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, 2023 filed with the Securities and Exchange Commission on February 20, 2024 ("Annual Report") 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.
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, operates, invests in and develops mixed-use properties in high growth and high barrier-to-entry submarkets in and around Washington, D.C., most notably National Landing. Through an intense focus on placemaking, JBG SMITH cultivates vibrant, amenity-rich, walkable neighborhoods throughout the Washington, D.C. metropolitan area. Approximately 75.0% of our holdings are in the National Landing submarket in Northern Virginia, which is anchored by four key demand drivers: Amazon.com, Inc.'s ("Amazon") new headquarters; Virginia Tech's under-construction $1 billion Innovation Campus; the submarket’s proximity to the Pentagon; and our deployment of 5G digital infrastructure. In addition, our third-party asset management and real estate services business provides fee-based real estate services to 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 herein 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, but exclude our: (i) 10.0% subordinated interest in one commercial building, (ii) 33.5% subordinated interest in four commercial buildings (the "Fortress Assets"), (iii) 49.0% interest in three commercial buildings (the "L'Enfant Plaza Assets") and (iv) 9.9% interest in The Foundry, as well as the associated non-recourse mortgage loans, held through unconsolidated real estate ventures; these interests and debt are excluded because our investment in each real estate venture is zero, we do not anticipate receiving any near-term cash flow distributions from the real estate ventures, and we have not guaranteed their obligations or otherwise committed to providing financial support.
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."
References to our financial statements refer to our unaudited condensed consolidated financial statements as of March 31, 2024 and December 31, 2023, and for the three months ended March 31, 2024 and 2023. References to our balance sheets refer to our condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023. References
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to our statements of operations refer to our condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023. References to our statements of cash flows refer to our condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023.
The accompanying financial statements and notes 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 the 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 those activities.
We aggregate our operating segments into three reportable segments (multifamily, commercial, 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; this seasonality 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 March 31, 2024, our Operating Portfolio consisted of 41 operating assets comprising 15 multifamily assets totaling 6,318 units (6,318 units at our share), 24 commercial assets totaling 7.5 million square feet (7.2 million square feet at our share) and two wholly owned land assets for which we are the ground lessor. Additionally, we have two under-construction multifamily assets with 1,583 units (1,583 units at our share) and 18 assets in the development pipeline totaling 11.3 million square feet (9.3 million square feet at our share) of estimated potential development density.
We continue to implement our comprehensive plan to reposition our holdings in the National Landing submarket in Northern Virginia by executing a broad array of placemaking strategies. Our placemaking includes 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. To that end, we saw the delivery of two placemaking projects, Water Park and Surreal in 2023. Additionally, the digital infrastructure investments we are making, including our ownership of Citizens Broadband Radio Service wireless spectrum in National Landing and our agreements with AT&T, Cisco and Federated Wireless, are advancing our efforts to make National Landing among the first 5G-operable submarkets in the nation.
Outlook
A fundamental component of our strategy to maximize long-term net asset value ("NAV") per share is active capital allocation. We evaluate development, acquisition, disposition, share repurchases and other investment decisions based on
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how they may impact long-term NAV per share. We intend to continue to opportunistically sell or recapitalize assets as well as land sites where a ground lease or joint venture execution may represent the most attractive path to maximizing value. Successful execution of our capital allocation strategy enables us to source capital at NAV from the disposition of assets generating low cash yields and invest those proceeds in new acquisitions with higher cash yields and growth, development projects with significant yield spreads and profit potential, and share repurchases. Consequently, at any given time, we expect to be in various stages of discussions and negotiations with potential buyers, real estate venture partners, ground lessors and other counterparties with respect to sales, joint ventures and/or ground leases for certain of our assets, including portfolios thereof. These discussions and negotiations may or may not lead to definitive documentation or closed transactions. We anticipate redeploying the proceeds from these sales will not only help fund our planned growth, but will also further advance the strategic shift of our portfolio to majority multifamily. Current market conditions have significantly slowed down the pace of asset sales, and we expect this reduced activity to continue in 2024.
