4747 Bethesda Avenue
Crystal City Phase Zero
CEB Tower at Central Place
With over 50 years of experience in the Washington, DC region, JBG
SMITH is the leader in investing, owning, managing, and developing
office, retail, residential, and neighborhood assets. Our creativity
and scale enable us to be more than owners—we are placemakers
who shape inspiring and engaging places, which we believe create
value and have a positive impact in every community we touch.
TO OUR SHAREHOLDERS
We are pleased to deliver our first annual report as a public company. 2017
was a milestone year for us, and the post-merger integration of the JBG
and Vornado operating platforms has gone extremely well. We are excited
about the combined JBG SMITH team, our portfolio, and the abundant
growth opportunities ahead of us. The first half of this letter focuses on
our strategy and annual results, and the second half addresses market
commentary and our fourth quarter results.
We are the largest and most active mixed-use operator in the
Washington, DC Metropolitan Area. We own a unique portfolio
of some of the best office, multifamily and retail assets in the
strongest performing, high-barrier submarkets in the region. 98%
of the assets in our Operating Portfolio are Metro-served with
an average Walk Score of 84, making JBG SMITH one of the most
walkable publicly traded portfolios in the region. Our mixed-use
strategy positions us to offer the blend of uses and amenities that
urban tenants and consumers demand. Our proven development
expertise enables us to harvest high-yield growth opportunities
from our 17.9 million square foot (at share) Future Development
Pipeline, as well as to optimize and protect the value of the
assets in our Operating Portfolio. Our exclusive focus on the
DC Metro region offers investors concentrated exposure to the
best submarkets of our city while also preserving the downside
protection of a market that has historically been one of the most
recession-resistant in the country.
Our management team and Board of Trustees are closely aligned
with our shareholders as this group owns or represents more than
10% of the equity of JBG SMITH. Our primary focus is on long-
term value creation and maximizing net asset value (NAV) per
share. Through 2023 we expect to deliver over $140 million of NOI
growth – with over $100 million from our ten Under Construction
assets and approximately $40 million from the stabilization of
our Operating Portfolio. This reflects over $10 million of NOI from
progress towards portfolio stabilization in 2017 but does not
include any adjustments for our planned capital recycling efforts.
We have guaranteed maximum-price contracts in place for all of
JBG SMITH 2017 Annual Report | 1
Our exclusive
focus on the
DC Metro region
offers investors
concentrated
exposure to the
best submarkets
of our city while
also preserving
the downside
protection of
a market that
has historically
been one of the
most recession-
resistant in
the country.
our Under Construction assets, where we expect to make an incremental investment of approximately $766
million. The commercial space in these assets was 62.1% preleased at year-end, up approximately 10% from
the prior quarter. Our total expected NOI growth over the next six years represents a 6% CAGR, of which 2%
is expected to come from our Operating Portfolio. We believe that this growth has the potential to produce
$10-12 per share in incremental NAV over this period. This growth excludes the potential upside embedded in
our 17.9 million square foot Future Development Pipeline.
We are pursuing several opportunities to capitalize on today’s attractive selling environment where we
can achieve or exceed NAV pricing. The proceeds from these sales should allow us to build capacity to
invest in future growth opportunities, both within and outside our Future Development Pipeline, while
maintaining prudent leverage levels. We have identified opportunities to generate over $700 million of
capital through potential asset sales and recapitalizations, which could enable us to offset some of the
incremental investment in our Under Construction assets and reduce our leverage ratio between 0.5x
and 1.0x by year-end.
2017 Results
We finished 2017 in-line with our expectations and for the six months ended December 31, 2017, after
accounting for transaction costs related to the formation transaction, we reported a net loss of $96.7
million and Core FFO of $103.4 million or $0.89 per share. We realized year-to-date same store NOI growth
of 6.5%, and we ended the year at 89.9% leased and 88.9% occupied. For second generation leases, the
rental rate mark-to-market was -6.4% year-to-date, which exceeded our assumption of -5.0%, but is in-line
with our long-term expectation, as this number will fluctuate from quarter to quarter.
Our ten Under Construction assets total 1.3 million square feet of commercial space (1.2 million square feet
at share) and 1,767 multifamily units (1,568 units at share). In our view, these assets represent some of
the best new properties in the strongest locations throughout the Washington Metro Area. As land sites,
some took over a decade to assemble, and we are excited to be so close to bringing them online. We remain
on schedule and on budget for these assets, which have a weighted average projected yield of 7.1%
based on our estimated total project cost. Preleasing of our four Under Construction office assets
increased approximately 10% in the fourth quarter to 62.1%, and we have solid interest and activity for the
remaining vacancy in these properties, where 66% of our available square footage sits in the top half of
these buildings.
We continue to make progress advancing entitlements within our 17.9 million square foot Future
Development Pipeline, including the first phase of our Crystal City redevelopment plan. Our objective is
to monetize these assets either through recurring income from internal development or liquidity from
sale or recapitalization.
While Crystal City accounts for approximately 17% of our Future Development Pipeline, with the exception
of the anchor retail projects in Phase I, we intend to pursue development in the submarket only as market
conditions warrant. The timing of Phase I will depend on Arlington County approvals, which although out
of our control, have been progressing well. While the County has been a constructive partner, and we have
submitted our zoning applications well ahead of schedule, we cannot dictate the timing or ultimate level of
economic and zoning cooperation we will receive. Concurrent with this process we have been implementing
what we call Phase Zero in Crystal City, which upgrades and improves certain exterior building finishes,
garage entrances, lobbies, public plazas, landscaping and signage. In addition, we have wrapped four
currently out of service office buildings with art installations to improve the curb appeal of the submarket
while we work through entitlements and our redevelopment plans. These initiatives provide tangible
evidence to current and future tenants that change is coming and will help bridge the time between today
and the delivery of our first new buildings several years from now. We remain bullish on Crystal City, and we
are working hard to reposition the submarket to maximize long-term value for our shareholders.
As mentioned above, a more detailed summary of our market commentary and quarterly results follows
this strategic discussion.
JBG SMITH 2017 Annual Report | 2
Balance Sheet
We have prudent leverage, a well-laddered debt maturity profile, and sufficient liquidity to execute on
our growth plans. As of December 31, 2017, we had $317 million of cash and $1.2 billion available on our
$1.4 billion credit facility. Our Net Debt/EBITDA was 7.1x and our Net Debt/Total Enterprise Value was 32%.
Our average debt maturity is 4.1 years, and we have approximately $710 million coming due in the next
two years. Our debt is 70% fixed, and we have caps in place for 19% of our total debt. Consistent with our
strategy to finance our business primarily with non-recourse, asset-level financing, 93% of our consolidated
and unconsolidated debt is mortgage debt, of which approximately $122.5 million has recourse exposure.
