UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from ___________ to ___________
Commission file number
________________________________________________________________________________
(Exact name of Registrant as specified in its charter)
Registrant's telephone number, including area code: (
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes
As of July 26, 2024, JBG SMITH Properties had
JBG SMITH PROPERTIES
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2024
TABLE OF CONTENTS
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
JBG SMITH PROPERTIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value amounts)
| June 30, 2024 |
| December 31, 2023 | |||
ASSETS |
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Real estate, at cost: |
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Land and improvements | $ | | $ | | ||
Buildings and improvements |
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Construction in progress, including land |
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Less: accumulated depreciation |
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Real estate, net |
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Cash and cash equivalents |
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Restricted cash |
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Tenant and other receivables |
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Deferred rent receivable |
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Investments in unconsolidated real estate ventures |
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Deferred leasing costs, net | | | ||||
Intangible assets, net | | | ||||
Other assets, net |
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TOTAL ASSETS | $ | | $ | | ||
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY |
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Liabilities: |
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Mortgage loans, net | $ | | $ | | ||
Revolving credit facility |
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Term loans, net |
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Accounts payable and accrued expenses |
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Other liabilities, net |
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Total liabilities |
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Commitments and contingencies |
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Redeemable noncontrolling interests |
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Shareholders' equity: |
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Preferred shares, $ |
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Common shares, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive income |
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Total shareholders' equity of JBG SMITH Properties |
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Noncontrolling interests |
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Total equity |
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TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | $ | | $ | |
See accompanying notes to the condensed consolidated financial statements (unaudited).
3
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
REVENUE |
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Property rental | $ | | $ | | $ | | $ | | ||||
Third-party real estate services, including reimbursements |
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Other revenue |
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Total revenue |
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EXPENSES |
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Depreciation and amortization |
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Property operating |
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Real estate taxes |
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General and administrative: |
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Corporate and other |
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Third-party real estate services |
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Share-based compensation related to Formation Transaction and special equity awards |
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Transaction and other costs |
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Total expenses |
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OTHER INCOME (EXPENSE) |
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Income (loss) from unconsolidated real estate ventures, net |
| ( |
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Interest and other income, net |
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Interest expense |
| ( |
| ( |
| ( |
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Gain on the sale of real estate, net |
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| — |
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Loss on the extinguishment of debt |
| — |
| ( |
| — |
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Impairment loss | ( | — | ( | — | ||||||||
Total other income (expense) |
| ( |
| ( |
| ( |
| ( | ||||
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT |
| ( | ( |
| ( |
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Income tax (expense) benefit |
| ( |
| ( |
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NET INCOME (LOSS) |
| ( |
| ( |
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Net (income) loss attributable to redeemable noncontrolling interests |
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Net loss attributable to noncontrolling interests |
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NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | ( | $ | ( | $ | ( | $ | | ||||
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED | ( | ( | ( | | ||||||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED |
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See accompanying notes to the condensed consolidated financial statements (unaudited).
4
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
NET INCOME (LOSS) | $ | ( | $ | ( | $ | ( | $ | | ||||
OTHER COMPREHENSIVE INCOME (LOSS): |
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Change in fair value of derivative financial instruments |
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Reclassification of net income on derivative financial instruments from accumulated other comprehensive income into interest expense |
| ( |
| ( |
| ( |
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Total other comprehensive income (loss) |
| ( |
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| ( | ||||
COMPREHENSIVE INCOME (LOSS) |
| ( |
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| ( |
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Net (income) loss attributable to redeemable noncontrolling interests |
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Net loss attributable to noncontrolling interests | | | | | ||||||||
Other comprehensive (income) loss attributable to redeemable noncontrolling interests |
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| ( |
| ( |
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Other comprehensive income attributable to noncontrolling interests | ( | ( | ( | ( | ||||||||
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO JBG SMITH PROPERTIES | $ | ( | $ | | $ | ( | $ | |
See accompanying notes to the condensed consolidated financial statements (unaudited).
5
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Equity
(Unaudited)
(In thousands)
Accumulated | ||||||||||||||||||||
Additional | Other | |||||||||||||||||||
Common Shares | Paid-In | Accumulated |
| Comprehensive | Noncontrolling | Total | ||||||||||||||
Shares | Amount | Capital | Deficit |
| Income | Interests | Equity | |||||||||||||
BALANCE AS OF MARCH 31, 2024 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
Net loss attributable to common shareholders and noncontrolling interests |
| — |
| — |
| — |
| ( |
| — |
| ( |
| ( | ||||||
Redemption of common limited partnership units ("OP Units") for common shares |
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| — |
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Common shares repurchased | ( | ( | ( | — | — | — | ( | |||||||||||||
Common shares issued pursuant to employee incentive compensation plan and Employee Share Purchase Plan ("ESPP") | | — | | — | — | — | | |||||||||||||
Dividends declared on common shares ($ | — | — | — | ( | — | — | ( | |||||||||||||
Acquisition of noncontrolling interests | — | — | ( | — | — | ( | ( | |||||||||||||
Contributions from noncontrolling interests, net |
| — |
| — |
| — |
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| — |
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Redeemable noncontrolling interests redemption value adjustment and total other comprehensive loss allocation |
| — |
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Total other comprehensive loss |
| — |
| — |
| — |
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| ( |
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Other comprehensive income attributable to noncontrolling interest | — | — | — | — | ( | | — | |||||||||||||
BALANCE AS OF JUNE 30, 2024 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
BALANCE AS OF MARCH 31, 2023 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
Net loss attributable to common shareholders and noncontrolling interests |
| — |
| — |
| — |
| ( |
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| ( |
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Redemption of OP Units for common shares |
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Common shares repurchased | ( | ( | ( | — |
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Common shares issued pursuant to employee incentive compensation plan and ESPP | | — | | — | — | — | | |||||||||||||
Dividends declared on common shares | — | — | — | ( | — | — | ( | |||||||||||||
Distributions to noncontrolling interests, net |
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| ( |
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Redeemable noncontrolling interests redemption value adjustment and total other comprehensive income allocation |
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| ( |
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| ( |
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Total other comprehensive income |
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Other comprehensive income attributable to noncontrolling interest | — | — | — | — | ( | | — | |||||||||||||
BALANCE AS OF JUNE 30, 2023 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | |
See accompanying notes to the condensed consolidated financial statements (unaudited).
6
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Equity
(Unaudited)
(In thousands)
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Accumulated | ||||||||||||||||||||
Additional | Other | |||||||||||||||||||
Common Shares | Paid-In | Accumulated |
| Comprehensive | Noncontrolling | Total | ||||||||||||||
Shares | Amount | Capital | Deficit |
| Income | Interests | Equity | |||||||||||||
BALANCE AS OF DECEMBER 31, 2023 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
Net loss attributable to common shareholders and noncontrolling interests |
| — |
| — |
| — |
| ( |
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| ( |
| ( | ||||||
Redemption of OP Units for common shares |
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Common shares repurchased | ( | ( | ( | — | — | — | ( | |||||||||||||
Common shares issued pursuant to employee incentive compensation plan and ESPP | | — | | — | — | — | | |||||||||||||
Dividends declared on common shares ($ | — | — | — | ( | — | — | ( | |||||||||||||
Acquisition of noncontrolling interests | — | — | ( | — | — | ( | ( | |||||||||||||
Contributions from noncontrolling interests, net |
| — |
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Redeemable noncontrolling interests redemption value adjustment and total other comprehensive income allocation |
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| ( |
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Total other comprehensive income |
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Other comprehensive income attributable to noncontrolling interests | — | — | — | — | ( | | — | |||||||||||||
BALANCE AS OF JUNE 30, 2024 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
BALANCE AS OF DECEMBER 31, 2022 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | ||||||
Net income (loss) attributable to common shareholders and noncontrolling interests |
| — |
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| ( |
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Redemption of OP Units for common shares |
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Common shares repurchased | ( | ( | ( | — | — | — | ( | |||||||||||||
Common shares issued pursuant to employee incentive compensation plan and ESPP | | — | | — | — | — | | |||||||||||||
Dividends declared on common shares ($ | — | — | — | ( | — | — | ( | |||||||||||||
Distributions to noncontrolling interests, net |
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| ( |
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Redeemable noncontrolling interests redemption value adjustment and total other comprehensive loss allocation |
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Total other comprehensive loss |
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| ( |
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Other comprehensive income attributable to noncontrolling interests | — | — | — | — | ( | | — | |||||||||||||
BALANCE AS OF JUNE 30, 2023 |
| | $ | | $ | | $ | ( | $ | | $ | | $ | |
See accompanying notes to the condensed consolidated financial statements (unaudited).
7
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended June 30, | ||||||
| 2024 |
| 2023 | |||
OPERATING ACTIVITIES: |
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Net income (loss) | $ | ( | $ | | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Share-based compensation expense |
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Depreciation and amortization expense, including amortization of deferred financing costs |
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Deferred rent |
| ( |
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Income from unconsolidated real estate ventures, net |
| ( |
| ( | ||
Amortization of market lease intangibles, net |
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Amortization of lease incentives |
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Loss on the extinguishment of debt |
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Impairment loss | | — | ||||
Gain on the sale of real estate, net |
| ( |
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Loss (income) on operating lease and other receivables |
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Income from investments, net | ( | ( | ||||
Return on capital from unconsolidated real estate ventures |
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Other non-cash items |
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Changes in operating assets and liabilities: |
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Tenant and other receivables |
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Other assets, net |
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Accounts payable and accrued expenses |
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Other liabilities, net |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES: |
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Development costs, construction in progress and real estate additions |
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Acquisition of real estate |
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Proceeds from the sale of real estate |
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Proceeds from derivative financial instruments | | — | ||||
Distributions of capital from unconsolidated real estate ventures and other investments |
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Investments in unconsolidated real estate ventures and other investments |
| ( |
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Net cash provided by (used in) investing activities |
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FINANCING ACTIVITIES: |
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Borrowings under mortgage loans |
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Borrowings under revolving credit facility |
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Borrowings under term loans |
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Repayments of mortgage loans |
| ( |
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Repayments of revolving credit facility |
| ( |
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Payments on derivative financial instruments | ( | — | ||||
Debt issuance and modification costs |
| ( |
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Acquisition/redemption of noncontrolling interests |
| ( |
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Proceeds from common shares issued pursuant to ESPP |
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Common shares repurchased | ( | ( | ||||
Dividends paid to common shareholders |
| ( |
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Distributions to redeemable noncontrolling interests |
| ( |
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Distributions to noncontrolling interests | ( | ( | ||||
Net cash used in financing activities |
| ( |
| ( |
8
JBG SMITH PROPERTIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended June 30, | ||||||
| 2024 |
| 2023 | |||
Net increase (decrease) in cash and cash equivalents, and restricted cash | $ | | $ | ( | ||
Cash and cash equivalents, and restricted cash, beginning of period |
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Cash and cash equivalents, and restricted cash, end of period | $ | | $ | | ||
CASH AND CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD: |
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Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
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Cash and cash equivalents, and restricted cash | $ | | $ | | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION: |
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Cash paid for interest (net of capitalized interest of $ | $ | | $ | | ||
Accrued capital expenditures included in accounts payable and accrued expenses |
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Write-off of fully depreciated assets |
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Redemption of OP Units for common shares |
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Recognition (derecognition) of operating lease right-of-use asset | ( | | ||||
Recognition (derecognition) of liabilities related to operating lease right-of-use asset | ( | | ||||
Cash paid for amounts included in the measurement of lease liabilities for operating leases |
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See accompanying notes to the condensed consolidated financial statements (unaudited).