Our multifamily portfolio occupancy as of March 31, 2024 of 94.3% decreased by 40 basis points compared to December 31, 2023. First quarter lease expirations increased effective rents, which represent the average change in rental rates versus expiring rental rates net of concessions, by 9.4% upon renewal while achieving a 52.4% renewal rate across our portfolio. We continue to advance our two under-construction multifamily assets in National Landing, 1900 Crystal Drive (The Grace and Reva) and 2000/2001 South Bell Street, totaling 1,583 units. 1900 Crystal Drive began leasing in January 2024 with move-ins commencing in February 2024 and expected delivery of all remaining units in the second quarter of 2024. 2000/2001 South Bell Street is expected to deliver in the third quarter of 2025. We expect that interest expense will increase as we deliver our under-construction assets and cease capitalization of interest on those assets.
Our office portfolio occupancy as of March 31, 2024 of 83.1% decreased by 180 basis points as compared to December 31, 2023. As the office market continues to experience headwinds due to hybrid work trends and tenants seeking to repurpose space for flexibility, we anticipate continued weakness in the commercial office sector. In this environment, we expect many tenants will look for space that is newer or repurposed for their current flexible workspace needs. We have also seen tenants lease space but contract their total footprint. Accordingly, our efforts to re-lease certain spaces will be targeted toward buildings with long-term viability where we can concentrate occupancy, and we intend to take some of our other buildings out of service. In addition to 1800 South Bell Street, which we took out of service in the first quarter of 2024, we plan to take 2100 Crystal Drive out of service when Amazon vacates in the second quarter of 2024. We are also phasing 2200 Crystal Drive out of service as leases expire. With the objective of ultimately reducing our competitive office inventory in National Landing, we expect to repurpose these older, obsolete and under-leased buildings for redevelopment, conversion to multifamily, hospitality or another specialty use.
We continue to advance the design and entitlement of our 11.3 million square feet (9.3 million square feet at our share) of estimated potential development density in our development pipeline and will look to source joint venture capital as a means of funding these developments as market conditions permit.
Operating Results
Key highlights for the three months ended March 31, 2024 included:
● net loss attributable to common shareholders of $32.3 million, or $0.36 per diluted common share, for the three months ended March 31, 2024 compared to net income attributable to common shareholders of $21.2 million, or $0.19 per diluted common share, for the three months ended March 31, 2023;
● third-party real estate services revenue, including reimbursements, of $17.9 million and $22.8 million for the three months ended March 31, 2024 and 2023;
● operating multifamily portfolio leased and occupied percentages (1) at our share of 95.9% and 94.3% as of March 31, 2024 compared to 96.0% and 94.7% as of December 31, 2023, and 95.0% and 92.9% as of March 31, 2023;
● operating commercial portfolio leased and occupied percentages at our share of 84.6% and 83.1% as of March 31, 2024 compared to 86.3% and 84.9% as of December 31, 2023, and 87.6% and 85.2% as of March 31, 2023;
● the leasing of 99,000 square feet at our share, at an initial rent (2) of $45.68 per square foot and a GAAP-basis weighted average rent per square foot (3) of $45.38 for the three months ended March 31, 2024; and
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● an increase in same store (4) NOI of 6.5% to $75.7 million for the three months ended March 31, 2024 compared to $71.1 million for the three months ended March 31, 2023.
(1) 2221 S. Clark Street - Residential and 900 W Street are excluded from leased and occupied percentages as they are operated as short-term rental properties.
(2) Represents the cash basis weighted average starting rent per square foot at our share, which excludes free rent and fixed escalations .
(3) 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.
(4) Includes the results of the properties that are owned, operated and in-service for the entirety of both periods being compared except for properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
Additionally, investing and financing activity during the three months ended March 31, 2024 included:
● the sale of North End Retail. See Note 3 to the financial statements for additional information;
● the sale of Central Place Tower by one of our unconsolidated real estate ventures. See Note 4 to the financial statements for additional information;
● net repayment of $62.0 million under our revolving credit facility;
● the payment of dividends totaling $16.1 million and distributions to redeemable noncontrolling interests of $2.9 million;
● the repurchase and retirement of 3.0 million of our common shares for $49.4 million, a weighted average purchase price per share of $16.50; and
● the investment of $48.0 million in development costs, construction in progress and real estate additions.
