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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2024 ​ December 31, 2023 ​ ​ ​ 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Mortgage loans: ​ ​ ​ ​ ​ ​ ​ Variable rate (1) ​ $ 641,382 ​ 6.31% ​ ​ $ 1,445 ​ $ 608,582 6.25% ​ Fixed rate (2) ​ 1,189,484 ​ 4.78% ​ ​ — ​ 1,189,643 4.78% ​ ​ ​ $ 1,830,866 ​ ​ ​ ​ ​ $ 1,445 ​ $ 1,798,225 ​ ​ ​ Revolving credit facility and term loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Revolving credit facility (3) ​ $ — ​ 6.79% ​ ​ $ — ​ $ 62,000 6.83% ​ Tranche A-1 Term Loan (4) ​ 200,000 ​ 2.70% ​ ​ — ​ 200,000 2.70% ​ Tranche A-2 Term Loan (4) ​ 400,000 ​ 3.58% ​ ​ — ​ 400,000 3.58% ​ 2023 Term Loan (4) ​ ​ 120,000 ​ ​ 5.31% ​ ​ ​ — ​ ​ 120,000 ​ 5.31% ​ ​ ​ $ 720,000 ​ ​ ​ ​ ​ $ — ​ $ 782,000 ​ ​ ​ Pro rata share of debt of unconsolidated real estate ventures (contractual balances): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Variable rate (1) ​ $ 35,000 ​ 5.73% ​ ​ $ — ​ $ 35,000 5.00% ​ Fixed rate (2) ​ 33,000 ​ 4.13% ​ ​ — ​ 33,000 4.13% ​ ​ ​ $ 68,000 ​ ​ ​ ​ ​ $ — ​ $ 68,000 ​ ​ ​ (1) 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 SOFR was 5.33%. The impact of these interest rate caps is reflected in our calculation of the annual effect of a 1% change in base rates. (2) Includes variable rate mortgages with interest rates fixed by interest rate swap agreements. (3) As of March 31, 2024, daily SOFR was 5.34%. The interest rate for our revolving credit facility excludes a 0.15% facility fee. (4) As of March 31, 2024 and December 31, 2023, the outstanding balance was fixed by interest rate swap agreements. As of March 31, 2024, the interest rate swaps fix SOFR at a weighted average interest rate of 1.46% for the Tranche A-1 Term Loan, 2.29% for the Tranche A-2 Term Loan and 4.01% for the 2023 Term Loan. See Note 7 to the financial statements for additional information. The fair value of our mortgage loans 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 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 March 31, 2024 and December 31, 2023, the estimated fair value of our consolidated debt was $2.5 billion. These estimates of 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. 43 Table of Contents 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" 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 March 31, 2024 and December 31, 2023, we had interest rate swap and cap agreements with an aggregate notional value of $2.2 billion, which were designated as effective hedges. The fair value of our interest rate swaps and caps designated as effective hedges primarily consisted of assets totaling $40.6 million and $35.6 million as of March 31, 2024 and December 31, 2023, included in "Other assets, net" in our balance sheets, and liabilities totaling $16,000 and $7.9 million as of March 31, 2024 and December 31, 2023, included in "Other liabilities, net" in our balance sheet. Non-Designated Derivatives Certain derivative financial instruments, consisting of interest rate cap agreements, do not meet the accounting requirements to be classified as hedging instruments. These derivatives are carried at their estimated fair value on a recurring basis with realized and unrealized gains recorded in "Interest expense" in our statements of operations. As of March 31, 2024 and December 31, 2023, we had various interest rate cap agreements with an aggregate notional value of $475.2 million and $642.7 million, which were non-designated derivatives. The fair value of our interest rate cap agreements which were non-designated derivatives consisted of assets totaling $6.5 million and $6.7 million as of March 31, 2024 and December 31, 2023, included in "Other assets, net" in our balance sheets, and liabilities totaling $6.4 million and $6.5 million as of March 31, 2024 and December 31, 2023, included in "Other liabilities, net" in our balance sheets.