In our June 2017 Investor Presentation, we described our long-term Net Debt/EBITDA target of 6.0x – 7.0x,
and our expectation that interim peak levels would remain below 8.5x. These levels assumed that we did
not complete any capital recycling. With the targeted dispositions we previewed in our last letter and have
detailed above, it is our objective to take advantage of attractive selling opportunities available today,
especially in the office market. We have identified opportunities to generate approximately $700 million
of capital through potential asset sales and recapitalizations, which could enable us to repay existing
indebtedness and reduce our peak and stabilized leverage between 0.5x and 1.0x. That being said, we have
always been careful to promise only those outcomes that are within our control. Our capital recycling
efforts remain subject to market conditions and our ability to transact with third parties. Consequently,
investors should not count on any such transactions until deals are closed and wires have cleared.
Capital Allocation
Nothing that we do is more important than prudent capital allocation, which will be decisive in driving
long-term NAV growth and stock price performance.
Long Term NAV Per Share
We evaluate every leasing, development, acquisition or disposition decision based on how it impacts
long-term NAV per share. We require that new investments be accretive to long-term NAV on a per share
basis, which ensures that we do not sacrifice asset quality, location or risk in pursuit of short-term yield
or preservation of current income. To maintain discipline through market cycles we prioritize the expected
unleveraged internal return of an asset over a 10-year hold period with particular attention paid to
long-term replacement value. We prioritize these absolute return metrics to protect against the adverse
outcomes that can arise from using relative returns when markets are overbought or oversold.
Prudent Leverage
Maintaining internal investment capacity is critical to our long-term strategy. The best returns are made
selling near the peaks and buying near the troughs. If we are capital-constrained when the cycle turns, we
will not be able to take advantage of the richest buying opportunities when they arise. Likewise, if we fail
to take advantage of market conditions when selling is attractive, we may miss opportunities to deleverage
using attractively priced sources of capital. These considerations are related, and they are key drivers of our
current capital recycling strategy as we seek to create balance sheet capacity for the next buyer’s market
or contrarian development environment.
JBG SMITH 2017 Annual Report | 3
“Sell” Discipline
In the same way that we are stingy buyers and
developers, we are demanding sellers. Just as we
hold our investment decisions to a rigorous
risk-adjusted return standard, we do the same
when evaluating candidates for sale. We regularly
re-underwrite every asset in our portfolio to
determine the value at which we would be a willing
seller and a willing buyer. There must be a sizeable
gap between these numbers (the “buy” and the
“sell”) to provide a sufficient margin of safety
and reflect the fact that good buying and selling
opportunities rarely co-exist.
We seek opportunities to sell when market pricing
exceeds replacement cost and where implied
go-forward unleveraged rates of return are too low
to justify holding. We also prioritize recapitalizing
or selling assets in submarkets where we see lower
long-term growth potential or those where we do
not have concentrated holdings with long-term
upside. If we find ourselves in a “seller’s” market
without compelling internal uses for our capital,
then we may distribute cash to our investors
through a combination of dividends and/or share
buy-backs. While any land or income-producing
asset in the portfolio is a potential sale candidate,
we are careful to minimize distribution obligations
necessitated by sales that produce taxable income.
By definition, when it’s a good time to sell an asset it
is typically not a great time to buy an asset, so low
basis assets will be considered for 1031 exchanges
only where we can improve risk-adjusted returns and
upgrade asset quality, location or use type.
Current Market Position
Acquisitions: The current acquisition market in
Washington, DC is very competitive, especially for
low risk, “core” assets. The competitive landscape
has us picking our shots very carefully. Our limited
level of acquisition activity is focused on assets
with redevelopment potential in emerging growth
submarkets amidst our existing holdings where the
combination of sites can add unique value to any
new investment.
Dispositions: With private investors accepting rates
of return at or below 6%, we believe it is a good time
to be a seller into the private market. As mentioned
above, we have identified opportunities to generate
approximately $700 million through potential asset
sales and recapitalizations, and we are exploring
the market to determine if we can clear our return
thresholds and source attractively priced capital at
or above NAV. We are focused on liquid assets where
we can retain capital for deleveraging. These include
high-basis assets and those that lend themselves
to partial sales and loan repayment. We are also
very focused on opportunities to turn land assets
into income streams or retained capital. Given the
aggressive pricing of office assets and our stated
long-term objective of shifting our portfolio to a
50:50 mix of office and multifamily, we are targeting
primarily office assets in submarkets where we
have less concentration and where we anticipate
lower growth rates going forward relative to other
opportunities within our portfolio.
Development: We continue to make progress
advancing the entitlements and readiness of
opportunities in our Future Development Pipeline.
As we have stated before, the anchor and amenity
retail projects in Phase I of our transformative
repositioning of Crystal City are the only assets
we are committed to build. The remaining Future
Development assets will become investment
opportunities only when market conditions warrant
and when we have sufficient balance sheet
capacity. Multifamily assets remain attractive
given an expected decline in supply levels into 2019
and we are bullish on the long-term trajectory of
apartment rents in our submarkets. As is always the
case, we will not commence construction on any
development opportunity until we have
a guaranteed maximum-price construction
contract in place.
JBG SMITH 2017 Annual Report | 4
Culture and Governance
We pride ourselves on a transparent and collaborative culture
that rewards merit and talent over tenure. We strive to align
goals and rewards with the creation of long-term value, and
we place a premium on accountability and fairness. It is these
factors that have allowed us to cultivate and retain a strong
bench of investment, operating, and development expertise
across asset classes. An ownership mentality is ingrained in our
corporate culture evidenced by the fact that 100% of our senior
vice presidents and above participate in our performance-based
equity compensation program, further aligning daily decision
making with the interests of our shareholders.
We pride ourselves
on a transparent
and collaborative
culture that
rewards merit and
talent over tenure.
We have an outstanding Board of Trustees with deep experience
in the public markets and strong capital allocation credentials. While maintaining these strengths, we
believe our board should evolve in a direction that reflects the strength and diversity of our national labor
force. To this end, since the time of our launch, our Board has made a long-term commitment to establish
an equal balance between men and women and one that reflects the diversity of our country. These goals
will not be achieved overnight, but they are deeply important to us, and we are committed to them over
the long term. Over time, we also intend to increase the proportion of independent Trustees serving on
our Board.
Together with our Board of Trustees, in the period following the merger, we have reviewed our corporate
governance structure to ensure that it reflects our culture of transparency and fairness. As a result of our
analysis, and in the spirit of “majority rule” and aligning our governance practices with corporate America
generally, we have decided to make several proactive, shareholder-aligned changes. These changes include
allowing a majority of our shareholders to amend our bylaws, call a special meeting of shareholders,
and approve business combinations. We also opted out of the Maryland Unsolicited Takeover Act and the
Maryland Business Combinations Act, subject to shareholder approval. We are making these elections to
send a strong signal to investors about the seriousness with which we take shareholder alignment. We
believe that these changes, combined with our significant inside ownership of the company, create a
powerful dynamic to drive long-term growth and value creation.