Activity subsequent to March 31, 2024 included:
● the declaration of a quarterly dividend of $0.175 per common share, payable on May 24, 2024 to shareholders of record as of May 10, 2024.
Critical Accounting Estimates
Our Annual Report contains a description of our critical accounting estimates, including asset acquisitions, real estate, investments in real estate ventures and revenue recognition. There have been no significant changes to our policies during the three months ended March 31, 2024.
Recent Accounting Pronouncements
See Note 2 to the financial statements for a description of recent accounting pronouncements.
Results of Operations
During the three months ended March 31, 2024, we sold North End Retail. In 2023, we sold an 80.0% interest in 4747 Bethesda Avenue to an unconsolidated real estate venture, and we sold Falkland Chase-South & West/North, 5 M Street Southwest, Crystal City Marriott and Capital Point-North-75 New York Avenue. We collectively refer to these assets as the "Disposed Properties" in the discussion below.
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Comparison of the Three Months Ended March 31, 2024 to 2023
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 March 31, 2024 compared to the same period in 2023:
Three Months Ended March 31,
2024
2023
% Change
(Dollars in thousands)
Property rental revenue
$
122,636
$
124,033
(1.1)
%
Third-party real estate services revenue, including reimbursements
17,868
22,784
(21.6)
%
Depreciation and amortization expense
56,855
53,431
6.4
%
Property operating expense
35,279
35,612
(0.9)
%
Real estate taxes expense
13,795
15,224
(9.4)
%
General and administrative expense:
Corporate and other
14,973
16,123
(7.1)
%
Third-party real estate services
22,327
23,823
(6.3)
%
Share-based compensation related to Formation Transaction and special equity awards
—
351
(100.0)
%
Income from unconsolidated real estate ventures, net
975
433
125.2
%
Interest expense
30,160
26,842
12.4
%
Gain on the sale of real estate, net
197
40,700
(99.5)
%
Impairment loss
17,211
—
*
_____________
* Not meaningful.
Property rental revenue decreased by approximately $1.4 million, or 1.1%, to $122.6 million in 2024 from $124.0 million in 2023. The decrease was primarily due to a $14.3 million decrease in revenue from our commercial assets, partially offset by $10.3 million in lease termination revenue, a $1.5 million increase in revenue from our multifamily assets and a $1.1 million increase in other revenue. The decrease in revenue from our commercial assets was primarily due to a $3.8 million decrease related to the Disposed Properties, a $2.1 million decrease related to 1800 South Bell Street, which was taken out of service during the first quarter of 2024, and lower occupancy and rents across the portfolio. The increase in revenue from our multifamily assets was primarily due to higher occupancy and rents across the portfolio and continued lease up of 8001 Woodmont, partially offset by a $2.6 million decrease related to the Disposed Properties.
Third-party real estate services revenue, including reimbursements, decreased by approximately $4.9 million, or 21.6%, to $17.9 million in 2024 from $22.8 million in 2023. The decrease was primarily due to a $2.0 million decrease in reimbursement revenue, a $1.7 million decrease in development fees related to the timing of development projects and a $681,000 decrease in property management fees.
Depreciation and amortization expense increased by approximately $3.4 million, or 6.4%, to $56.9 million in 2024 from $53.4 million in 2023. The increase was primarily due to (i) a $7.7 million increase related to 2100 Crystal Drive due to the acceleration of depreciation of certain assets as the building will be taken out of service in the second quarter of 2024, (ii) a $2.3 million increase related to 1900 Crystal Drive, which we began leasing during the first quarter of 2024, and (iii) a $1.7 million increase related to various National Landing assets primarily due to placing Water Park and Surreal into service and the acceleration of depreciation of certain assets. The increase in depreciation and amortization expense was partially offset by (iv) a $3.3 million decrease related to 8001 Woodmont due to the amortization of acquired in-place lease intangibles in 2023, (v) a $3.0 million decrease related to the Disposed Properties and (vi) a $2.2 million decrease related to 1800 South Bell Street, which was taken out of service during the first quarter of 2024.