9
JBG SMITH PROPERTIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.Organization and Basis of Presentation
Organization
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
Substantially all our assets are held by, and our operations are conducted through, JBG SMITH Properties LP ("JBG SMITH LP"), our operating partnership. As of June 30, 2024, JBG SMITH, as its sole general partner, controlled JBG SMITH LP and owned
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."
As of June 30, 2024, our Operating Portfolio consisted of
We derive our revenue primarily from leases with multifamily and commercial tenants, which include fixed and percentage rents, and reimbursements from tenants for certain expenses such as real estate taxes, property operating expenses, and repairs and maintenance. In addition, our third-party asset management and real estate services business provides fee-based real estate services.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not contain certain information required in annual financial statements and notes as required under GAAP. In our opinion, all adjustments considered necessary for a fair presentation have been included, and all such adjustments are of a normal recurring nature. All intercompany transactions and balances have been eliminated. The results of operations
10
for the three and six months ended June 30, 2024 and 2023 are not necessarily indicative of the results that may be expected for a full year. These condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission ("SEC") on February 20, 2024 ("Annual Report").
The accompanying condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries and consolidated variable interest entities ("VIEs"), including JBG SMITH LP. See Note 5 for additional information. The portions of the equity and net income (loss) of consolidated entities that are not attributable to us are presented separately as amounts attributable to noncontrolling interests in our condensed consolidated financial statements.
References to our financial statements refer to our unaudited condensed consolidated financial statements as of June 30, 2024 and December 31, 2023, and for the three and six months ended June 30, 2024 and 2023. References to our balance sheets refer to our condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023. References to our statements of operations refer to our condensed consolidated statements of operations for the three and six months ended June 30, 2024 and 2023. References to our statements of comprehensive income (loss) refer to our condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2024 and 2023.
Income Taxes
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.
2.Summary of Significant Accounting Policies
Significant Accounting Policies
There were no material changes to our significant accounting policies disclosed in our Annual Report.
Use of Estimates
The preparation of the financial statements in conformity with GAAP 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 those estimates.
Recent Accounting Pronouncements
Standards Not Yet Adopted
Climate-Related Disclosures
In March 2024, the SEC issued final rules on the enhancement and standardization of climate-related disclosures. The rules require disclosure of, among other things, (i) actual and potential material impacts of climate-related risks on our strategy, business model and outlook, (ii) climate-related targets and goals that have materially affected or are reasonably likely to materially affect our business, results of operations or financial condition, (iii) governance and management of climate-related risks and (iv) material Scope 1 and Scope 2 greenhouse gas emissions. Additionally, the rules require disclosures in the notes to the financial statements regarding the effects of severe weather events and other natural conditions, subject to certain materiality thresholds, and certain carbon offsets and renewable energy certificates. The rules are effective on a phased-in timeline beginning in the annual reports for the year ended December 31, 2025. In April 2024, the SEC announced a stay of these climate disclosure rules pending judicial review. We are currently evaluating the potential impact of adopting these new rules on our disclosures.
11
Income Taxes
In December 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("Topic 740"). Topic 740 modifies the rules on income tax disclosures to require entities to disclose (i) specific categories in the rate reconciliation, (ii) the income (loss) from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (iii) income tax expense or benefit from continuing operations (separated by federal, state and foreign). Topic 740 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. This guidance should be applied on a prospective basis, but retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our financial statement disclosures.
Segment Reporting
In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segments Disclosures" ("Topic 280"). Topic 280 enhances disclosures of significant segment expenses and other segment items regularly provided to the chief operating decision maker ("CODM"), extends certain annual disclosures to interim periods and permits more than one measure of segment profit (loss) to be reported under certain conditions. The amendments are effective in fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Retrospective adoption to all periods presented is required, and early adoption of the amendments is permitted. We are currently evaluating the potential impact of adopting this new guidance on our financial statement disclosures.
3.Dispositions
Dispositions
The following is a summary of activity for the six months ended June 30, 2024:
Gross | Cash | on the Sale | |||||||||||
Sales | Proceeds | of Real | |||||||||||
Date Disposed |
| Assets |
| Segment |
| Price |
| from Sale |
| Estate | |||
(In thousands) | |||||||||||||
January 22, 2024 | North End Retail | Multifamily | $ | | $ | | $ | ( | |||||
Other (1) | | ||||||||||||
$ | |
(1) | Primarily related to certain previously recorded contingent liabilities which were relieved in connection with the sale of Central Place Tower by one of our unconsolidated real estate ventures. See Note 4 for additional information. |
We are under contract to sell a multifamily asset located in Washington D.C. for $
12
4.Investments in Unconsolidated Real Estate Ventures
The following is a summary of the composition of our investments in unconsolidated real estate ventures:
Effective | ||||||||
| Ownership | |||||||
Real Estate Venture |
| Interest (1) |
| June 30, 2024 |
| December 31, 2023 | ||
(In thousands) | ||||||||
Prudential Global Investment Management ("PGIM") (2) |
| $ | | $ | | |||
J.P. Morgan Global Alternatives ("J.P. Morgan") (3) | | | ||||||
4747 Bethesda Venture | | | ||||||
Brandywine Realty Trust |
|
| |
| | |||
CBREI Venture (4) |
|
| |
| | |||
Landmark Partners (5) |
|
| |
| | |||
Other |
|
| | | ||||
Total investments in unconsolidated real estate ventures (6) (7) | $ | | $ | |
(1) | Reflects our effective ownership interests as of June 30, 2024. We have multiple investments with certain venture partners in the underlying real estate. |
(2) | In February 2024, the venture sold its interest in Central Place Tower for a gross sales price of $ |
(3) | J.P. Morgan is the advisor for an institutional investor. |
(4) | Excludes The Foundry for which we had a |
(5) | Excludes the L'Enfant Plaza Assets for which we have a |
(6) | Excludes (i) |
(7) | As of June 30, 2024 and December 31, 2023, our total investments in unconsolidated real estate ventures were greater than our share of the net book value of the underlying assets by $ |
We provide leasing, property management and other real estate services to our unconsolidated real estate ventures. We recognized revenue, including expense reimbursements, of $
The following is a summary of disposition activity by our unconsolidated real estate ventures:
Proportionate | ||||||||||||
Real Estate | Gross | Share of | ||||||||||
Venture | Ownership | Sales | Aggregate | |||||||||
Date Disposed |
| Partner | Assets | Percentage |
| Price | Gain (1) | |||||
(In thousands) | ||||||||||||
February 13, 2024 | PGIM | Central Place Tower | $ | | $ | |
(1) | Additionally, we recognized $ |
13
The following is a summary of the debt of our unconsolidated real estate ventures:
Weighted | ||||||||
Average Effective | ||||||||
| Interest Rate (1) |
| June 30, 2024 |
| December 31, 2023 | |||
(In thousands) | ||||||||
Variable rate (2) |
| $ | | $ | | |||
Fixed rate (3) |
|
| |
| | |||
Mortgage loans (4) |
| |
| | ||||
Unamortized deferred financing costs and premium / discount, net |
| ( |
| ( | ||||
Mortgage loans, net (4) (5) | $ | | $ | |
(1) | Weighted average effective interest rate as of June 30, 2024. |
(2) | Includes variable rate mortgages with interest rate cap agreements. |
(3) | Includes variable rate mortgages with interest rates fixed by interest rate swap agreements. |
(4) | Excludes mortgage loans related to the Fortress Assets, the L'Enfant Plaza Assets and The Foundry. In April 2024, the lender foreclosed on the loan secured by The Foundry and took possession of the property. |
(5) | See Note 17 for additional information on guarantees of the debt of certain of our unconsolidated real estate ventures. |
The following is a summary of financial information for our unconsolidated real estate ventures:
| June 30, 2024 |
| December 31, 2023 | |||
| (In thousands) | |||||
Combined balance sheet information: (1) | ||||||
Real estate, net | $ | | $ | | ||
Other assets, net |
| |
| | ||
Total assets | $ | | $ | | ||
Mortgage loans, net | $ | | $ | | ||
Other liabilities, net |
| |
| | ||
Total liabilities |
| |
| | ||
Total equity |
| |
| | ||
Total liabilities and equity | $ | | $ | |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 | 2024 |
| 2023 | ||||||
| (In thousands) | |||||||||||
Combined income statement information: (1) | ||||||||||||
Total revenue | $ | | $ | | $ | | $ | | ||||
Operating income (2) | | |
| |
| | ||||||
Net loss (2) | ( | ( |
| ( |
| ( |
(1) | Excludes amounts related to the Fortress Assets and the L'Enfant Plaza Assets. Excludes combined balance sheet information for both periods presented and combined income statement information for the three and six months ended June 30, 2024 related to The Foundry as we discontinued applying the equity method of accounting after September 30, 2023. |
(2) | Includes the gain on the sale of Central Place Tower of $ |
5.Variable Interest Entities
We hold various interests in entities deemed to be VIEs, which we evaluate at acquisition, formation, after a change in the ownership agreement, after a change in the entity's economics or after any other reconsideration event to determine if the VIE should be consolidated in our financial statements or should no longer be considered a VIE. An entity is a VIE because it is in the development stage and/or does not hold sufficient equity at risk, or conducts substantially all its operations on
14
behalf of an investor with disproportionately few voting rights. We will consolidate a VIE if we are the primary beneficiary of the VIE, which entails having the power to direct the activities that most significantly impact the VIE’s economic performance. Certain criteria we assess in determining whether we are the primary beneficiary of the VIE include our influence over significant business activities, our voting rights and any noncontrolling interest kick-out or participating rights.