Market Commentary and Fourth Quarter Results
Washington, DC Market Update
DC closed out 2017 with office market conditions that were largely unchanged from their position last
quarter and at the end of 2016. While employment growth continued to be strong with 55,400 jobs added,
a climate of uncertainty throughout the year dampened office demand. Despite the start-stop nature
of federal government budget negotiations and two brief government shutdowns, the bipartisan budget
bill that passed in February 2018 is expected to bring some semblance of certainty and increased federal
spending within the DC metro region. While we are still analyzing the impacts of the bill, the unwinding of
the sequester spending caps and approximately $300 billion of additional spending, much of it on defense,
bodes well for office demand in the coming year, particularly in Northern Virginia.
As we predicted, high numbers of residential deliveries kept rents in the Class A apartment market flat.
The same job growth that had little impact on the office market drove significant absorption of new supply
and caused vacancies to fall by year-end. We continue to believe that as the level of new deliveries falls
through 2019, our region’s robust demographic fundamentals will drive further declines in vacancy causing
apartment rents to grow. As discussed in June, our long-term NOI expectations assume annual multifamily
rent growth of 2.75%.
Digging a level deeper than the headline statistics, we continue to see strong outperformance in our
amenity-rich, transit-oriented infill offerings. While the overall office market has a direct vacancy rate of
JBG SMITH 2017 Annual Report | 5
15.9%, our submarkets maintained a spread that was 200-250 basis points lower all year, finishing at 13.9%
vacant. The rent spread between these markets is similarly substantial in a positive direction, at nearly
$8.50 per square foot (full service). Class B assets in the District continue to strongly outperform with
vacancy falling to 7.8% - their lowest level in over five years. Rents in that class remain just below $50 per
square foot full service, representing a spread of over $15 per square foot with Arlington Class B and almost
$10 per square foot with Arlington Class A. We believe that this spread strongly favors our strategy of
targeting Class B tenants priced out of downtown DC as prospects for Crystal City. The trophy market also
remains strong in the CBD, with vacancy for existing buildings below 10% and rents in excess of $80
per square foot (full service). The laggard continues to be Commodity A buildings, although softened
pricing and generous concessions drove stronger absorption in this sector through 2017, finishing the year
at 16.5% vacant.
As a reminder, on a square footage basis, approximately 5% of our operating portfolio in the District is
Trophy, 35% is Class A, and 60% is Class B. Upon delivery of all assets currently under construction in
DC, approximately 16% of our operating portfolio in Washington, DC will be Trophy, 31% will be Class A,
and 53% will be Class B. Our Class A exposure in the District is less than 10% of our total operating portfolio.
We continue to expect office market rent growth to be back end weighted at 2.0% over the
next five to six years.
Our transit-oriented apartment markets also outperformed, with vacancy of 9.5% representing an average
120 basis point advantage over the overall market average of 10.7% throughout 2017. Rent spreads were
more muted largely due to the peak of 14,000 new units delivered this year. While rent growth was subdued
in 2017, flat performance in the context of record deliveries speaks to the strength of these locations and
the impact of Washington’s continued strong population growth. This is particularly impactful given that
our submarkets saw approximately 70% of 2017’s new supply.
Despite relatively flat fundamentals, 2017 was a strong year for investment sales. Office sales finished the
year with over $5.7 billion in transactions compared to $4.3 billion in 2016. 83% of those sales occurred in
our submarkets, further underscoring the depth of liquidity in those markets. Investors have displayed
a willingness to pay near trophy prices for the best Commodity A assets, as cap rates dip and investor
competition remains robust for the best Trophy properties. The strong pricing and deep pool of demand
for core office assets lines up well with our capital recycling strategy discussed above. On the multifamily
side, sales volume ended the year at just over $4.5 billion. Our markets made up less than $1 billion of the
Q4 2017 STATS
12.2M
Commercial SF +
4,232
Multifamily Units
Operating Portfolio
1.2M
Commercial SF +
1,568
Multifamily Units
Under Construction
5.6M
Commercial SF +
12.3M
Multifamily SF
Future Development
Pipeline
total volume, reflecting the current preference among investors for suburban Class B/C apartments, which
accounted for 40% of the volume in 2017. The relative lack of capital flow into urban infill multifamily has
caused a slight widening of cap rates for these assets but has also reduced the number of new construction
starts in these locations. We believe this is a reflection of a domestic capital base in which many private
investors are overweight this asset class after years of record investment levels. We will be watching this
sector closely as these conditions may generate attractive buying opportunities down the road.
Operating Portfolio
Notwithstanding a relatively flat market, we had a solid finish to the year. During the fourth quarter we
completed 558,000 square feet of office leases at our share in 48 lease transactions, of which 437,000
square feet was in our operating portfolio. Our 12 million square foot office portfolio (at share) generated
$284.2 million of annualized NOI during the fourth quarter and was 88% leased at year-end. For second
generation leases, the rental rate mark to market was -8.8% on a cash basis. During the quarter we signed
significant renewals with Lockheed Martin, Conservation International and Immigration and Customs
Enforcement - all existing Crystal City tenants.
Our average lease term in the operating office portfolio was 5.7 years, and we have a manageable lease
expiration schedule through 2023, averaging approximately 12% of our total square footage each year. Our
lease rollover exposure is also manageable in Crystal City averaging 11.6% of our leased square footage
in that submarket each year through 2023. Leasing concession packages remain elevated with tenant
improvements ranging from $40-$120 per square foot, depending on the location and quality of the asset,
and rental abatement continues to average approximately one month per year of term.
Our approximately 4,200 unit operating residential portfolio (at share) finished the fourth quarter at
95.6% leased. While the overall market has experienced softness in certain submarkets, our operating
residential portfolio generated $72.7 million of annualized NOI during the fourth quarter. The Bartlett, a
699-unit residential asset located in Pentagon City that includes a Whole Foods, was 95% leased as of the
end of the fourth quarter and has delivered strong NOI performance. We anticipate a competitive rental
rate environment during 2018 as last year’s peak deliveries continue to lease up, but we expect supply to
moderate in 2018 and 2019.