Property operating expense decreased by approximately $333,000, or 0.9%, to $35.3 million in 2024 from $35.6 million in 2023. The decrease was primarily due to a $2.3 million decrease in property operating expense from our commercial assets and a $49,000 decrease in property operating expense from our multifamily assets, partially offset by a $2.0 million increase in other property operating expense. The decrease in property operating expense from our commercial assets was primarily due to a $1.3 million decrease related to the Disposed Properties, a $699,000 decrease in construction management services provided to tenants and a $329,000 decrease related to 1800 South Bell Street, which was taken out of service during the
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first quarter of 2024. The increase in other property operating expense was primarily due to a $1.3 million increase in insurance claims covered by our captive insurance subsidiary.
Real estate taxes expense decreased by approximately $1.4 million, or 9.4%, to $13.8 million in 2024 from $15.2 million in 2023. The decrease was primarily due to a $1.1 million decrease related to the Disposed Properties.
General and administrative expense: corporate and other decreased by approximately $1.2 million, or 7.1%, to $15.0 million in 2024 from $16.1 million in 2023. The decrease was primarily due to lower compensation expenses, partially offset by a decrease in capitalized payroll.
General and administrative expense: third-party real estate services decreased by approximately $1.5 million, or 6.3%, to $22.3 million in 2024 from $23.8 million in 2023. The decrease was primarily due to lower third-party reimbursable expenses.
General and administrative expense: share-based compensation related to Formation Transaction and special equity awards decreased by approximately $351,000, or 100.0%, to $0 in 2024 from $351,000 in 2023. The decrease was due to certain awards fully vesting in 2023.
Income from unconsolidated real estate ventures increased by approximately $542,000, or 125.2%, to $975,000 in 2024 from $433,000 in 2023. The increase was primarily due to a $480,000 gain at our share from the sale of Central Place Tower in 2024.
Interest expense increased by approximately $3.3 million, or 12.4%, to $30.2 million in 2024 from $26.8 million in 2023. The increase in interest expense was primarily due to (i) a $6.8 million increase due to higher outstanding debt, (ii) a $3.1 million increase related to rising interest rates on variable rate mortgage loans and (iii) a $550,000 decrease in capitalized interest as we began placing 1900 Crystal Drive into service during the first quarter of 2024. The increase in interest expense was partially offset by (iv) a $2.7 million decrease related to the increase in mark-to-market associated with our non-designated derivatives, (v) a $2.7 million decrease related to mortgage loans collateralized by 800 North Glebe Road, 2121 Crystal Drive and Falkland Chase-South & West, which were repaid during 2023 and (vi) a $2.1 million decrease related to the Disposed Properties, excluding Falkland Chase-South & West.
Gain on the sale of real estate of $197,000 in 2024 was primarily due to the recognition of previously recorded contingent liabilities, which were relieved in connection with the sale of Central Place Tower by one of our unconsolidated real estate ventures, partially offset by the loss on the sale of North End Retail. Gain on the sale of real estate of $40.7 million in 2023 was due to the sale of the Disposed Properties.
Impairment loss of $17.2 million in 2024 is related to a development parcel, which was written down to its estimated fair value.
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 expense related to real estate, gains (losses) from the sale of certain real estate assets, gains (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, which implicitly assumes that the value of real estate diminishes predictably over time rather than fluctuating based on market conditions and other non-comparable income and expenses. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should
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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 March 31,
2024
2023
(In thousands)
Net income (loss) attributable to common shareholders
$
(32,276)
$
21,171
Net income (loss) attributable to redeemable noncontrolling interests
(4,534)
3,363
Net loss attributable to noncontrolling interests
(5,380)
(224)
Net income (loss)
(42,190)
24,310
Gain on the sale of real estate, net of tax
(1,409)
(40,700)
Gain on the sale of unconsolidated real estate assets
(480)
—
Real estate depreciation and amortization
55,187
51,611
Pro rata share of real estate depreciation and amortization from unconsolidated real estate ventures
1,491
2,760
FFO attributable to noncontrolling interests
—
224
FFO attributable to common limited partnership units ("OP Units")
12,599
38,205
FFO attributable to redeemable noncontrolling interests
(1,921)
(5,203)
FFO attributable to common shareholders
$
10,678
$
33,002
NOI and Same Store NOI
NOI is a non-GAAP financial measure management uses to assess an asset's performance. The most directly comparable GAAP measure is net income (loss) attributable to common shareholders. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only property related revenue (which includes base rent, tenant reimbursements and other operating revenue, net of free rent and payments associated with assumed lease liabilities) less operating expenses and ground rent for operating leases, 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 expense 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.