Unconsolidated VIEs
As of June 30, 2024 and December 31, 2023, we had interests in entities deemed to be VIEs. Although we may be responsible for managing the day-to-day operations of these investees, we are not the primary beneficiary of these VIEs, as we do not hold unilateral power over activities that, when taken together, most significantly impact the respective VIE's economic performance. We account for our investment in these entities under the equity method. As of June 30, 2024 and December 31, 2023, the net carrying amounts of our investment in these entities were $
Consolidated VIEs
JBG SMITH LP is our most significant consolidated VIE. We hold
In March 2021, we leased the land underlying 1900 Crystal Drive located in National Landing to a lessee, which constructed an 808-unit multifamily asset comprising
As of June 30, 2024, excluding JBG SMITH LP, we consolidated
15
6.Other Assets, Net
The following is a summary of other assets, net:
| June 30, 2024 |
| December 31, 2023 | |||
(In thousands) | ||||||
Prepaid expenses | $ | | $ | | ||
Derivative financial instruments, at fair value | | | ||||
Deferred financing costs, net |
| |
| | ||
Operating lease right-of-use assets | | | ||||
Investments in funds (1) | | | ||||
Other investments (2) | | | ||||
Other |
| |
| | ||
Total other assets, net | $ | | $ | |
(1) | Consists of investments in real estate-focused technology companies, which are recorded at their fair value based on their reported net asset value. During the three and six months ended June 30, 2024, unrealized gains related to these investments were $ |
(2) | Primarily consists of equity investments that are carried at cost. |
7.Debt
Mortgage Loans
The following is a summary of mortgage loans:
Weighted Average | ||||||||
Effective | ||||||||
| Interest Rate (1) |
| June 30, 2024 |
| December 31, 2023 | |||
(In thousands) | ||||||||
Variable rate (2) |
| $ | | $ | | |||
Fixed rate (3) |
|
| |
| | |||
Mortgage loans |
| |
| | ||||
Unamortized deferred financing costs and premium / discount, net |
| ( |
| ( | ||||
Mortgage loans, net | $ | | $ | |
(1) | Weighted average effective interest rate as of June 30, 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) | Includes variable rate mortgages with interest rates fixed by interest rate swap agreements. |
As of June 30, 2024 and December 31, 2023, the net carrying value of real estate collateralizing our mortgage loans totaled $
As of June 30, 2024 and December 31, 2023, we had various interest rate swap and cap agreements on certain mortgage loans with an aggregate notional value of $
16
Revolving Credit Facility and Term Loans
As of June 30, 2024 and December 31, 2023, our unsecured revolving credit facility and term loans totaling $
The following is a summary of amounts outstanding under the revolving credit facility and term loans:
Effective | ||||||||
| Interest Rate (1) | June 30, 2024 |
| December 31, 2023 | ||||
(In thousands) | ||||||||
Revolving credit facility (2) (3) |
| $ | | $ | | |||
Tranche A-1 Term Loan (4) |
| $ | | $ | | |||
Tranche A-2 Term Loan (5) |
|
| |
| | |||
2023 Term Loan (6) | | | ||||||
Term loans |
|
|
| |
| | ||
Unamortized deferred financing costs, net |
|
|
| ( |
| ( | ||
Term loans, net |
|
| $ | | $ | |
(1) | Effective interest rate as of June 30, 2024. The interest rate for our revolving credit facility excludes a |
(2) | As of June 30, 2024, daily SOFR was |
(3) | As of June 30, 2024 and December 31, 2023, excludes $ |
(4) | As of June 30, 2024 and December 31, 2023, the interest rate swaps fix SOFR at a weighted average interest rate of |
(5) | As of June 30, 2024 and December 31, 2023, the interest rate swaps fix SOFR at a weighted average interest rate of |
(6) | As of June 30, 2024 and December 31, 2023, the outstanding balance was fixed by an interest rate swap agreement, which fixes SOFR at an interest rate of |
8.Other Liabilities, Net
The following is a summary of other liabilities, net:
| June 30, 2024 |
| December 31, 2023 | |||
(In thousands) | ||||||
Lease intangible liabilities, net | $ | | $ | | ||
Lease incentive liabilities |
| |
| | ||
| |
| | |||
Prepaid rent |
| |
| | ||
Security deposits |
| |
| | ||
Environmental liabilities |
| |
| | ||
Deferred tax liability, net |
| |
| | ||
Derivative financial instruments, at fair value |
| |
| | ||
Other |
| |
| | ||
Total other liabilities, net | $ | | $ | |
17
9.Redeemable Noncontrolling Interests
OP Units held by persons other than JBG SMITH are redeemable for cash or, at our election, our common shares, subject to certain limitations. Vested LTIP Units are redeemable into OP Units. During the six months ended June 30, 2024 and 2023, unitholders redeemed
The following is a summary of the activity of redeemable noncontrolling interests:
Three Months Ended June 30, | ||||||||||||
2024 | 2023 | |||||||||||
Consolidated | ||||||||||||
JBG | JBG | Real Estate | ||||||||||
| SMITH LP |
| SMITH LP |
| Venture |
| Total | |||||
| (In thousands) | |||||||||||
Balance, beginning of period | $ | | $ | | $ | — | $ | | ||||
Redemptions |
| ( |
| ( |
| — |
| ( | ||||
LTIP Units issued in lieu of cash compensation (1) |
| |
| |
| — |
| | ||||
Net loss |
| ( |
| ( |
| — |
| ( | ||||
Other comprehensive income (loss) |
| ( |
| |
| — |
| | ||||
Distributions |
| ( |
| ( |
| — |
| ( | ||||
Share-based compensation expense |
| |
| |
| — |
| | ||||
Adjustment to redemption value |
| ( |
| |
| — |
| | ||||
Balance, end of period | $ | | $ | | $ | — | $ | | ||||
Six Months Ended June 30, | ||||||||||||
2024 | 2023 | |||||||||||
Consolidated | ||||||||||||
JBG | JBG | Real Estate | ||||||||||
| SMITH LP |
| SMITH LP |
| Venture (2) |
| Total | |||||
| (In thousands) | |||||||||||
Balance, beginning of period | $ | | $ | | $ | | $ | | ||||
Redemptions |
| ( |
| ( |
| ( |
| ( | ||||
LTIP Units issued in lieu of cash compensation (1) |
| |
| |
| — |
| | ||||
Net income (loss) |
| ( |
| |
| — |
| | ||||
Other comprehensive income (loss) |
| |
| ( |
| — |
| ( | ||||
Distributions |
| ( |
| ( |
| — |
| ( | ||||
Share-based compensation expense |
| |
| |
| — |
| | ||||
Adjustment to redemption value |
| ( |
| ( |
| — |
| ( | ||||
Balance, end of period | $ | | $ | | $ | — | $ | |
(1) | See Note 11 for additional information. |
(2) | As of December 31, 2022, we held a |
18
10.Property Rental Revenue
The following is a summary of property rental revenue from our non-cancellable leases:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 | X | 2024 |
| 2023 | |||||
(In thousands) | ||||||||||||
Fixed | $ | | $ | | $ | | $ | | ||||
Variable | | | | | ||||||||
Property rental revenue | $ | | $ | | $ | | $ | |
11.Share-Based Payments
LTIP Units and Time-Based LTIP Units
In January 2024, we granted to certain employees
In January 2024, we granted
In April 2024, as part of their annual compensation, we granted to non-employee trustees a total of
The aggregate grant-date fair value of the Time-Based LTIP Units and the LTIP Units granted during the six months ended June 30, 2024 was $
Expected volatility |
| |
Risk-free interest rate |
| |
Post-grant restriction periods |
|
Appreciation-Only LTIP Units ("AO LTIP Units")
In January 2024, we granted to certain employees
The aggregate grant-date fair value of the AO LTIP Units granted during the six months ended June 30, 2024 was $
Expected volatility |
| |
Dividend yield |
| |
Risk-free interest rate |
|
19
Restricted Share Units ("RSUs")
In January 2024, we granted to certain non-executive employees
The aggregate grant-date fair value of the RSUs granted during the six months ended June 30, 2024 was $
ESPP
Pursuant to the ESPP, employees purchased
Expected volatility |
| |
Dividend yield |
| |
Risk-free interest rate |
| |
Expected life |
Share-Based Compensation Expense
The following is a summary of share-based compensation expense:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 | X | 2024 |
| 2023 | |||||
| (In thousands) | |||||||||||
Time-Based LTIP Units | $ | | $ | | $ | | $ | | ||||
AO LTIP Units and Performance-Based LTIP Units |
| |
| |
| |
| | ||||
LTIP Units |
| |
| |
| |
| | ||||
Other equity awards (1) |
| |
| |
| |
| | ||||
Share-based compensation expense - other |
| |
| |
| |
| | ||||
Share-based compensation related to Formation Transaction and special equity awards (2) |
| — |
| — |
| — |
| | ||||
Total share-based compensation expense |
| |
| |
| |
| | ||||
Less: amount capitalized |
| ( |
| ( |
| ( |
| ( | ||||
Share-based compensation expense | $ | | $ | | $ | | $ | |
(1) | Primarily comprising compensation expense for: (i) fully vested LTIP Units issued to certain employees in lieu of all or a portion of any cash bonuses earned, (ii) RSUs and (iii) shares issued under our ESPP. |
(2) | Included in "General and administrative expense: Share-based compensation related to Formation Transaction and special equity awards" in our statement of operations. Includes share-based compensation expense for awards issued in connection with the Formation Transaction and with our successful pursuit of Amazon's additional headquarters in National Landing all of which were fully expensed as of December 31, 2023. |
As of June 30, 2024, we had $
In April 2024, our shareholders approved an amendment to the JBG SMITH 2017 Omnibus Share Plan, as amended, (the "Plan") to increase the common shares reserved for issuance under the Plan by
20
12.Transaction and Other Costs
The following is a summary of transaction and other costs:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 | X | 2024 |
| 2023 | |||||
| (In thousands) | |||||||||||
Completed, potential and pursued transaction expenses (1) | $ | | $ | | $ | | $ | | ||||
Severance and other costs |
| |
| |
| |
| | ||||
Demolition costs | | | | | ||||||||
Transaction and other costs | $ | | $ | | $ | | $ | |
(1) | Primarily consists of dead deal costs. |
13.Interest Expense
The following is a summary of interest expense:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 | X | 2024 |
| 2023 | |||||
| (In thousands) | |||||||||||
Interest expense before capitalized interest | $ | | $ | | $ | | $ | | ||||
Amortization of deferred financing costs |
| |
| |
| |
| | ||||
Net loss on non-designated derivatives: |
|
| ||||||||||
Net unrealized loss |
| |
| |
| |
| | ||||
Net realized loss |
| — |
| |
| — |
| | ||||
Capitalized interest |
| ( |
| ( |
| ( |
| ( | ||||
Interest expense | $ | | $ | | $ | | $ | |
14.Shareholders' Equity and Earnings (Loss) Per Common Share
Common Shares Repurchased
Our Board of Trustees has authorized the repurchase of up to $
During July 2024, through the date of this filing, we repurchased and retired
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average common shares outstanding during the period. Unvested share-based compensation awards that entitle holders to receive non-forfeitable distributions are considered participating securities. Consequently, we are required to apply the two-class method of computing basic and diluted earnings (loss) that would otherwise have been available to common shareholders. Under the two-class method, earnings for the period are allocated between common shareholders and participating securities based on their respective rights to receive dividends. During periods of net loss, losses are allocated only to the extent the participating securities are required to absorb their share of such losses. Distributions to
21
participating securities in excess of their allocated income or loss are shown as a reduction to net income (loss) attributable to common shareholders. Diluted earnings (loss) per common share reflects the potential dilution of the assumed exchange of various unit and share-based compensation awards into common shares to the extent they are dilutive.