Development Portfolio
Under Construction: As of the fourth quarter, we had ten assets Under Construction, all of which had
guaranteed maximum price construction contracts. These assets had a weighted average estimated
completion date of third quarter 2019, a weighted average estimated stabilization date of first quarter
2021, and a projected NOI yield based on estimated total project cost of 7.1%. During the fourth quarter
we started construction on 965 Florida Avenue, a 433-unit (416-unit at our share) multifamily building with
approximately 46,000-square feet of retail that will be anchored by a Whole Foods and stands adjacent to
our other holdings in the U Street/Shaw submarket of Washington, DC. In December, we announced leases
with Host Hotels & Resorts and Booz Allen Hamilton totaling 120,000 square feet at 4747 Bethesda Avenue,
a 287,000-square foot office building in the Bethesda CBD, bringing the building to 69.8% preleased. Our
leasing success at this asset further highlights the outperformance of high quality properties in submarkets
with substantial amenities, including close proximity to the Metro.
Near Term Development Pipeline: We do not have any assets in the Near-Term Development pipeline
at year-end.
Future Development Pipeline: Our Future Development Pipeline comprises 17.9 million square feet,
approximately 97% of which is Metro-served, with an estimated total investment per square foot of $41.15.
This quarter we also provided additional disclosure by breaking our Future Development Pipeline into
submarkets to help investors better understand this portion of our portfolio. This should enable investors
to compare our total cost with market land values and more easily underwrite the embedded upside in this
part of our portfolio. As of the fourth quarter, approximately 2% of this pipeline was in the DC CBD, 19%
JBG SMITH 2017 Annual Report | 7
was in the DC emerging markets, 17% was in Crystal City, 26% was in Pentagon City,
23% was in Reston, 5% was in other Virginia submarkets, and 8% was in Maryland.
Amazon: In January, Amazon announced a shortlist of 20 cities for its second
headquarters (HQ2). We were pleased to see three of our region’s submarkets
included in the next round competing for HQ2. The world is full of theories on who
will win and why, and every city believes it has a compelling pitch for why they will
rise to the top. We intend to keep our heads down and work hard to show why we
believe Northern Virginia, and specifically Crystal City, should make the final cut.
Cushman & Wakefield ranked Washington as the top Tech City on Amazon’s shortlist
and 3rd nationally after San Jose and San Francisco. This combined with our blend of
walkable places, in-place infrastructure and low-cost housing makes Crystal City a
compelling location. Our holdings alone can accommodate Amazon’s entire
long-term space requirement and we have a cost advantage over our competitors
given the existing in-place parking and substantial infrastructure. Crystal City has
plenty of capacity to accommodate Amazon or any large user looking for a sizeable
home in an urban market. Moreover, Crystal City is a short walk to Reagan National Airport, a distance
that will become even shorter when the Crystal City BID completes construction of a planned pedestrian
connection between the two. It’s hard not to get excited about a user that would represent 4x the last
ten years of net absorption in our region. Amazon is a compelling growth engine and were they to select
this region, they would do wonders for the Washington economy. As we’ve said before, the process will be
fiercely competitive, and we intend to work hard, expect nothing, and hope for the best.
Third-Party Asset Management and Real Estate Services Business
Our share of revenue from our third-party asset management and real estate services business was $14.2
million in the fourth quarter, primarily driven by $5.8 million in property management fees and $4.0
million in asset management fees. The portion of these fees associated with the legacy JBG Funds
totaled $6.5 million. The legacy JBG Funds continued to dispose of assets, consistent with our plan to
wind down the fund portion of this business over the next five to seven years. Since the spin-off in July,
the legacy JBG Funds have sold approximately $800 million of assets. While somewhat lumpy and
dependent on market conditions, we anticipate the decline in our revenue from services to the Fund
business to be fairly linear over the wind down period. We also expect a corresponding decline in G&A as the
fund business winds down.
Q4 2017
STATS
84
Walk Score
Over 98%
Metro Served
Disposition Activity
On the disposition side, we made progress on our stated goal to raise capital through asset sales in the
private markets. Last month, we announced a joint venture with Canada Pension Plan Investment Board
(CPPIB) at 1900 N Street, an Under Construction, 271,000-square foot, Trophy office building located in the
downtown CBD. CPPIB invests the funds of the Canada Pension Plan and manages C$337.1 billion (as of the
fourth quarter of 2017) on its behalf. 1900 N Street is 29.6% preleased to Goodwin Procter (global 50 law
firm) from the top down, a. CPPIB will invest approximately $101 million for a 45% interest in the venture
and we will continue to develop, manage and lease the asset. Our historical cost for 1900 N Street was $69
million as of the fourth quarter, prior to reflecting an adjustment resulting from the formation transaction.
Our work on entitling the property, pre-leasing a sizable portion of space, and executing a guaranteed
maximum-price construction contract reduced the risk and increased the investment attractiveness for a
capital partner like CPPIB, allowing us to contribute the asset to the joint venture at an implied value of $90
million as of the fourth quarter, a $21 million premium to our cost. This transaction demonstrates our intent
and ability to source capital at or above our NAV when possible. Our expanded partnership with CPPIB
provides us with the opportunity to recycle $100 million of capital previously committed to 1900 N Street
into other higher-yielding investment opportunities.
Balance Sheet
A key element of our strategy entails executing our growth plans while maintaining prudent leverage levels.
At year-end, we had approximately $317 million of cash and $1.2 billion of capacity under our credit facility.
During the fourth quarter, we closed two asset-level loans totaling $148 million (at share) and executed
short-term extensions of three loans we expect to refinance in 2018. We also repaid two asset-level loans,
including a $67.3 million multifamily loan as part of our plan to increase our pool of unencumbered
multifamily assets. We executed $857 million of floating-to-fixed interest rate swaps during the fourth
quarter, including hedging the second $50 million draw on our Term Loan A-1 facility in January 2018. Our
fixed-rate debt now represents approximately 70% of our total debt, which is in-line with our target range
of 70%-80% fixed.
As of December 31, 2017, our Net Debt/EBITDA was 7.1x and our Net Debt/Total Enterprise Value was 32%.
The $766 million of remaining construction costs to complete our assets Under Construction can be fully
funded with cash on hand, in place construction loans, and available draws on our term loan facilities.
Our team is energized and focused on the opportunities
before us, and we will continue to work hard to maintain
your trust and confidence.
We appreciate the time that you have invested reading this letter and getting to know our company and
strategy. We look forward to creating value for you as our growth plans unfold, and we hope that you are as
excited about the future of our platform and our portfolio as we are. Our team is energized and focused on
the opportunities before us, and we will continue to work hard to maintain your trust and confidence.
W. Matthew Kelly
Chief Executive Officer
JBG SMITH 2017 Annual Report | 9
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 001-37994
JBG SMITH PROPERTIES
________________________________________________________________________________
(Exact name of Registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
81 4307010
(I.R.S. Employer Identification No.)
4445 Willard Avenue, Suite 400
Chevy Chase, MD
(Address of principal executive offices)
20815
(Zip Code)
Registrant’s telephone number, including area code: (240) 333 3600
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, par value $0.01 per share
(Title of each class)
New York Stock Exchange
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
_______________________________
No
No
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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. Yes
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted 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 and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
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.