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 disposed properties or properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared. During the three months ended March 31, 2024, our same store pool decreased to 41 properties from 42 properties due to (i) the sale of North End Retail and Central Place Tower, (ii) the exclusion of 1800 South Bell Street, which was taken out of service, and (iii) the inclusion of 8001 Woodmont and 1831/1861 Wiehle Avenue as they were in service for the entirety of the comparable periods. 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
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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 increased $4.6 million, or 6.5%, to $75.7 million for the three months ended March 31, 2024 from $71.1 million for the same period in 2023. The increase was substantially attributable to (i) higher rents and occupancy, partially offset by higher operating expenses in our multifamily portfolio and (ii) burn off of rent abatements and lower bad debt, real estate taxes and operating expenses, partially offset by lower occupancy in our commercial portfolio.
The following is the reconciliation of net income (loss) attributable to common shareholders to NOI and same store NOI:
Three Months Ended March 31,
2024
2023
(Dollars in thousands)
Net income (loss) attributable to common shareholders
$
(32,276)
$
21,171
Add:
Depreciation and amortization expense
56,855
53,431
General and administrative expense:
Corporate and other
14,973
16,123
Third-party real estate services
22,327
23,823
Share-based compensation related to Formation Transaction and special equity awards
—
351
Transaction and other costs
1,514
2,472
Interest expense
30,160
26,842
Impairment loss
17,211
—
Income tax benefit
(1,468)
(16)
Net income (loss) attributable to redeemable noncontrolling interests
(4,534)
3,363
Net loss attributable to noncontrolling interests
(5,380)
(224)
Less:
Third-party real estate services, including reimbursements revenue
17,868
22,784
Other revenue
11,263
1,726
Income from unconsolidated real estate ventures, net
975
433
Interest and other income, net
2,100
4,077
Gain on the sale of real estate, net
197
40,700
Consolidated NOI
66,979
77,616
NOI attributable to unconsolidated real estate ventures at our share
3,046
4,429
Non-cash rent adjustments (1)
(1,430)
(8,377)
Other adjustments (2)
5,240
6,845
Total adjustments
6,856
2,897
NOI
73,835
80,513
Less: out-of-service NOI loss (3)
(3,032)
(710)
Operating Portfolio NOI
76,867
81,223
Non-same store NOI (4)
1,130
10,109
Same store NOI (5)
$
75,737
$
71,114
Change in same store NOI
6.5%
Number of properties in same store pool
41
(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 related party management fees.
(3) Includes the results of our under-construction assets and assets in the development pipeline.
(4) Includes the results of properties that were not in-service for the entirety of both periods being compared, including disposed properties, 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.
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Reportable Segments
We review operating and financial data for each property on an individual basis; therefore, each of our individual properties is a separate operating segment. We define 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 (multifamily, commercial, 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.
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 asset management and real estate services business:
Three Months Ended March 31,
2024
2023
(In thousands)
Property management fees
$
4,271
$
4,952
Asset management fees
924
1,103
Development fees
238
1,986
Leasing fees
1,135
1,356
Construction management fees
383
340
Other service revenue
1,054
1,224
Third-party real estate services revenue, excluding reimbursements
8,005
10,961
Reimbursement revenue (1)
9,863
11,823
Third-party real estate services revenue, including reimbursements
17,868
22,784
Third-party real estate services expenses
22,327
23,823
Third-party real estate services revenue less expenses
$
(4,459)
$
(1,039)
(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.
See discussion of third-party real estate services revenue, including reimbursements, and third-party real estate services expenses for the three months ended March 31, 2024 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. 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 months ended March 31, 2024 and 2023.
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The following is a summary of NOI by segment:
Three Months Ended March 31,
2024
2023
(In thousands)
Property revenue: (1)
Multifamily
$
51,627
$
50,134
Commercial
61,179
76,055
Other (2)
3,247
2,263
Total property revenue
116,053
128,452
Property expense: (3)
Multifamily
23,363
23,063
Commercial
24,478
28,372
Other (2)
1,233
(599)
Total property expense
49,074
50,836
Consolidated NOI:
Multifamily
28,264
27,071
Commercial
36,701
47,683
Other (2)
2,014
2,862
Consolidated NOI
$
66,979
$
77,616
(1) Includes property rental revenue and parking revenue.