The following is a summary of the calculation of basic and diluted earnings (loss) per common share and a reconciliation of net income (loss) to the amounts of net income (loss) available to common shareholders used in calculating basic and diluted earnings (loss) per common share:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2024 |
| 2023 | X | 2024 |
| 2023 | ||||||
(In thousands, except per share amounts) | ||||||||||||
Net income (loss) | $ | ( | $ | ( | $ | ( | $ | | ||||
Net (income) loss attributable to redeemable noncontrolling interests | |
| |
| |
| ( | |||||
Net loss attributable to noncontrolling interests | |
| |
| |
| | |||||
Net income (loss) attributable to common shareholders | ( | ( | ( | | ||||||||
Distributions to participating securities | ( | ( |
| ( |
| ( | ||||||
Net income (loss) available to common shareholders - basic and diluted | ( | ( | | |||||||||
Weighted average number of common shares outstanding - basic and diluted | | |
| |
| | ||||||
Earnings (loss) per common share - basic and diluted | ( | ( | ( | |
The effect of the redemption of OP Units, Time-Based LTIP Units, fully vested LTIP Units and special equity awards that were outstanding as of June 30, 2024 and 2023 is excluded in the computation of diluted earnings (loss) per common share as the assumed exchange of such units for common shares on a one-for-one basis was antidilutive (the assumed redemption of these units would have no impact on the determination of diluted earnings (loss) per share). Since OP Units, Time-Based LTIP Units, LTIP Units and special equity awards, which are held by noncontrolling interests, are attributed gains at an identical proportion to the common shareholders, the gains attributable and their equivalent weighted average impact are excluded from net income (loss) available to common shareholders and from the weighted average number of common shares outstanding in calculating diluted earnings (loss) per common share. AO LTIP Units, Performance-Based LTIP Units, formation awards and RSUs, which totaled
Dividends Declared in July 2024
On
15.Fair Value Measurements
Fair Value Measurements on a Recurring Basis
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.
As of June 30, 2024 and December 31, 2023, we had various derivative financial instruments consisting of interest rate swap and cap agreements that are measured at fair value on a recurring basis. The net unrealized gain on our derivative financial instruments designated as effective hedges was $
22
Accounting Standards Codification 820 ("Topic 820"), Fair Value Measurement and Disclosures, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels:
Level 1 — quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities;
Level 2 — observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and
Level 3 — unobservable inputs that are used when little or no market data is available.
The fair values of the derivative financial instruments are based on the estimated amounts we would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and observable inputs. The derivative financial instruments are classified within Level 2 of the valuation hierarchy.
The following is a summary of assets and liabilities measured at fair value on a recurring basis:
Fair Value Measurements | ||||||||||||
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
(In thousands) | ||||||||||||
June 30, 2024 |
| |||||||||||
Derivative financial instruments designated as effective hedges: |
|
|
|
|
|
|
|
| ||||
$ | | — | $ | | — | |||||||
Non-designated derivatives: |
|
|
|
|
|
|
|
| ||||
| |
| — |
| |
| — | |||||
| |
| — |
| |
| — | |||||
December 31, 2023 |
|
|
|
|
|
|
|
| ||||
Derivative financial instruments designated as effective hedges: |
|
|
|
|
|
|
|
| ||||
$ | | — | $ | | — | |||||||
|
| — | |
| — | |||||||
Non-designated derivatives: |
|
|
|
|
|
|
|
| ||||
| |
| — |
| |
| — | |||||
| |
| — |
| |
| — |
The fair values of our derivative financial instruments were determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the derivative financial instrument. This analysis reflected the contractual terms of the derivative, including the period to maturity, and used observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While it was determined that the majority of the inputs used to value the derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the derivatives also utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of June 30, 2024 and December 31, 2023, the significance of the impact of the credit valuation adjustments on the overall valuation of the derivative financial instruments was assessed, and it was determined that these adjustments were not significant to the overall valuation of the derivative financial instruments. As a result, it was determined that the derivative financial instruments in their entirety should be classified in Level 2 of the fair value hierarchy. The net unrealized gains (losses) included in "Other comprehensive income (loss)" in our statements of comprehensive income (loss) for the three and six months ended June 30, 2024 and 2023 were attributable to the net change in unrealized gains or losses related to effective derivative financial instruments that were outstanding during those periods, none of which were reported in our statements of operations as the derivative financial instruments were documented and qualified as hedging instruments. Realized and unrealized gains (losses) related to non-designated hedges are included in "Interest expense" in our statements of operations.
23
Fair Value Measurements on a Nonrecurring Basis
Our real estate assets are reviewed for impairment whenever there are changes in circumstances or indicators that the carrying amount of the assets may not be recoverable.
This assessment resulted in the impairment of
Financial Assets and Liabilities Not Measured at Fair Value
As of June 30, 2024 and December 31, 2023, all financial assets and liabilities were reflected in our balance sheets at amounts which, in our estimation, reasonably approximated their fair values, except for the following:
June 30, 2024 | December 31, 2023 | |||||||||||
| Carrying |
|
| Carrying |
| |||||||
Amount (1) | Fair Value | Amount (1) | Fair Value | |||||||||
| (In thousands) | |||||||||||
Financial liabilities: |
|
|
|
|
|
|
|
| ||||
Mortgage loans | $ | | $ | | $ | | $ | | ||||
Revolving credit facility |
| |
| |
| |
| | ||||
Term loans |
| |
| |
| |
| |
(1) | The carrying amount consists of principal only. |
The fair values of the mortgage loans, revolving credit facility and term loans were determined using Level 2 inputs of the fair value hierarchy. 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.
16.Segment Information
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 CODM makes key operating decisions, evaluates financial results, allocates resources and manages our business. Accordingly, we aggregate our operating segments into
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 net operating income ("NOI") of properties within each segment. NOI includes property rental revenue and parking revenue, and deducts property operating expenses and real estate taxes.
With respect to the third-party asset management and real estate services business, the CODM reviews revenue streams generated by this segment ("Third-party real estate services, including reimbursements"), as well as the expenses attributable to the segment ("General and administrative: third-party real estate services"), which are both disclosed separately in our statements of operations.
24
The following represents the components of revenue from our third-party asset management and real estate services business:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 | X | 2024 |
| 2023 | |||||
| (In thousands) | |||||||||||
Property management fees | $ | | $ | | $ | | $ | | ||||
Asset management fees |
| |
| |
| |
| | ||||
Development fees |
| |
| |
| |
| | ||||
Leasing fees |
| |
| |
| |
| | ||||
Construction management fees |
| |
| |
| |
| | ||||
Other service revenue |
| |
| |
| |
| | ||||
Third-party real estate services revenue, excluding reimbursements |
| |
| |
| |
| | ||||
Reimbursement revenue (1) |
| |
| |
| |
| | ||||
Third-party real estate services revenue, including reimbursements | | | | | ||||||||
Third-party real estate services expenses | | | | | ||||||||
Third-party real estate services revenue less expenses | $ | ( | $ | | $ | ( | $ | ( |
(1) | Represents reimbursement 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. |
Management company assets primarily consist of management and leasing contracts with a net book value of $
The following is the reconciliation of net income (loss) attributable to common shareholders to consolidated NOI:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 | X | 2024 |
| 2023 | |||||
| (In thousands) | |||||||||||
Net income (loss) attributable to common shareholders | $ | ( | $ | ( | $ | ( | $ | | ||||
Net income (loss) attributable to redeemable noncontrolling interests |
| ( |
| ( |
| ( |
| | ||||
Net loss attributable to noncontrolling interests | ( | ( | ( | ( | ||||||||
Net income (loss) | ( | ( | ( | | ||||||||
Add: |
|
|
|
|
|
|
|
| ||||
Depreciation and amortization expense |
| |
| |
| |
| | ||||
General and administrative expense: |
|
|
|
|
|
|
|
| ||||
Corporate and other |
| |
| |
| |
| | ||||
Third-party real estate services |
| |
| |
| |
| | ||||
Share-based compensation related to Formation Transaction and special equity awards |
| — |
| — |
| — |
| | ||||
Transaction and other costs |
| |
| |
| |
| | ||||
Interest expense |
| |
| |
| |
| | ||||
Loss on the extinguishment of debt |
| — |
| |
| — |
| | ||||
Impairment loss | |
| — | | — | |||||||
Income tax expense (benefit) |
| |
| |
| ( |
| | ||||
Less: |
|
|
|
|
|
|
|
| ||||
Third-party real estate services, including reimbursements revenue |
| |
| |
| |
| | ||||
Other revenue |
| |
| |
| |
| | ||||
Income (loss) from unconsolidated real estate ventures, net |
| ( |
| |
| |
| | ||||
Interest and other income, net |
| |
| |
| |
| | ||||
Gain on the sale of real estate, net |
| |
| — |
| |
| | ||||
Consolidated NOI | $ | | $ | | $ | | $ | |
25
The following is a summary of NOI and certain balance sheet data by segment. Items classified in the Other column include development assets, corporate entities, land assets for which we are the ground lessor and the elimination of inter-segment activity.