Large accelerated filer
Emerging growth company
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
The registrant was a wholly owned subsidiary of another company prior to July 18, 2017. Accordingly, there was no public market for
the registrant’s common shares as of June 30, 2017, the last day of the registrant’s most recently completed second quarter.
As of March 5, 2018, JBG SMITH Properties had 117,954,877 common shares outstanding.
Smaller reporting company
Non-accelerated filer
Accelerated filer
No
No
Part III incorporates by reference information from certain portions of the registrant's definitive proxy statement for its 2018 annual
meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to
which this report relates.
DOCUMENTS INCORPORATED BY REFERENCE
JBG SMITH PROPERTIES
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Properties
Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Item 6.
Equity Securities
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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2
PART I
ITEM 1. BUSINESS
The Company
JBG SMITH Properties ("JBG SMITH") is a real estate investment trust ("REIT") that owns, operates, invests in and develops
real estate assets concentrated in leading urban infill submarkets in and around Washington, DC. We own and operate a portfolio
of high-quality office and multifamily assets, many of which are amenitized with ancillary retail. In addition, we have a third-
party real estate services business that provides fee-based real estate services to the legacy funds formerly organized by The JBG
Companies ("JBG Legacy Funds") and other third parties. References to "our share" refer to our ownership percentage of
consolidated and unconsolidated assets in real estate ventures.
As of December 31, 2017, our Operating Portfolio consists of 69 operating assets comprising 51 office assets totaling over 13.7
million square feet (11.8 million square feet at our share), 14 multifamily assets totaling 6,016 units (4,232 units at our share) and
four other assets totaling approximately 765,000 square feet (348,000 square feet at our share). Additionally, we have: (i) ten assets
under construction comprising four office assets totaling approximately 1.3 million square feet (1.2 million square feet at our
share), five multifamily assets totaling 1,767 units (1,568 units at our share) and one other asset totaling approximately 41,100
square feet (4,100 square feet at our share); and (ii) 43 future development assets totaling approximately 21.4 million square feet
(17.9 million square feet at our share) of estimated potential development density. We present combined portfolio operating data
that aggregates assets that we consolidate in our financial statements and assets in which we own an interest, but do not consolidate
in our financial results. For more information regarding our assets, see Item 2 "Properties".
We define "square feet" or "SF" as the amount of rentable square feet of a property that can be rented to tenants, defined as (i) for
office and other assets, rentable square footage defined in the current lease and for vacant space the rentable square footage defined
in the previous lease for that space, (ii) for multifamily assets, management’s estimate of approximate rentable square feet, (iii) for
the assets under construction and the near-term development assets, management’s estimate of approximate rentable square feet
based on current design plans as of December 31, 2017, or (iv) for the future development assets, management’s estimate of
developable gross square feet based on its current business plans with respect to real estate owned or controlled as of December 31,
2017. "Metro" is the public transportation network serving the Washington, DC metropolitan area operated by the Washington
Metropolitan Area Transit Authority, and we consider "Metro-served" to be locations, submarkets or assets that are generally
nearby and within walking distance of a Metro station, defined as being within 0.5 miles of an existing or planned Metro station.
Corporate Structure and Formation Transaction
JBG SMITH was organized by Vornado Realty Trust ("Vornado" or "former parent") as a Maryland REIT on October 27, 2016
(capitalized on November 22, 2016). JBG SMITH was formed for the purpose of receiving, via the spin-off on July 17, 2017 (the
"Separation"), substantially all of the assets and liabilities of Vornado’s Washington, DC segment, which operated as Vornado /
Charles E. Smith, (the "Vornado Included Assets"). On July 18, 2017, JBG SMITH acquired the management business and certain
assets and liabilities (the "JBG Assets") of The JBG Companies ("JBG") (the "Combination"). The Separation and the Combination
are collectively referred to as the "Formation Transaction." Unless the context otherwise requires, all references to "we," "us," and
"our," refer to the Vornado Included Assets (our predecessor and accounting acquirer) for periods prior to the Separation and to
JBG SMITH for periods after the Separation. Substantially all of our assets are held by, and our operations are conducted through,
JBG SMITH Properties LP ("JBG SMITH LP"), our operating partnership.
Our Strategy
Our mission is to own and operate a high-quality portfolio of Metro-served, urban-infill office, multifamily and retail assets
concentrated in downtown Washington, DC, our nation’s capital, and other leading urban infill submarkets with proximity to
downtown Washington, DC and to grow this portfolio through value-added development and acquisitions. We have significant
expertise across multiple product types and consider office, multifamily and retail to be our core asset classes. We believe we are
known for our creative deal-making and capital allocation skills and for our development and value creation expertise across our
core product types.
One of our approaches to value creation uses a series of complementary disciplines through a process that we call "Placemaking."
Placemaking involves strategically mixing high-quality multifamily and commercial buildings with anchor, specialty and
neighborhood retail in a high density, thoughtfully planned and designed public space. Through this process, we are able to create
synergies, and thus value, across those varied uses and create unique, amenity-rich, walkable neighborhoods that are desirable
and enhance significant tenant and investor demand. We believe that our Placemaking approach will increase occupancy and rental
rates in our portfolio, particularly with respect to our concentrated and extensive land and building holdings in Crystal City. Crystal
3
City’s attractive attributes as an urban-infill location with close proximity to downtown Washington, DC, access to Metro and
other key transportation infrastructure and strong surrounding demographics serve as a solid foundation upon which to build the
mix of uses and amenities that today’s tenants demand. We believe that the application of our Placemaking approach will allow
us to increase Crystal City’s attractiveness to potential tenants and create significant value for our shareholders. Our strategy in
Crystal City focuses on creating a 24-hour environment with an active retail heart through the delivery of additional anchor and
small store retail and the introduction of a greater mix of uses, including new multifamily and the conversion of certain out-of-
service office buildings to multifamily. These elements, combined with thoughtfully planned streetscapes and public spaces, are
all critical to the creation of a dynamic place that we believe will help increase occupancy and rental rates throughout the submarket
over time. Importantly, the broader benefits of this repositioning should be achievable without the need to invest significant capital
in repositioning all our holdings in the submarket.
Our primary business objectives are to maximize cash flow and generate strong risk-adjusted returns for our shareholders. We
intend to pursue these objectives through the following strategies:
Focus on High-Quality Mixed-Use Assets in Metro-Served Submarkets in the Washington, DC Metropolitan Area. We
intend to continue our longstanding strategy of owning and operating assets within urban-infill, Metro-served submarkets in the
Washington, DC metropolitan area with high barriers to entry and key urban amenities, including being within walking distance
of the Metro. These submarkets, which include the District of Columbia; Crystal City and Pentagon City, the Rosslyn-Ballston
Corridor, Reston and Alexandria in Virginia; and Bethesda, Silver Spring and the Rockville Pike Corridor in Maryland, generally
feature strong economic and demographic attributes, as well as a superior transportation infrastructure that caters to the preferences
of our office, multifamily and retail tenants. We believe these positive attributes will allow our assets located in these submarkets
to outperform the Washington, DC metropolitan area as a whole.