(2) Includes activity related to development assets, corporate entities, land assets for which we are the ground lessor and the elimination of inter-segment activity.
(3) Includes property operating expenses and real estate taxes.
Comparison of the Three Months Ended March 31, 2024 to 2023
Multifamily: Property revenue increased by $1.5 million, or 3.0%, to $51.6 million in 2024 from $50.1 million in 2023. Consolidated NOI increased by $1.2 million, or 4.4%, to $28.3 million in 2024 from $27.1 million in 2023. The increases in property revenue and consolidated NOI were primarily due to higher occupancy and rents across the portfolio, partially offset by the Disposed Properties. The increase in consolidated NOI was partially offset by an increase in property operating costs.
Commercial: Property revenue decreased by $14.9 million, or 19.6%, to $61.2 million in 2024 from $76.1 million in 2023. Consolidated NOI decreased by $11.0 million, or 23.0%, to $36.7 million in 2024 from $47.7 million in 2023. The decreases in property revenue and consolidated NOI were primarily due to the Disposed Properties, 1800 South Bell Street being taken out of service during the first quarter of 2024, and lower occupancy and rents across the portfolio.
Liquidity and Capital Resources
Property rental income is our primary source of operating cash flow and depends 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 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 and long-term incentive partnership units ("LTIP 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, asset sales and recapitalizations, 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 and LTIP Units over the next 12 months.
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Mortgage Loans
The following is a summary of mortgage loans:
Weighted Average
Effective
Interest Rate (1)
March 31, 2024
December 31, 2023
(In thousands)
Variable rate (2)
6.31%
$
641,382
$
608,582
Fixed rate (3)
4.78%
1,189,484
1,189,643
Mortgage loans
1,830,866
1,798,225
Unamortized deferred financing costs and premium/discount, net
(14,358)
(15,211)
Mortgage loans, net
$
1,816,508
$
1,783,014
(1) Weighted average effective interest rate as of March 31, 2024.
(2) Includes variable rate mortgage loans with interest rate cap agreements. For mortgage loans with interest rate caps, the weighted average interest rate cap strike was 3.41%, and the weighted average maturity date of the interest rate caps was April 2025. The interest rate cap strike is exclusive of the credit spreads associated with the mortgage loans. As of March 31, 2024, one-month term Secured Overnight Financing Rate ("SOFR") was 5.33%.
(3) Includes variable rate mortgages with interest rates fixed by interest rate swap agreements.
As of March 31, 2024 and December 31, 2023, the net carrying value of real estate collateralizing our mortgage loans totaled $2.2 billion. Our mortgage loans 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 mortgage loans are recourse to us. See Note 17 to the financial statements for additional information.
As of March 31, 2024 and December 31, 2023, we had various interest rate swap and cap agreements on certain mortgage loans with an aggregate notional value of $1.6 billion and $1.7 billion. See Note 15 to the financial statements for additional information.
Revolving Credit Facility and Term Loans
As of March 31, 2024 and December 31, 2023, our unsecured revolving credit facility and term loans totaling $1.5 billion consisted of a $750.0 million revolving credit facility maturing in June 2027, a $200.0 million term loan ("Tranche A-1 Term Loan") maturing in January 2025, a $400.0 million term loan ("Tranche A-2 Term Loan") maturing in January 2028 and a $120.0 million term loan ("2023 Term Loan") maturing in June 2028. The revolving credit facility has two six-month extension options, and the Tranche A-1 Term Loan has two one-year extension options.
The following is a summary of amounts outstanding under the revolving credit facility and term loans:
Effective
Interest Rate (1)
March 31, 2024
December 31, 2023
(In thousands)
Revolving credit facility (2) (3)
6.79%
$
—
$
62,000
Tranche A-1 Term Loan (4)
2.70%
$
200,000
$
200,000
Tranche A-2 Term Loan (5)
3.58%
400,000
400,000
2023 Term Loan (6)
5.31%
120,000
120,000
Term loans
720,000
720,000
Unamortized deferred financing costs, net
(2,609)
(2,828)
Term loans, net
$
717,391
$
717,172
(1) Effective interest rate as of March 31, 2024. The interest rate for our revolving credit facility excludes a 0.15% facility fee.
