2 Term Loan (4) ​ 350,000 ​ 3.40% ​ ​ — ​ 200,000 2.49% ​ ​ ​ $ 650,000 ​ ​ ​ ​ ​ $ 1,014 ​ $ 700,000 ​ ​ ​ Pro rata share of debt of unconsolidated real estate ventures (contractual balances): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Variable rate (1) ​ $ 130,587 ​ 6.31% ​ ​ $ 1,324 ​ $ 281,608 2.56% ​ Fixed rate (2) ​ 84,905 ​ 4.55% ​ ​ — ​ 91,653 4.49% ​ ​ ​ $ 215,492 ​ ​ ​ ​ ​ $ 1,324 ​ $ 373,261 ​ ​ ​ ​ (1) Includes variable rate mortgages with interest rate cap agreements. As of September 30, 2022, one-month LIBOR was 3.14% and one-month term SOFR was 3.04%, as applicable. (2) Includes variable rate mortgages with interest rates fixed by interest rate swap agreements. (3) As of September 30, 2022, one-month term SOFR was 3.04%. The interest rate for our revolving credit facility excludes a 0.15% facility fee. (4) As of September 30, 2022 and December 31, 2021, the outstanding balance was fixed by interest rate swap agreements. As of September 30, 2022, the interest rate swaps fix SOFR at a weighted average interest rate of 1.46% for the Tranche A-1 Term Loan and 2.15% for the Tranche A-2 Term Loan. See Note 7 to the financial statements for additional information. The fair value of our mortgages payable is estimated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit profiles based on market sources. The fair value of our revolving credit facility and unsecured term loans is calculated based on the net present value of payments over the term of the facilities using estimated market rates for similar notes and remaining terms. As of September 30, 2022 and December 31, 2021, the estimated fair value of our consolidated debt was $2.3 billion and $2.5 billion. These estimates of 50 Table of Contents fair value, which are made at the end of the reporting period, may be different from the amounts that may ultimately be realized upon the disposition of our financial instruments. Hedging Activities To manage or hedge our exposure to interest rate risk, we follow established risk management policies and procedures, including the use of a variety of derivative financial instruments. We do not enter into derivative financial instruments for speculative purposes. Derivative Financial Instruments Designated as Effective Hedges Certain derivative financial instruments, consisting of interest rate swap and cap agreements, are cash flow hedges that are designated as effective hedges, and are carried at their estimated fair value on a recurring basis. We assess the effectiveness of our hedges both at inception and on an ongoing basis. If the hedges are deemed to be effective, the fair value is recorded in "Accumulated other comprehensive income (loss)" in our balance sheets and is subsequently reclassified into "Interest expense" in our statements of operations in the period that the hedged forecasted transactions affect earnings. Our hedges become less than perfectly effective if the critical terms of the hedging instrument and the forecasted transactions do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and interest rates. In addition, we evaluate the default risk of the counterparty by monitoring the creditworthiness of the counterparty. While management believes its judgments are reasonable, a change in a derivative's effectiveness as a hedge could materially affect expenses, net income (loss) and equity. As of September 30, 2022 and December 31, 2021, we had interest rate swap and cap agreements with an aggregate notional value of $1.4 billion and $862.7 million, which were designated as effective hedges. The fair value of our interest rate swaps and caps designated as effective hedges consisted of assets totaling $52.6 million and $393,000 as of September 30, 2022 and December 31, 2021, included in "Other assets, net" in our balance sheets, and liabilities totaling $18.4 million as of December 31, 2021, included in "Other liabilities, net" in our balance sheet. Derivative Financial Instruments Designated as Ineffective Hedges Certain derivative financial instruments, consisting of interest rate swap and cap agreements, are cash flow hedges that are designated as ineffective hedges, and are carried at their estimated fair value on a recurring basis. Realized and unrealized gains or losses are recorded in "Interest expense" in our statements of operations. As of September 30, 2022 and December 31, 2021, we had various interest rate swap and cap agreements with an aggregate notional value of $711.8 million and $867.7 million, which were designated as ineffective hedges. The fair value of our interest rate swaps and caps designated as ineffective hedges consisted of assets totaling $9.4 million and $558,000 as of September 30, 2022 and December 31, 2021, included in "Other assets, net" in our balance sheets. ​