Realize Contractual Embedded Growth. We believe there are substantial near-term growth opportunities embedded in our
existing Operating Portfolio, many of which are contractual in nature, including the burn-off of free rent, contractual rent escalators
in our non-GSA office and retail leases based on increases in CPI or a fixed percentage, and the commencement of signed but not
yet commenced leases. "GSA" refers to the General Services Administration, which is the independent federal government agency
that manages real estate procurement for the federal government and federal agencies.
Drive Incremental Growth Through Lease-up of Our Assets. We believe that we are well-positioned to achieve significant
internal growth through lease-up of the vacant space in our Operating Portfolio, including certain recently developed assets, given
our leasing capabilities and the tenant demand for high-quality space in our submarkets. As of December 31, 2017, we had 51
operating office assets totaling over 13.7 million square feet (11.8 million square feet at our share), which were 88.0% leased at
our share, resulting in approximately 1.4 million square feet available for lease.
Deliver Our Assets Under Construction. As of December 31, 2017, we had ten high-quality assets under construction in which
we expect to make an estimated incremental investment of $766.0 million at our share. Our assets under construction consist of
over 1.3 million square feet (1.2 million square feet at our share) of office space and 1,767 units (1,568 units at our share) of
multifamily, all of which are Metro-served. We believe these projects provide significant potential for value creation. As of
December 31, 2017, 62.1% (61.8% at our share) of our office assets under construction were pre-leased. We define "estimated
incremental investment" to mean management’s estimate of the remaining cost to be incurred in connection with the development
of an asset as of December 31, 2017, including all remaining acquisition costs, hard costs, soft costs, tenant improvements, leasing
costs and other similar costs to develop and stabilize the asset but excluding any financing costs, ground rent expenses and
capitalized payroll costs.
Develop Our Significant Future Development Pipeline. We have a significant pipeline of opportunities for value creation through
ground-up development, with the goal of producing favorable risk-adjusted returns on invested capital. We expect to be active in
developing these opportunities while maintaining prudent leverage levels. We have a future development pipeline consisting of
43 assets. We estimate our future development pipeline can support over 21.4 million square feet (17.9 million square feet at our
share) of estimated potential development density, with 96.5% of this potential development density being Metro-served based
on our share of estimated potential development density. The estimated potential development densities and uses reflect our current
business plans as of December 31, 2017 and are subject to change based on market conditions. We characterize our future
development pipeline as our assets that are development opportunities on which we do not intend to commence construction within
18 months of December 31, 2017 where we (i) own land or control the land through a ground lease or (ii) are under a long-term
conditional contract to purchase or enter into a leasehold interest with respect to land.
Our future development pipeline includes eight parcels attached to assets in our Operating Portfolio that would require a
redevelopment of approximately 341,000 office and/or retail square feet (207,000 square feet at our share) and 316 multifamily
units (177 units at our share), which generated $2.9 million of net operating income ("NOI") for the year ended December 31,
4
2017, in order to access approximately 4.7 million square feet (3.1 million square feet at our share) of total estimated potential
development density.
Redevelop and Reposition Our Assets. We evaluate our portfolio on an ongoing basis to identify value-creating redevelopment
and renovation opportunities, including the addition of amenities, unit renovations and building and landscaping enhancements.
We intend to seek to increase occupancy and rents, improve tenant quality and enhance cash flow and value by completing the
redevelopment and repositioning of certain of our assets, including the use of our Placemaking process. This approach is facilitated
by our extensive proprietary research platform and deep understanding of submarket dynamics. We believe there will be significant
opportunities to apply our Placemaking process across our portfolio.
Pursue Attractive Acquisition Opportunities. We are well known in the brokerage community and have deep relationships with
the most active brokers and sellers in the Washington, DC market. In addition, we believe we have developed a reputation for fair
dealing, performance and creative deal-making, making us a preferred counterparty among market participants. We believe that
our longstanding market relationships, reputation and expertise will continue to provide us with access to a pipeline of deals that
are often compelling, off-market opportunities. We will continue to pursue acquisition opportunities with a disciplined approach
and will place an emphasis on well-located, public transit-oriented assets in improving neighborhoods that have strong prospects
for growth and where we believe that we can increase value through increasing occupancy and rental rates, re-marketing tenant
space, enhancing public spaces, employing Placemaking strategies and improving building management.
Third-Party Services Business
Our third-party asset management and real estate services platform provides fee-based real estate services to the JBG Legacy
Funds and other third-parties. Although a significant portion of our real estate ventures' assets and interests in assets formerly
owned by certain of the JBG Legacy Funds were contributed to us in the Combination, the JBG Legacy Funds retained certain
assets that are not consistent with our long-term business strategy, which were generally categorized as (i) condominium and
townhome assets, (ii) hotels, (iii) assets that were likely to be sold by the JBG Legacy Funds in the near term as of the time of the
Combination, (iv) assets located outside of our core markets or that are not Metro-served, (v) noncontrolling real estate venture
interests and (vi) single-tenant leased GSA assets that are encumbered with long-term, hyper-amortizing bond financing that is
not consistent with our financing strategy. With respect to the JBG Legacy Funds and for most assets that we hold through real
estate ventures, we will continue to provide the same asset management, property management, construction management, leasing
and other services that were provided prior to the Combination by the management business that we acquired in the Combination.
We do not intend to raise any future investment funds, and the JBG Legacy Funds will be managed and liquidated over time. We
expect to continue to earn fees from these funds as they are wound down, as well as from any real estate venture arrangements
currently in place and any new real estate venture arrangements entered into in the future. Certain individual members of our
management team own direct equity co-investment and promote interests in the JBG Legacy Funds that were not contributed to
us. As the JBG Legacy Funds are wound down over time, these economic interests will decrease and be eventually eliminated.
We believe that the fees we earn in connection with providing these services will enhance our overall returns, provide additional
scale and efficiency in our operating, development and acquisition businesses and generate capital which we can use to absorb
overhead and other administrative costs of the platform. This scale provides competitive advantages, including market knowledge,
buying power and operating efficiencies across all product types. We also believe that our existing relationships arising out of our
third-party asset management and real estate services business will continue to provide potential capital and new investment
opportunities.