Three Months Ended June 30, 2024 | ||||||||||||
| Multifamily |
| Commercial |
| Other |
| Total | |||||
| (In thousands) | |||||||||||
Property rental revenue (1) | $ | | $ | | $ | | $ | | ||||
Parking revenue |
| |
| |
| ( |
| | ||||
Total property revenue |
| |
| |
| |
| | ||||
Property expense: |
|
|
|
|
| |||||||
Property operating |
| |
| |
| ( |
| | ||||
Real estate taxes |
| |
| |
| |
| | ||||
Total property expense |
| |
| |
| |
| | ||||
Consolidated NOI | $ | | $ | | $ | | $ | | ||||
Three Months Ended June 30, 2023 | ||||||||||||
| Multifamily |
| Commercial |
| Other |
| Total | |||||
| (In thousands) | |||||||||||
Property rental revenue | $ | | $ | | $ | | $ | | ||||
Parking revenue |
| |
| |
| |
| | ||||
Total property revenue |
| |
| |
| |
| | ||||
Property expense: |
|
|
|
|
|
|
| |||||
Property operating |
| |
| |
| ( |
| | ||||
Real estate taxes |
| |
| |
| |
| | ||||
Total property expense |
| |
| |
| ( |
| | ||||
Consolidated NOI | $ | | $ | | $ | | $ | |
Six Months Ended June 30, 2024 | ||||||||||||
| Multifamily |
| Commercial |
| Other |
| Total | |||||
| (In thousands) | |||||||||||
Property rental revenue (1) | $ | | $ | | $ | | $ | | ||||
Parking revenue |
| |
| |
| ( |
| | ||||
Total property revenue |
| |
| |
| |
| | ||||
Property expense: |
|
|
|
|
|
|
| |||||
Property operating |
| |
| |
| |
| | ||||
Real estate taxes |
| |
| |
| |
| | ||||
Total property expense |
| |
| |
| |
| | ||||
Consolidated NOI | $ | | $ | | $ | | $ | | ||||
Six Months Ended June 30, 2023 | ||||||||||||
| Multifamily |
| Commercial |
| Other |
| Total | |||||
(In thousands) | ||||||||||||
Property rental revenue | $ | | $ | | $ | | $ | | ||||
Parking revenue |
| |
| |
| |
| | ||||
Total property revenue |
| |
| |
| |
| | ||||
Property expense: |
|
|
|
|
|
|
|
| ||||
Property operating |
| |
| |
| ( |
| | ||||
Real estate taxes |
| |
| |
| |
| | ||||
Total property expense |
| |
| |
| ( |
| | ||||
Consolidated NOI | $ | | $ | | $ | | $ | |
26
| Multifamily |
| Commercial |
| Other |
| Total | |||||
(In thousands) | ||||||||||||
June 30, 2024 | ||||||||||||
Real estate, at cost | $ | | $ | | $ | | $ | | ||||
Investments in unconsolidated real estate ventures |
| — |
| |
| |
| | ||||
Total assets |
| |
| |
| |
| | ||||
December 31, 2023 |
|
|
|
|
|
|
|
| ||||
Real estate, at cost | $ | | $ | | $ | | $ | | ||||
Investments in unconsolidated real estate ventures |
| — |
| |
| |
| | ||||
Total assets |
| |
| |
| |
| |
(1) | Property rental revenue excludes $ |
17.Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $
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 June 30, 2024, we had assets under construction that, based on our current plans and estimates, require an additional $
Environmental Matters
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
27
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. Environmental liabilities totaled $
Other
As of June 30, 2024, we had committed tenant-related obligations totaling $
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.
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 June 30, 2024, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures and other investments totaling $
Additionally, 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 June 30, 2024, the aggregate amount of debt principal payment guarantees was $
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.
18.Transactions with Related Parties
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. In connection with the contribution to us of certain assets formerly owned by the JBG Legacy Funds as part of the Formation Transaction, the general partner and managing member interests in the JBG Legacy Funds that were held by certain former JBG executives (and who became members of our management team and/or Board of Trustees) were not transferred to us and remain under the control of these individuals. In addition, certain members of our senior management team and Board of Trustees have ownership interests in the JBG Legacy Funds, and own carried interests in each fund and in certain of our real estate ventures that entitle them to receive cash payments if the fund or real estate venture achieves certain return thresholds.
28
We launched the Washington Housing Initiative ("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. The WHI Impact Pool completed fundraising in 2020 with capital commitments totaling $
The third-party real estate services revenue, including expense reimbursements, from the JBG Legacy Funds and the WHI Impact Pool and its affiliates was $
Commencing in March 2023, in connection with the sale of an
We have agreements with Building Maintenance Services ("BMS"), an entity in which we have a minor preferred interest, to supervise cleaning, engineering and security services at our properties. We paid BMS $
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
29
("Amazon") new headquarters; Virginia Tech's under-construction $1 billion Innovation Campus; the submarket’s proximity to the Pentagon; and our retail and digital placemaking initiatives and public infrastructure improvements. 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") and (iii) 49.0% interest in three commercial buildings (the "L'Enfant Plaza Assets"), 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 June 30, 2024 and December 31, 2023, and for the three and six months ended June 30, 2024 and 2023. References to our balance sheets refer to our condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023. References to our statements of operations refer to our condensed consolidated statements of operations for the three and six months ended June 30, 2024 and 2023. References to our statements of cash flows refer to our condensed consolidated statements of cash flows for the six months ended June 30, 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.
30
Overview
As of June 30, 2024, our Operating Portfolio consisted of 40 operating assets comprising 15 multifamily assets totaling 6,318 units (6,318 units at our share), 23 commercial assets totaling 7.2 million square feet (6.9 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 totaling 1,583 units (1,583 units at our share) and 18 assets in the development pipeline totaling 11.4 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. In the second quarter of 2024, we delivered 1900 Crystal Drive (The Grace and Reva) with 808 units and approximately 39,000 square feet of retail space. Additionally, the digital infrastructure investments we are making 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 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 June 30, 2024 of 94.3% was consistent compared to March 31, 2024. During the second quarter of 2024, we increased effective rents, which represent the average change in rental rates versus expiring rental rates net of concessions, by 4.6% blended across new and renewal leases and 8.6% upon renewal while achieving a 50.9% 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 (Valen and The Zoe), totaling 1,583 units. 1900 Crystal Drive began leasing in January 2024 with move-ins commencing in February 2024 and delivery of all remaining units in the second quarter of 2024, with 38.5% leased as of June 30, 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 June 30, 2024 of 80.6% decreased by 250 basis points as compared to March 31, 2024. 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 took 2100 Crystal Drive out of service when Amazon vacated 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
31
multifamily, hospitality or another specialty use. We anticipate approximately 485,000 square feet (approximately $22 million of annualized rent) in National Landing will be vacated in the second half of 2024 and in 2025, but that number could change as those expirations grow nearer.
We continue to advance the design and entitlement of our 11.4 million square feet (9.3 million square feet at our share) of estimated potential development density in our development pipeline and intend to look to source joint venture capital as a means of funding these developments as market conditions permit.
Operating Results
Key highlights for the three and six months ended June 30, 2024 included:
● | net loss attributable to common shareholders of $24.4 million, or $0.27 per diluted common share, for the three months ended June 30, 2024 compared to $10.5 million, or $0.10 per diluted common share, for the three months ended June 30, 2023. Net loss attributable to common shareholders of $56.6 million, or $0.63 per diluted common share, for the six months ended June 30, 2024 compared to net income attributable to common shareholders of $10.6 million, or $0.09 per diluted common share, for the six months ended June 30, 2023; |
● | third-party real estate services revenue, including reimbursements, of $17.4 million and $35.3 million for the three and six months ended June 30, 2024, and $22.9 million and $45.6 million for the three and six months ended June 30, 2023; |
● | operating multifamily portfolio leased and occupied percentages (1) at our share of 96.9% and 94.3% as of June 30, 2024 compared to 95.9% and 94.3% as of March 31, 2024, and 96.8% and 93.7% as of June 30, 2023; |
● | operating commercial portfolio leased and occupied percentages at our share of 82.3% and 80.6% as of June 30, 2024 compared to 84.6% and 83.1% as of March 31, 2024, and 86.3% and 84.0% as of June 30, 2023; |
● | the leasing of 248,000 square feet at our share, at an initial rent (2) of $46.61 per square foot and a GAAP-basis weighted average rent per square foot (3) of $47.34 for the three months ended June 30, 2024, and the leasing of 347,000 square feet at our share, at an initial rent (2) of $46.34 per square foot and a GAAP-basis weighted average rent per square foot (3) of $46.78 for the six months ended June 30, 2024; and |
● | an increase in same store (4) NOI of 3.2% to $71.4 million for the three months ended June 30, 2024 compared to $69.1 million for the three months ended June 30, 2023, and an increase in same store (4) NOI of 5.2% to $145.1 million for the six months ended June 30, 2024 compared to $137.9 million for the six months ended June 30, 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 six months ended June 30, 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 $22.0 million under our revolving credit facility; |
● | the payment of dividends totaling $32.2 million and distributions to redeemable noncontrolling interests of $5.8 million; |
● | the repurchase and retirement of 7.7 million of our common shares for $118.1 million, a weighted average purchase price per share of $15.35; and |
● | the investment of $113.4 million in development costs, construction in progress and real estate additions. |
32
Activity subsequent to June 30, 2024 included:
● | the declaration of a quarterly dividend of $0.175 per common share, payable on August 21, 2024 to shareholders of record as of August 7, 2024; |
● | the repurchase and retirement of 897,531 common shares for $14.0 million, a weighted average purchase price per share of $15.55, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended; and |
● | a contract to sell a multifamily asset located in Washington D.C. for $86.8 million that went firm on July 29, 2024. Subject to customary closing conditions, we anticipate that this transaction will close in 2024; however, we can make no assurances as to when or if the transaction will close. |
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 six months ended June 30, 2024.
Recent Accounting Pronouncements
See Note 2 to the financial statements for a description of recent accounting pronouncements.
Results of Operations
During the six months ended June 30, 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.
Comparison of the Three Months Ended June 30, 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 June 30, 2024 compared to the same period in 2023:
Three Months Ended June 30, |
| ||||||||
| 2024 |
| 2023 |
| % Change |
| |||
(Dollars in thousands) |
| ||||||||
Property rental revenue | $ | 112,536 | $ | 120,592 |
| (6.7) | % | ||
Third-party real estate services revenue, including reimbursements |
| 17,397 |
| 22,862 |
| (23.9) | % | ||
Depreciation and amortization expense |
| 51,306 |
| 49,218 |
| 4.2 | % | ||
Property operating expense |
| 36,254 |
| 35,912 |
| 1.0 | % | ||
Real estate taxes expense |
| 14,399 |
| 14,424 |
| (0.2) | % | ||
General and administrative expense: | |||||||||
Corporate and other |
| 17,001 |
| 15,093 |
| 12.6 | % | ||
Third-party real estate services |
| 18,650 |
| 22,105 |
| (15.6) | % | ||
Income (loss) from unconsolidated real estate ventures, net |
| (226) |
| 510 |
| (144.3) | % | ||
Interest expense |
| 31,973 |
| 25,835 |
| 23.8 | % |
Property rental revenue decreased by approximately $8.1 million, or 6.7%, to $112.5 million in 2024 from $120.6 million in 2023. The decrease was primarily due to an $8.7 million decrease in revenue from our commercial assets and a $910,000 decrease in other revenue, partially offset by a $781,000 increase in revenue from our multifamily assets and $738,000 in lease termination revenue. The decrease in revenue from our commercial assets was primarily due to a $3.8 million decrease related to 1800 South Bell Street and 2100 Crystal Drive, which were taken out of service during 2024, a $2.3 million decrease related to the Disposed Properties, and lower occupancy and rents across the portfolio. The increase in revenue from our multifamily assets was primarily due to a $1.2 million increase related to 1900 Crystal Drive, which we began
33
leasing during the first quarter of 2024, and higher occupancy and rents across the portfolio, partially offset by a $2.8 million decrease related to the Disposed Properties.
Third-party real estate services revenue, including reimbursements, decreased by approximately $5.5 million, or 23.9%, to $17.4 million in 2024 from $22.9 million in 2023. The decrease was primarily due to a $2.3 million decrease in development fees related to the timing of development projects, a $1.8 million decrease in reimbursement revenue and a $1.0 million decrease in property management fees.