(2) As of March 31, 2024, daily SOFR was 5.34%. As of March 31, 2024 and December 31, 2023, letters of credit with an aggregate face amount of $467,000 were outstanding under our revolving credit facility.
(3) As of March 31, 2024 and December 31, 2023, excludes $9.5 million and $10.2 million of net deferred financing costs related to our revolving credit facility that were included in "Other assets, net" in our balance sheets.
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(4) As of March 31, 2024 and December 31, 2023, the interest rate swaps fix SOFR at a weighted average interest rate of 1.46%. Interest rate swaps with a total notional value of $200.0 million mature in July 2024. We have two forward-starting interest rate swaps that will be effective July 2024 with a total notional value of $200.0 million, which will effectively fix SOFR at a weighted average interest rate of 4.00% through January 2027.
(5) As of March 31, 2024 and December 31, 2023, the interest rate swaps fix SOFR at a weighted average interest rate of 2.29%. Interest rate swaps with a total notional value of $200.0 million mature in July 2024 and with a total notional value of $200.0 million mature in January 2028. We have two forward-starting interest rate swaps that will be effective July 2024 with a total notional value of $200.0 million, which will effectively fix SOFR at a weighted average interest rate of 2.81% through the maturity date.
(6) As of March 31, 2024 and December 31, 2023, the outstanding balance was fixed by an interest rate swap agreement, which fixes SOFR at an interest rate of 4.01% through the maturity date.
Common Shares Repurchased
Our Board of Trustees has authorized the repurchase of up to $1.5 billion of our outstanding common shares. During the three months ended March 31, 2024, we repurchased and retired 3.0 million common shares for $49.4 million, a weighted average purchase price per share of $16.50. During the three months ended March 31, 2023, we repurchased and retired 1.2 million common shares for $20.1 million, a weighted average purchase price per share of $16.66. Since we began the share repurchase program through March 31, 2024, we have repurchased and retired 48.9 million common shares for $1.0 billion, a weighted average purchase price per share of $20.61.
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, applicable legal requirements and other factors. The program may be suspended or discontinued at our discretion without prior notice.
Material Cash Requirements
Our material cash requirements for the next 12 months and beyond are to fund:
● normal recurring expenses;
● debt service and principal repayment obligations, including balloon payments on maturing mortgage loans — As of March 31, 2024, we had $120.9 million on a consolidated basis and at our share related to a mortgage loan scheduled to mature in 2024;
● capital expenditures, including major renovations, tenant improvements and leasing costs — As of March 31, 2024, we had committed tenant-related obligations totaling $33.4 million ($33.3 million related to our consolidated entities and $113,000 related to our unconsolidated real estate ventures at our share);
● development expenditures — As of March 31, 2024, we had assets under construction that, based on our current plans and estimates, require an additional $134.4 million to complete, which we anticipate will be primarily expended over the next two years;
● dividends to shareholders and distributions to holders of OP Units and LTIP Units — On April 25, 2024, our Board of Trustees declared a quarterly dividend of $0.175 per common share;
● possible common share repurchases; and
● possible acquisitions of properties, either directly or indirectly through the acquisition of equity interests.
We expect to satisfy these needs using one or more of the following:
● cash and cash equivalents — As of March 31, 2024, we had cash and cash equivalents of $220.5 million ;
● cash flows from operations;
● distributions from real estate ventures;
● borrowing capacity under our revolving credit facility — As of March 31, 2024, we had $749.5 million of availability under our revolving credit facility;
● proceeds from financings, asset sales and recapitalizations; and
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● proceeds from the issuance of securities.
During the three months ended March 31, 2024, there were no significant changes to the material cash requirements information presented in Item 7 of Part II of our Annual Report.
See additional information in the following pages under "Commitments and Contingencies."