Competition
The commercial real estate markets in which we operate are highly competitive. We compete with numerous acquirers, developers,
owners and operators of commercial real estate including other REITs, private real estate funds, domestic and foreign financial
institutions, life insurance companies, pension trusts, partnerships and individual investors, many of which own or may seek to
acquire or develop assets similar to ours in the same markets in which our assets are located. These competitors may have greater
financial resources or access to capital than we do or be willing to acquire assets in transactions which are more highly leveraged
or are less attractive from a financial viewpoint than we are willing to pursue. Leasing is a major component of our business and
is highly competitive. The principal means of competition in leasing are lease terms (including rent charged and tenant improvement
allowances), location, services provided and the nature and condition of the asset to be leased. If our competitors offer space at
rental rates below current market rates, below the rental rates we currently charge our tenants, in better locations within our markets,
in higher quality assets or offer better services, we may lose potential tenants and we may be pressured to reduce our rental rates
below those we currently charge to retain tenants when our tenants’ leases expire.
5
Seasonality
Our revenues and expenses are, to some extent, subject to seasonality during the year, which impacts quarterly net earnings, cash
flows and funds from operations that affects the sequential comparison of our results in individual quarters over time. We have
historically experienced higher utility costs in the first and third quarters of the year.
Segment Data
We operate in the following business segments: office, multifamily and third-party real estate services. Financial information
related to these business segments for each of the three years in the period ended December 31, 2017 is set forth in Note 16 -
Segment Information to our consolidated and combined financial statements included herein.
Tax Status
We intend to elect 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. Prior to the Separation, Vornado operated as a REIT and distributed 100% of taxable income to its shareholders,
accordingly, no provision for federal income taxes has been made in the accompanying financial statements for the periods prior
to the Separation. We intend to adhere to these requirements and maintain our REIT status in future periods.
As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions to shareholders. Future distributions
will be declared and paid at the discretion of our Board of Trustees and will depend upon cash generated by operating activities,
our financial condition, capital requirements, annual dividend requirements under the REIT provisions of the Code, as amended,
and such other factors as our Board of Trustees deems relevant.
We also participate in the activities conducted by subsidiary entities which have elected to be treated as taxable REIT subsidiaries
("TRS") under the Code. As such, we are subject to federal, state, and local taxes on the income from these activities. Income
taxes attributable to our TRSs are accounted for under the asset and liability method. Under the asset and liability method, deferred
income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the
financial statements, which will result in taxable or deductible amounts in the future.
Significant Tenants
Only the U.S. federal government accounted for 10% or more of our rental revenue, which consists of property rentals and tenant
reimbursements, during each of the three years in the period ended December 31, 2017 as follows:
(Dollars in thousands)
Year Ended December 31,
2016
2015
2017
Rental revenue from the U.S. federal government
$
92,192
$
103,864
$
102,951
Percentage of office segment rental revenue
Percentage of total rental revenue
24.5%
19.4%
29.6%
23.6%
29.7%
23.9%
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal
or remediation of certain hazardous or toxic substances on such real estate. These laws often impose such liability without regard
to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of remediation
or removal of such substances may be substantial and the presence of such substances, or the failure to promptly remediate such
substances, may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In
connection with the ownership and operation of our assets, we may be potentially liable for such costs. The operations of current
and former tenants at our assets have involved, or may have involved, the use of hazardous materials or generated hazardous
wastes. The release of such hazardous materials and wastes could result in us incurring liabilities to remediate any resulting
contamination if the responsible party is unable or unwilling to do so. In addition, our assets are exposed to the risk of contamination
originating from other sources. While a property owner may not be responsible for remediating contamination that has migrated
onsite from an identifiable and viable offsite source, the contaminant’s presence can have adverse effects on operations and the
redevelopment of our assets.
6
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 the preparation and issuance of a written report. Soil and/or groundwater subsurface testing is conducted at our assets,
when necessary, to further investigate any issues raised by the initial assessment that could reasonably be expected to pose a
material concern to the property or result in us incurring material environmental liabilities as a result of redevelopment. They may
not, however, have included extensive sampling or subsurface investigations. In each case where the environmental assessments
have identified conditions requiring remedial actions required by law, we have initiated appropriate actions.
Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental
assessments did not reveal any material environmental contamination that we believe would have a material adverse effect on our
overall business, financial condition or results of operations, or that have not been anticipated and remediated during site
redevelopment as required by law. Nevertheless, there can be no assurance that the identification of new areas of contamination,
changes in the extent or known scope of contamination, the discovery of additional sites or changes in cleanup requirements would
not result in significant cost to us.
Employees
Our headquarters are located at 4445 Willard Avenue, Suite 400, Chevy Chase, MD 20815. As of December 31, 2017, we had
1,020 employees.
Available Information
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments
to those reports are available free of charge through our website (www.JBGSMITH.com) as soon as reasonably practicable after
they are electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC"). Also available on our website
are copies of our Audit Committee Charter, Compensation Committee Charter, Corporate Governance and Nominating Committee
Charter, Code of Business Conduct and Ethics and Corporate Governance Guidelines. In the event of any changes to these charters
or the code or guidelines, changed copies will also be made available on our website. Copies of these documents are also available
directly from us free of charge. Our website also includes other financial information, including certain financial measures not in
compliance with accounting principles generally accepted in the United States ("GAAP"), none of which is a part of this Annual
Report on Form 10-K. Copies of our filings under the Securities Exchange Act of 1934 are also available free of charge from us,
upon request.
ITEM 1A. RISK FACTORS
You should carefully consider the following risks in evaluating our company and our common shares. If any of the following risks
were to occur, our business, prospects, financial condition, results of operations, cash flow and the ability to make distributions
to our shareholders could be materially and adversely affected, which we refer herein collectively as a "material adverse effect
on us," the per share trading price of our common shares could decline significantly, and you could lose all or a part of your
investment. Some statements in this Form 10-K, including statements in the following risk factors, constitute forward-looking
statements. Refer to the section entitled "Cautionary Statement Concerning Forward-Looking Statements" for additional
information regarding these forward-looking statements.
Risks Related to Our Business and Operations
Our portfolio of assets is geographically concentrated in the Washington, DC metropolitan area and in particular submarkets
therein, which makes us susceptible to regional and local adverse economic and other conditions such that an economic
downturn affecting this area could have a material adverse effect on us.
All of our assets are located in the Washington, DC metropolitan area. As a result, we are particularly susceptible to adverse
economic or other conditions in this market (such as periods of economic slowdown or recession, business layoffs or downsizing,
industry slowdowns, relocations of businesses, increases in real estate and other taxes, and the cost of complying with governmental
regulations or increased regulation), as well as to natural disasters (including earthquakes, floods, storms and hurricanes), potentially
adverse effects of "global warming" and other disruptions that occur in this market (such as terrorist activity or threats of terrorist
activity and other events), any of which may have a greater impact on the value of our assets or on our operating results than if
we owned a more geographically diverse portfolio. This market experienced an economic downturn in recent years. A similar or
worse economic downturn in the future could have a material adverse effect on us. We cannot assure you that this market will
grow or that underlying real estate fundamentals will be favorable to our asset classes or future development.