Depreciation and amortization expense increased by approximately $2.1 million, or 4.2%, to $51.3 million in 2024 from $49.2 million in 2023. The increase was primarily due to (i) a $4.2 million increase related to 1900 Crystal Drive, which we began leasing during the first quarter of 2024, (ii) a $1.5 million increase related to 2100 Crystal Drive due to the acceleration of depreciation of certain assets as the building was taken out of service in the second quarter of 2024 and (iii) a $514,000 increase related to Crystal City Shops at 2100 due to the acceleration of depreciation. The increase in depreciation and amortization expense was partially offset by (iv) a $2.2 million decrease related to 1800 South Bell Street, which was taken out of service during the first quarter of 2024, (v) a $1.5 million decrease related to the Disposed Properties and (vi) a $1.1 million decrease related to 2451 Crystal Drive due to the disposal of certain tenant-related assets in 2023.
Property operating expense increased by approximately $342,000, or 1.0%, to $36.3 million in 2024 from $35.9 million in 2023. The increase was primarily due to a $519,000 increase in property operating expense from our multifamily assets and a $522,000 increase in other property operating expense, partially offset by a $699,000 decrease in property operating expense from our commercial assets. The increase in property operating expense from our multifamily assets was primarily due to a $1.0 million increase related to 1900 Crystal Drive, which we began leasing during the first quarter of 2024, and higher operating expenses due to higher occupancy across the portfolio, partially offset by a $914,000 decrease related to the Disposed Properties. The increase in other property operating expense was primarily due to a $646,000 increase in insurance claims covered by our captive insurance subsidiary. The decrease in property operating expense from our commercial assets was primarily due to an $836,000 decrease related to 1800 South Bell Street and 2100 Crystal Drive, which were taken out of service during 2024, a $525,000 decrease related to the Disposed Properties and lower operating expenses due to lower occupancy across the portfolio, partially offset by a $557,000 increase in expenses incurred in connection with construction management services provided to tenants.
Real estate taxes expense decreased by approximately $25,000, or 0.2%, to $14.4 million in 2024. The decrease was primarily due to a $546,000 decrease related to the Disposed Properties and lower assessments across the portfolio, partially offset by an $841,000 increase related to 1900 Crystal Drive, which we began leasing during the first quarter of 2024.
General and administrative expense: corporate and other increased by approximately $1.9 million, or 12.6%, to $17.0 million in 2024 from $15.1 million in 2023. The increase was primarily due to higher compensation expenses and a decrease in capitalized payroll.
General and administrative expense: third-party real estate services decreased by approximately $3.5 million, or 15.6%, to $18.7 million in 2024 from $22.1 million in 2023. The decrease was primarily due to lower third-party reimbursable expenses.
Loss from unconsolidated real estate ventures increased by approximately $736,000, or 144.3%, to $226,000 in 2024 from income of $510,000 in 2023 due to a decrease in income at our share primarily related to disposition activity.
Interest expense increased by approximately $6.1 million, or 23.8%, to $32.0 million in 2024 from $25.8 million in 2023. The increase in interest expense was primarily due to (i) a $5.5 million increase due to higher outstanding debt, (ii) a $2.9 million increase related to rising interest rates on variable rate mortgage loans and (iii) a $2.9 million decrease in capitalized interest as we placed 1900 Crystal Drive into service. The increase in interest expense was partially offset by (iv) a $2.9 million decrease related to the increase in mark-to-market associated with our non-designated derivatives and a decrease resulting from the expiration of certain derivatives and (v) a $2.1 million decrease related to mortgage loans collateralized by 800 North Glebe Road and Falkland Chase-South & West, which were repaid during 2023.
34
Comparison of the Six Months Ended June 30, 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 six months ended June 30, 2024 compared to the same period in 2023:
Six Months Ended June 30, | |||||||||
| 2024 |
| 2023 |
| % Change |
| |||
(Dollars in thousands) |
| ||||||||
Property rental revenue | $ | 235,172 | $ | 244,625 |
| (3.9) | % | ||
Third-party real estate services revenue, including reimbursements |
| 35,265 |
| 45,646 |
| (22.7) | % | ||
Depreciation and amortization expense |
| 108,161 |
| 102,649 |
| 5.4 | % | ||
Property operating expense |
| 71,533 |
| 71,524 |
| — | |||
Real estate taxes expense |
| 28,194 |
| 29,648 |
| (4.9) | % | ||
General and administrative expense: | |||||||||
Corporate and other |
| 31,974 |
| 31,216 |
| 2.4 | % | ||
Third-party real estate services |
| 40,977 |
| 45,928 |
| (10.8) | % | ||
Share-based compensation related to Formation Transaction and special equity awards |
| — |
| 351 |
| (100.0) | % | ||
Income from unconsolidated real estate ventures, net |
| 749 |
| 943 |
| (20.6) | % | ||
Interest expense |
| 62,133 |
| 52,677 |
| 18.0 | % | ||
Gain on the sale of real estate, net |
| 286 |
| 40,700 |
| (99.3) | % | ||
Impairment loss | 18,236 | — | * |
* Not meaningful.
Property rental revenue decreased by approximately $9.5 million, or 3.9%, to $235.2 million in 2024 from $244.6 million in 2023. The decrease was primarily due to a $23.0 million decrease in revenue from our commercial assets, partially offset by $11.1 million in lease termination revenue, a $2.3 million increase in revenue from our multifamily assets and a $163,000 increase in other revenue. The decrease in revenue from our commercial assets was primarily due to a $6.6 million decrease related to the Disposed Properties, a $6.2 million decrease related to 1800 South Bell Street and 2100 Crystal Drive, which were taken out of service during 2024, and lower occupancy and rents across the portfolio. The increase in revenue from our multifamily assets was primarily due to a $1.3 million increase related to 1900 Crystal Drive, which we began leasing during the first quarter of 2024, and higher occupancy and rents across the portfolio, partially offset by a $5.4 million decrease related to the Disposed Properties.
Third-party real estate services revenue, including reimbursements, decreased by approximately $10.4 million, or 22.7%, to $35.3 million in 2024 from $45.6 million in 2023. The decrease was primarily due to a $4.1 million decrease in development fees related to the timing of development projects, a $3.7 million decrease in reimbursement revenue and a $1.7 million decrease in property management fees.
Depreciation and amortization expense increased by approximately $5.5 million, or 5.4%, to $108.2 million in 2024 from $102.6 million in 2023. The increase was primarily due to (i) a $7.5 million increase related to 2100 Crystal Drive due to the acceleration of depreciation of certain assets as the building was taken out of service in the second quarter of 2024, (ii) a $6.5 million increase related to 1900 Crystal Drive, which we began leasing during the first quarter of 2024, (iii) a $2.2 million increase related to Crystal City Shops at 2100 due to the acceleration of depreciation and (iv) a $2.0 million increase related to various National Landing assets primarily due to placing Water Park and Surreal into service. The increase in depreciation and amortization expense was partially offset by (v) a $4.9 million decrease related to the Disposed Properties, (vi) a $4.3 million decrease related to 1800 South Bell Street, which was taken out of service during the first quarter of 2024, (vii) a $3.4 million decrease related to 8001 Woodmont due to the amortization of acquired in-place lease intangibles in 2023 and (viii) a $1.0 million decrease related to 2451 Crystal Drive due to the disposal of certain tenant-related assets in 2023.
Property operating expense increased by approximately $9,000 to $71.5 million in 2024. The increase was primarily due to a $2.5 million increase in other property operating expense and a $470,000 increase in property operating expense from our multifamily assets, partially offset by a $3.0 million decrease in property operating expense from our commercial assets. The increase in other property operating expense was primarily due to a $1.8 million increase in insurance claims covered
35
by our captive insurance subsidiary. The increase in property operating expense from our multifamily assets was primarily due to a $2.0 million increase related to 1900 Crystal Drive, which we began leasing during the first quarter of 2024, and higher operating expenses due to higher occupancy across the portfolio, partially offset by a $1.6 million decrease related to the Disposed Properties. The decrease in property operating expense from our commercial assets was primarily due to a $1.9 million decrease related to the Disposed Properties, a $1.2 million decrease related to 1800 South Bell Street and 2100 Crystal Drive, which were taken out of service during 2024, and lower operating expenses due to lower occupancy across the portfolio.
Real estate taxes expense decreased by approximately $1.5 million, or 4.9%, to $28.2 million in 2024 from $29.6 million in 2023. The decrease was primarily due to a $1.6 million decrease related to the Disposed Properties and lower assessments across the portfolio, partially offset by a $1.4 million increase related to 1900 Crystal Drive, which we began leasing during the first quarter of 2024.
General and administrative expense: corporate and other increased by approximately $758,000, or 2.4%, to $32.0 million in 2024 from $31.2 million in 2023. The increase was primarily due to a decrease in capitalized payroll, partially offset by lower compensation expenses.
General and administrative expense: third-party real estate services decreased by approximately $5.0 million, or 10.8%, to $41.0 million in 2024 from $45.9 million in 2023. The decrease was primarily due to lower third-party reimbursable expenses and lower compensation 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 decreased by approximately $194,000, or 20.6%, to $749,000 in 2024 from $943,000 in 2023. The decrease was due to a decrease in income at our share primarily related to disposition activity, partially offset by a $480,000 gain at our share from the sale of Central Place Tower in 2024.
Interest expense increased by approximately $9.5 million, or 18.0%, to $62.1 million in 2024 from $52.7 million in 2023. The increase in interest expense was primarily due to (i) a $11.9 million increase due to higher outstanding debt, (ii) a $5.9 million increase related to rising interest rates on variable rate mortgage loans and (iii) a $3.4 million decrease in capitalized interest as we placed 1900 Crystal Drive into service. The increase in interest expense was partially offset by (iv) a $5.6 million decrease resulting from the expiration of certain non-designated derivatives, (v) a $4.8 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 $286,000 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 $18.2 million in 2024 was related to two development parcels, which were written down to their 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.