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:
Three Months Ended March 31,
2024
2023
(In thousands)
Net cash provided by operating activities
$
37,043
$
42,632
Net cash provided by (used in) investing activities
123,602
(26,673)
Net cash (used in) provided by financing activities
(100,820)
31,860
Cash Flows for the Three Months Ended March 31, 2024
Cash and cash equivalents, and restricted cash increased $59.8 million to $260.3 million as of March 31, 2024, compared to $200.4 million as of December 31, 2023. This increase resulted from $123.6 million of net cash provided by investing activities and $37.0 million of net cash provided by operating activities, partially offset by $100.8 million of net cash used in financing activities. Our outstanding debt was $2.6 billion as of March 31, 2024 and December 31, 2023.
Net cash provided by operating activities of $37.0 million comprised: (i) $38.2 million of net income (before $80.6 million of non-cash items and a $197,000 gain on the sale of real estate), (ii) $1.2 million of return on capital from unconsolidated real estate ventures and (iii) $2.3 million of net change in operating assets and liabilities. Non-cash income adjustments of $80.6 million primarily include depreciation and amortization expense, impairment loss, share-based compensation expense, deferred rent and amortization of lease incentives.
Net cash provided by investing activities of $123.6 million primarily comprised: (i) $160.3 million of distributions of capital from unconsolidated real estate ventures and other investments primarily related to the sale of Central Place Tower by one of our unconsolidated real estate ventures, and (ii) $12.4 million of proceeds from the sale of real estate, partially offset by (iii) $48.0 million of development costs, construction in progress and real estate additions, and (iv) $2.5 million of investments in unconsolidated real estate ventures and other investments.
Net cash used in financing activities of $100.8 million primarily comprised: (i) $92.0 million of repayments on the revolving credit facility, (ii) $49.4 million of common shares repurchased, (iii) $16.1 million of dividends paid to common shareholders and (iv) $2.9 million of distributions to our redeemable noncontrolling interests, partially offset by (v) $31.6 million of borrowings under mortgage loans and (vi) $30.0 million of borrowings under the revolving credit facility.
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 March 31, 2024, we had investments in unconsolidated real estate ventures totaling $104.8 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.
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
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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 March 31, 2024, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures and other investments totaling $58.7 million. As of March 31, 2024, we had no debt principal payment guarantees related to our unconsolidated real estate ventures.
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 $1.0 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 conventional 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 mortgage loans secured by our properties, a revolving credit facility and 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 a reasonable cost 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 March 31, 2024, we had assets under construction that, based on our current plans and estimates, require an additional $134.4 million to complete, which we anticipate will be primarily expended over the next 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 sales and recapitalizations, and available cash.
Other
As of March 31, 2024, we had committed tenant-related obligations totaling $33.4 million ($33.3 million related to our consolidated entities and $113,000 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.
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
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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 March 31, 2024, the aggregate amount of debt principal payment guarantees was $8.3 million for our consolidated entities.
In connection with the Formation Transaction, we have an agreement with Vornado regarding tax matters (the "Tax Matters Agreement") that provides special rules that allocate tax liabilities if the distribution of JBG SMITH shares by Vornado, together with certain related transactions, is determined not to be tax-free. Under the Tax Matters Agreement, we may be 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, a current or former owner or operator of real estate may be liable for conducting or paying for the costs of the investigation, removal or remediation of certain hazardous or toxic substances on that real estate. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances, and the liability may be joint and several. The costs of remediation or removal of these substances may be substantial and could exceed the value of the property, and the presence of these substances, or the failure to promptly remediate these substances, may adversely affect the owner's ability to sell or develop the real estate or to borrow using the real estate as collateral. In connection with the ownership and operation of our current and former assets, we may be potentially liable for these costs. The operations of current and former tenants at our assets have involved, or may have involved, the use of hazardous substances or generated hazardous wastes, and indemnities in our lease agreements may not fully protect us from liability, if, for example, a tenant responsible for environmental noncompliance or contamination becomes insolvent. The release of these hazardous substances 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 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 arrange for contaminated materials to be sent to other locations for treatment or disposal, we may be liable for the cleanup of those sites if they become contaminated, without regard to whether we complied with environmental laws in doing so.
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 other features, and the preparation and issuance of a written report. Soil, soil vapor 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. The tests 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 have not revealed 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 $17.6 million as of March 31, 2024 and December 31, 2023, and are included in "Other liabilities, net" in our balance sheets.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.