36
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 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 June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 | 2024 |
| 2023 | ||||||
(In thousands) | ||||||||||||
Net income (loss) attributable to common shareholders | $ | (24,373) | $ | (10,545) | $ | (56,649) | $ | 10,626 | ||||
Net income (loss) attributable to redeemable noncontrolling interests |
| (3,454) |
| (1,398) |
| (7,988) |
| 1,965 | ||||
Net loss attributable to noncontrolling interests |
| (5,587) |
| (311) |
| (10,967) |
| (535) | ||||
Net income (loss) |
| (33,414) |
| (12,254) |
| (75,604) |
| 12,056 | ||||
Gain on the sale of real estate, net of tax |
| (89) |
| — |
| (1,498) |
| (40,700) | ||||
Gain on the sale of unconsolidated real estate assets |
| — |
| — |
| (480) |
| — | ||||
Real estate depreciation and amortization |
| 49,631 |
| 47,502 |
| 104,818 |
| 99,113 | ||||
Pro rata share of real estate depreciation and amortization from unconsolidated real estate ventures |
| 799 |
| 3,111 |
| 2,290 |
| 5,871 | ||||
FFO attributable to noncontrolling interests |
| — |
| 311 |
| — |
| 535 | ||||
FFO attributable to common limited partnership units ("OP Units") |
| 16,927 |
| 38,670 |
| 29,526 |
| 76,875 | ||||
FFO attributable to redeemable noncontrolling interests |
| (2,592) |
| (5,247) |
| (4,513) |
| (10,450) | ||||
FFO attributable to common shareholders | $ | 14,335 | $ | 33,423 | $ | 25,013 | $ | 66,425 |
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 June 30, 2024, our same store pool decreased to 40 properties from 41 properties due to the exclusion of 2100 Crystal Drive, which was taken out of service. During the six months ended June 30, 2024, our same store pool decreased to 40
37
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 and 2100 Crystal Drive, which were 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 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 $2.2 million, or 3.2%, to $71.4 million for the three months ended June 30, 2024 from $69.1 million for the same period in 2023. The increase for the three months ended June 30, 2024 was substantially attributable to (i) higher rents and occupancy and lower concessions, partially offset by higher operating expenses in our multifamily portfolio, and (ii) lower real estate taxes and operating expenses, partially offset by lower occupancy in our commercial portfolio. Same store NOI increased $7.2 million, or 5.2%, to $145.1 million for the six months ended June 30, 2024 from $137.9 million for the same period in 2023. The increase for the six months ended June 30, 2024 was substantially attributable to (i) higher rents and occupancy and lower concessions, partially offset by higher operating expenses in our multifamily portfolio, and (ii) burn off of rent abatements, lower real estate taxes and non-reimbursable operating expenses, partially offset by lower occupancy in our commercial portfolio.
38
The following is the reconciliation of net income (loss) attributable to common shareholders to NOI and same store NOI:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
(Dollars in thousands) | ||||||||||||
Net income (loss) attributable to common shareholders | $ | (24,373) | $ | (10,545) | $ | (56,649) | $ | 10,626 | ||||
Net income (loss) attributable to redeemable noncontrolling interests |
| (3,454) |
| (1,398) |
| (7,988) |
| 1,965 | ||||
Net loss attributable to noncontrolling interests | (5,587) | (311) | (10,967) | (535) | ||||||||
Net income (loss) | (33,414) | (12,254) | (75,604) | 12,056 | ||||||||
Add: | ||||||||||||
Depreciation and amortization expense |
| 51,306 |
| 49,218 |
| 108,161 |
| 102,649 | ||||
General and administrative expense: | ||||||||||||
Corporate and other |
| 17,001 |
| 15,093 |
| 31,974 |
| 31,216 | ||||
Third-party real estate services |
| 18,650 |
| 22,105 |
| 40,977 |
| 45,928 | ||||
Share-based compensation related to Formation Transaction and special equity awards |
| — |
| — |
| — |
| 351 | ||||
Transaction and other costs |
| 824 |
| 3,492 |
| 2,338 |
| 5,964 | ||||
Interest expense |
| 31,973 |
| 25,835 |
| 62,133 |
| 52,677 | ||||
Loss on the extinguishment of debt |
| — |
| 450 |
| — |
| 450 | ||||
Impairment loss | 1,025 |
| — | 18,236 | — | |||||||
Income tax expense (benefit) |
| 597 |
| 611 |
| (871) |
| 595 | ||||
Less: | ||||||||||||
Third-party real estate services, including reimbursements revenue |
| 17,397 |
| 22,862 |
| 35,265 |
| 45,646 | ||||
Other revenue |
| 2,126 |
| 3,846 |
| 13,389 |
| 5,572 | ||||
Income (loss) from unconsolidated real estate ventures, net |
| (226) |
| 510 |
| 749 |
| 943 | ||||
Interest and other income, net |
| 3,432 |
| 2,281 |
| 5,532 |
| 6,358 | ||||
Gain on the sale of real estate, net |
| 89 |
| — |
| 286 |
| 40,700 | ||||
Consolidated NOI |
| 65,144 |
| 75,051 |
| 132,123 |
| 152,667 | ||||
NOI attributable to unconsolidated real estate ventures at our share |
| 1,168 |
| 5,175 |
| 4,215 |
| 9,604 | ||||
Non-cash rent adjustments (1) |
| (2,509) |
| (6,311) |
| (3,939) |
| (14,688) | ||||
Other adjustments (2) |
| 5,450 |
| 5,163 |
| 10,684 |
| 12,008 | ||||
Total adjustments |
| 4,109 |
| 4,027 |
| 10,960 |
| 6,924 | ||||
NOI |
| 69,253 |
| 79,078 |
| 143,083 |
| 159,591 | ||||
Less: out-of-service NOI loss (3) |
| (2,341) |
| (902) |
| (5,374) |
| (1,611) | ||||
Operating Portfolio NOI |
| 71,594 |
| 79,980 |
| 148,457 |
| 161,202 | ||||
Non-same store NOI (4) |
| 225 |
| 10,853 |
| 3,389 |
| 23,317 | ||||
Same store NOI (5) | $ | 71,369 | $ | 69,127 | $ | 145,068 | $ | 137,885 | ||||
Change in same store NOI |
| 3.2% |
| 5.2% | ||||||||
Number of properties in same store pool |
| 40 |
| 40 |
(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. |
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.
39
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 June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 | 2024 |
| 2023 | ||||||
(In thousands) | ||||||||||||
Property management fees | $ | 3,976 | $ | 5,017 | $ | 8,247 | $ | 9,969 | ||||
Asset management fees |
| 1,242 |
| 1,255 |
| 2,166 |
| 2,358 | ||||
Development fees |
| 419 |
| 2,756 |
| 657 |
| 4,742 | ||||
Leasing fees |
| 1,190 |
| 1,256 |
| 2,325 |
| 2,612 | ||||
Construction management fees |
| 177 |
| 303 |
| 560 |
| 643 | ||||
Other service revenue |
| 1,311 |
| 1,422 |
| 2,365 |
| 2,646 | ||||
Third-party real estate services revenue, excluding reimbursements |
| 8,315 |
| 12,009 |
| 16,320 |
| 22,970 | ||||
Reimbursement revenue (1) |
| 9,082 |
| 10,853 |
| 18,945 |
| 22,676 | ||||
Third-party real estate services revenue, including reimbursements | 17,397 | 22,862 | 35,265 | 45,646 | ||||||||
Third-party real estate services expenses | 18,650 | 22,105 | 40,977 | 45,928 | ||||||||
Third-party real estate services revenue less expenses | $ | (1,253) | $ | 757 | $ | (5,712) | $ | (282) |
(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 and six months ended June 30, 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 and six months ended June 30, 2024 and 2023.
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The following is a summary of NOI by segment:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 | 2024 |
| 2023 | ||||||
(In thousands) | ||||||||||||
Property revenue: (1) |
|
|
|
|
|
|
| |||||
Multifamily | $ | 53,422 | $ | 52,738 | $ | 105,049 | $ | 102,872 | ||||
Commercial |
| 59,488 |
| 68,747 |
| 120,667 |
| 144,802 | ||||
Other (2) |
| 2,887 |
| 3,902 |
| 6,134 |
| 6,165 | ||||
Total property revenue |
| 115,797 |
| 125,387 |
| 231,850 |
| 253,839 | ||||
Property expense: (3) |
|
|
|
|
|
|
|
| ||||
Multifamily |
| 25,232 |
| 24,042 |
| 48,595 |
| 47,105 | ||||
Commercial |
| 24,929 |
| 26,447 |
| 49,407 |
| 54,819 | ||||
Other (2) |
| 492 |
| (153) |
| 1,725 |
| (752) | ||||
Total property expense |
| 50,653 |
| 50,336 |
| 99,727 |
| 101,172 | ||||
Consolidated NOI: |
|
|
|
|
|
|
|
| ||||
Multifamily |
| 28,190 |
| 28,696 |
| 56,454 |
| 55,767 | ||||
Commercial |
| 34,559 |
| 42,300 |
| 71,260 |
| 89,983 | ||||
Other (2) |
| 2,395 |
| 4,055 |
| 4,409 |
| 6,917 | ||||
Consolidated NOI | $ | 65,144 | $ | 75,051 | $ | 132,123 | $ | 152,667 |
(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 June 30, 2024 to 2023
Multifamily: Property revenue increased by $684,000, or 1.3%, to $53.4 million in 2024 from $52.7 million in 2023. Consolidated NOI decreased by $506,000, or 1.8%, to $28.2 million in 2024 from $28.7 million in 2023. The increase in property revenue was primarily due to 1900 Crystal Drive, which we began leasing during the first quarter of 2024, and higher occupancy and rents across the portfolio, partially offset by a decrease related to the Disposed Properties. The decrease in consolidated NOI was due to an increase in property operating expenses primarily related to 1900 Crystal Drive, partially offset by a decrease in property operating expenses related to the Disposed Properties and an increase in property revenue.
Commercial: Property revenue decreased by $9.3 million, or 13.5%, to $59.5 million in 2024 from $68.7 million in 2023. Consolidated NOI decreased by $7.7 million, or 18.3%, to $34.6 million in 2024 from $42.3 million in 2023. The decreases in property revenue and consolidated NOI were primarily due to 1800 South Bell Street and 2100 Crystal Drive, which were taken out of service during 2024, the Disposed Properties, and lower occupancy and rents across the portfolio.
Comparison of the Six Months Ended June 30, 2024 to 2023
Multifamily: Property revenue increased by $2.2 million, or 2.1%, to $105.0 million in 2024 from $102.9 million in 2023. Consolidated NOI increased by $687,000, or 1.2%, to $56.5 million in 2024 from $55.8 million in 2023. The increases in property revenue and consolidated NOI were primarily due to 1900 Crystal Drive, which we began leasing during the first quarter of 2024, and higher occupancy and rents across the portfolio, partially offset by a decrease related to the Disposed Properties.
Commercial: Property revenue decreased by $24.1 million, or 16.7%, to $120.7 million in 2024 from $144.8 million in 2023. Consolidated NOI decreased by $18.7 million, or 20.8%, to $71.3 million in 2024 from $90.0 million in 2023. The decreases in property revenue and consolidated NOI were primarily due to the Disposed Properties, 1800 South Bell Street and 2100 Crystal Drive, which were taken out of service during 2024, and lower occupancy and rents across the portfolio.
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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.
Mortgage Loans
The following is a summary of mortgage loans:
Weighted Average | ||||||||
Effective |
| |||||||
| Interest Rate (1) |
| June 30, 2024 |
| December 31, 2023 | |||
(In thousands) | ||||||||
Variable rate (2) |
| 6.23% | $ | 701,283 | $ | 608,582 | ||
Fixed rate (3) |
| 4.78% |
| 1,188,709 |
| 1,189,643 | ||
Mortgage loans |
|
| 1,889,992 |
| 1,798,225 | |||
Unamortized deferred financing costs and premium/discount, net |
|
| (13,533) |
| (15,211) | |||
Mortgage loans, net | $ | 1,876,459 | $ | 1,783,014 |
(1) | Weighted average effective interest rate as of June 30, 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 3.52%, and the weighted average maturity date of the interest rate caps was June 2025. In July 2024, a new interest rate cap was executed that extended the weighted average maturity date of the interest rate caps to October 2025. The interest rate cap strike is exclusive of the credit spreads associated with the mortgage loans. As of June 30, 2024, one-month term Secured Overnight Financing Rate ("SOFR") was 5.34%. |
(3) | Includes variable rate mortgages with interest rates fixed by interest rate swap agreements. |
As of June 30, 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 June 30, 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 June 30, 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.
42
The following is a summary of amounts outstanding under the revolving credit facility and term loans:
Effective | ||||||||
| Interest Rate (1) |
| June 30, 2024 |
| December 31, 2023 | |||
(In thousands) | ||||||||
Revolving credit facility (2) (3) |
| 6.78% | $ | 40,000 | $ | 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 |
|
| (2,390) |
| (2,828) | |||
Term loans, net | $ | 717,610 | $ | 717,172 |
(1) | Effective interest rate as of June 30, 2024. The interest rate for our revolving credit facility excludes a 0.15% facility fee. |
(2) | As of June 30, 2024, daily SOFR was 5.33%. As of June 30, 2024 and December 31, 2023, letters of credit with an aggregate face amount of $15.7 million and $467,000 were outstanding under our revolving credit facility. |
(3) | As of June 30, 2024 and December 31, 2023, excludes $8.7 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. |
(4) | As of June 30, 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 matured in July 2024. We have two forward-starting interest rate swaps that became effective in July 2024 with a total notional value of $200.0 million, which effectively fix SOFR at a weighted average interest rate of 4.00% through January 2027. |
(5) | As of June 30, 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 matured in July 2024 and with a total notional value of $200.0 million will mature in January 2028. We have two forward-starting interest rate swaps that became effective in July 2024 with a total notional value of $200.0 million, which effectively fix SOFR at a weighted average interest rate of 2.81% through the maturity date. |
(6) | As of June 30, 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 and six months ended June 30, 2024, we repurchased and retired 4.7 million and 7.7 million common shares for $68.7 million and $118.1 million, a weighted average purchase price per share of $14.62 and $15.35. During the three and six months ended June 30, 2023, we repurchased and retired 9.3 million and 10.5 million common shares for $135.7 million and $155.8 million, a weighted average purchase price per share of $14.54 and $14.79. Since we began the share repurchase program through June 30, 2024, we have repurchased and retired 53.6 million common shares for $1.1 billion, a weighted average purchase price per share of $20.09.
During July 2024, through the date of this filing, we repurchased and retired 897,531 common shares for $14.0 million, a weighted average purchase price per share of $15.55, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.
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 June 30, 2024, we had a $120.9 million mortgage loan scheduled to mature in August 2024. In 2025, we have maturities |
43
totaling $424.0 million ($391.0 million related to our consolidated entities and $33.0 million related to an unconsolidated real estate venture at our share), after adjusting for by-right extension options; |
● | capital expenditures, including major renovations, tenant improvements and leasing costs — As of June 30, 2024, we had committed tenant-related obligations totaling $44.4 million ($44.3 million related to our consolidated entities and $144,000 related to our unconsolidated real estate ventures at our share); |
● | development expenditures — As of June 30, 2024, we had assets under construction that, based on our current plans and estimates, require an additional $98.5 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 July 24, 2024, our Board of Trustees declared a quarterly dividend of $0.175 per common share; |
● | possible common share repurchases — during July 2024, through the date of this filing, we repurchased and retired 897,531 common shares for $14.0 million; 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 June 30, 2024, we had cash and cash equivalents of $163.5 million; |
● | cash flows from operations; |
● | distributions from real estate ventures; |
● | borrowing capacity under our revolving credit facility — As of June 30, 2024, we had $694.3 million of availability under our revolving credit facility; |
● | proceeds from financings, asset sales and recapitalizations; and |
● | proceeds from the issuance of securities. |
During the six months ended June 30, 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:
Six Months Ended June 30, | ||||||
| 2024 |
| 2023 | |||
(In thousands) | ||||||
Net cash provided by operating activities | $ | 60,813 | $ | 89,431 | ||
Net cash provided by (used in) investing activities |
| 61,992 |
| (135,500) | ||
Net cash used in financing activities |
| (117,344) |
| (25,160) |
Cash Flows for the Six Months Ended June 30, 2024
Cash and cash equivalents, and restricted cash increased $5.5 million to $205.9 million as of June 30, 2024, compared to $200.4 million as of December 31, 2023. This increase resulted from $62.0 million of net cash provided by investing activities and $60.8 million of net cash provided by operating activities, partially offset by $117.3 million of net cash used in financing activities. Our outstanding debt was $2.6 billion as of June 30, 2024 and December 31, 2023.
Net cash provided by operating activities of $60.8 million comprised: (i) $70.8 million of net income (before $146.7 million of non-cash items and a $286,000 gain on the sale of real estate), (ii) $1.7 million of return on capital from unconsolidated real estate ventures and (iii) $11.7 million of net change in operating assets and liabilities. Non-cash income adjustments of $146.7 million primarily include depreciation and amortization expense, share-based compensation expense, impairment loss, deferred rent and amortization of lease incentives.
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Net cash provided by investing activities of $62.0 million primarily comprised: (i) $163.9 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) $113.4 million of development costs, construction in progress and real estate additions, and (iv) $3.8 million of investments in unconsolidated real estate ventures and other investments.
Net cash used in financing activities of $117.3 million primarily comprised: (i) $195.0 million of repayments on the revolving credit facility, (ii) $116.4 million of common shares repurchased, (iii) $32.2 million of dividends paid to common shareholders, (iv) $26.6 million paid for the acquisition of noncontrolling interests and (v) $5.8 million of distributions to our redeemable noncontrolling interests, partially offset by (vi) $173.0 million of borrowings under the revolving credit facility and (vii) $89.6 million of borrowings under mortgage loans.
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 June 30, 2024, we had investments in unconsolidated real estate ventures totaling $101.0 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 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 June 30, 2024, we had additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures and other investments totaling $58.0 million. As of June 30, 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.
45
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 June 30, 2024, we had assets under construction that, based on our current plans and estimates, require an additional $98.5 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 June 30, 2024, we had committed tenant-related obligations totaling $44.4 million ($44.3 million related to our consolidated entities and $144,000 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 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 June 30, 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
46
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 $17.5 million and $17.6 million as of June 30, 2024 and December 31, 2023, and are included in "Other liabilities, net" in our balance sheets.
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:
| June 30, 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) | $ | 701,283 |
| 6.23% | $ | 1,445 | $ | 608,582 |
| 6.25% | ||||||
Fixed rate (2) |
| 1,188,709 |
| 4.78% |
| — |
| 1,189,643 |
| 4.78% | ||||||
$ | 1,889,992 | $ | 1,445 | $ | 1,798,225 | |||||||||||
Revolving credit facility and term loans: | ||||||||||||||||
Revolving credit facility (3) | $ | 40,000 |
| 6.78% | $ | 406 | $ | 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% | |||||||||||
$ | 760,000 | $ | 406 | $ | 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 3.52%, and the weighted average maturity date of the interest rate caps was June 2025. In July 2024, a new interest rate cap was executed that extended the weighted average maturity date of the interest rate caps to October 2025. The interest rate cap strike is exclusive of the credit spreads associated with the mortgage loans. As of June 30, 2024, one- |
47
month term SOFR was 5.34%. 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 June 30, 2024, daily SOFR was 5.33%. The interest rate for our revolving credit facility excludes a 0.15% facility fee. |
(4) | As of June 30, 2024 and December 31, 2023, the outstanding balance was fixed by interest rate swap agreements. As of June 30, 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 June 30, 2024 and December 31, 2023, the estimated fair value of our consolidated debt was $2.6 billion and $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.
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 June 30, 2024 and December 31, 2023, we had interest rate swap and cap agreements with an aggregate notional value of $2.3 billion and $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 $36.6 million and $35.6 million as of June 30, 2024 and December 31, 2023, included in "Other assets, net" in our balance sheets, and liabilities totaling $7.9 million as of 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 (losses) recorded in "Interest expense" in our statements of operations. As of June 30, 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 $5.5 million and $6.7 million as of June 30, 2024 and December 31, 2023, included in "Other assets, net" in our balance sheets, and liabilities totaling $5.5 million and $6.5 million as of June 30, 2024 and December 31, 2023, included in "Other liabilities, net" in our balance sheets.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2024, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are, from time to time, involved in legal actions arising in the ordinary course of business. In our opinion, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in our Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) | Not applicable. |
(b) | Not applicable. |
(c) | Purchases of equity securities by the issuer and affiliated purchasers: |
Period | Total Number Of Common Shares Purchased | Average Price Paid Per Common Share | Total Number Of Common Shares Purchased As Part Of Publicly Announced Plans Or Programs | Approximate Dollar Value Of Common Shares That May Yet Be Purchased Under the Plan Or Programs | ||||||
April 1, 2024 - April 30, 2024 | - | $ | - | - | $ | 491,788,979 | ||||
May 1, 2024 - May 31, 2024 | 494,539 | 14.02 | 494,539 | 484,844,099 | ||||||
June 1, 2024 - June 30, 2024 | 4,198,777 | 14.69 | 4,198,777 | 423,075,016 | ||||||
Total for the three months ended June 30, 2024 | 4,693,316 | 14.62 | 4,693,316 | |||||||
Total for the six months ended June 30, 2024 | 7,684,176 | 15.35 | 7,684,176 | |||||||
Program total since inception in March 2020 (1) | 53,558,179 | 20.09 | 53,558,179 |
(1) | During July 2024, through the date of this filing, we repurchased and retired 897,531 common shares for $14.0 million, a weighted average purchase price per share of $15.55, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. |
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In June 2022, our Board of Trustees authorized the repurchase of up to $1.0 billion of our outstanding common shares, and in May 2023, increased the authorized repurchase amount to $1.5 billion. 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, and, in any event.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Trading Arrangements
During the three months ended June 30, 2024, none of our officers or trustees adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of
ITEM 6. EXHIBITS
(a) Exhibit Index
Exhibits | Description |
---|---|
3.1 | |
3.2 | |
3.3 | |
3.4 | |
10.1† | |
31.1** | |
31.2** | |
32.1** | |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | Inline XBRL Taxonomy Extension Schema |
101.CAL | Inline XBRL Extension Calculation Linkbase |
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Exhibits | Description |
---|---|
101.LAB | Inline XBRL Extension Labels Linkbase |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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