7
Moreover, the same risks that apply to the Washington, DC metropolitan area as a whole also apply to the individual submarkets
where our assets are located. Any adverse economic or other conditions in the Washington, DC metropolitan area, our submarkets
or any decrease in demand for office, multifamily or retail assets could have a material adverse effect on us.
Our assets and the property development market in the Washington, DC metropolitan area are dependent on a metropolitan
economy that is heavily reliant on federal government spending, and any actual or anticipated curtailment of such spending
could have a material adverse effect on us.
The real estate and property development market in the Washington, DC metropolitan area is heavily dependent upon actual and
anticipated federal government spending, and the professional services and other industries that support the federal government.
Any actual or anticipated curtailment of federal government spending, whether due to an actual or potential change of presidential
administration or control of Congress, anticipation of federal government sequestrations, furloughs or shutdowns, a slowdown of
the U.S. and/or global economy or other factors, could have an adverse impact on real estate values and property development in
the Washington, DC metropolitan area, on demand and willingness to enter into long-term contracts for office space by the federal
government and companies dependent upon the federal government, as well as on occupancy rates and annualized rents of
multifamily and retail assets by occupants or patrons whose employment is by or related to the federal government. For example,
sequestration, which mainly impacted government contractors and federal government agencies, resulted in a large decrease in
federal government spending, and the implementation of BRAC (Base Realignment and Closure), which shifted Department of
Defense real estate from leased space to owned bases, contributed to 5.2 million square feet of occupancy losses in the Washington,
DC metropolitan area from 2012 through 2014, mainly in Northern Virginia. Similar curtailments in federal spending or changes
in federal leasing policy could occur in the future, which could have a material adverse effect on us.
We derive a significant portion of our revenues from U.S. federal government tenants.
In the year ended December 31, 2017, approximately 24.5% of the rental revenue from our office segment was generated by rentals
to federal government tenants and federal government tenants historically have been a significant source of new leasing for us.
The occurrence of events that have a negative impact on the demand for federal government office space, such as a decrease in
federal government payrolls or a change in policy that prevents governmental tenants from renting our office space, would have
a much larger adverse effect on our revenues than a corresponding occurrence affecting other categories of tenants. If demand for
federal government office space were to decline, it would be more difficult for us to lease our buildings and could reduce overall
market demand and corresponding rental rates, all of which could have a material adverse effect on us.
We may face additional risks and costs associated with directly managing assets occupied by government tenants.
As of December 31, 2017, we owned 27 assets in which some or all of the tenants were federal government agencies. Lease
agreements with these federal government agencies contain provisions required by federal law, which require, among other things,
that the lessor of the property, agree to comply with certain rules and regulations, including rules and regulations related to anti-
kickback procedures, examination of records, audits and records, equal opportunity provisions, prohibition against segregated
facilities, certain executive orders, subcontractor cost or pricing data, and certain provisions intending to assist small businesses.
Through one of our wholly owned subsidiaries, we directly manage assets with federal government agency tenants and, therefore,
we are subject to additional risks associated with compliance with all applicable federal rules and regulations. In addition, there
are certain additional requirements relating to the potential application of equal opportunity provisions and the related requirement
to prepare written affirmative action plans applicable to government contractors and subcontractors. Some of the factors used to
determine whether these requirements apply to a company that is affiliated with the actual government contractor (the legal entity
that is the lessor under a lease with a federal government agency) include whether such company and the government contractor
are under common ownership, have common management, and are under common control. We own the entity that is the government
contractor and the property manager, increasing the risk that requirements of the Employment Standards Administration’s Office
of Federal Contract Compliance Programs and requirements to prepare affirmative action plans pursuant to the applicable executive
order may be determined to be applicable to us. Compliance with these regulations is costly and any increase in regulation could
increase our costs, which could have a material adverse effect on us.
Capital markets and economic conditions can materially affect our liquidity, financial condition and results of operations, as
well as the value of our debt and equity securities.
There are many factors that can affect the value of our equity securities and any debt securities we may issue in the future, including
the state of the capital markets and the economy. Demand for office space may decline nationwide as it did in 2008 and 2009, due
to an economic downturn, bankruptcies, downsizing, layoffs and cost cutting. Government action or inaction may adversely affect
the state of the capital markets. The cost and availability of credit may be adversely affected by illiquid credit markets and wider
credit spreads, which may adversely affect our liquidity and financial condition, including our results of operations, and the liquidity
8
and financial condition of our tenants. Our inability or the inability of our tenants to timely refinance maturing liabilities and access
the capital markets to meet liquidity needs may materially affect our financial condition and results of operations and the value
of our equity securities and any debt securities we may issue in the future.
We are exposed to risks associated with real estate development and redevelopment, such as unanticipated expenses, delays
and other contingencies, any of which could have a material adverse effect on us.
Real estate development and redevelopment activities are a critical element of our business strategy, and we expect to engage in
such activities with respect to certain of our properties and with properties that we may acquire in the future. To the extent that
we do so, we will be subject to certain risks, including, without limitation:
•
•
•
•
•
•
•
•
•
construction or redevelopment costs of a project may exceed original estimates, possibly making the project less profitable
than originally estimated, or unprofitable;
time required to complete the construction or redevelopment of a project or to lease-up the completed project may be greater
than originally anticipated, thereby adversely affecting our cash flow and liquidity;
contractor and subcontractor disputes, strikes, labor disputes, weather conditions or supply disruptions;
failure to achieve expected occupancy and/or rent levels within the projected time frame, if at all;
delays with respect to obtaining, or the inability to obtain, necessary zoning, occupancy, land use and other governmental
permits, and changes in zoning and land use laws;
occupancy rates and rents of a completed project may not be sufficient to make the project profitable;
incurrence of design, permitting and other development costs for opportunities that we ultimately abandon;
the ability of prospective real estate venture partners or buyers of our properties to obtain financing; and
the availability and pricing of financing to fund our development activities on favorable terms or at all.
Furthermore, if we develop assets in new markets or asset classes where we do not have the same level of market knowledge or
experience as with our current markets and asset classes, then we may experience weaker than anticipated performance. These
risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent the initiation or
the completion of development or redevelopment activities, any of which could have a material adverse effect on us.
We may be unable to identify and complete acquisitions of properties that meet our criteria, which may impede our growth.
Our business strategy includes the acquisition of office, multifamily and retail properties and properties to be held for development.
We evaluate the market for suitable acquisition candidates or investment opportunities that meet our criteria and are compatible
with our growth strategies. However, we may be unable to acquire properties identified as potential acquisition opportunities on
favorable terms, or at all. We may incur significant costs and divert management attention in connection with evaluating and
negotiating potential acquisitions, including ones that we are subsequently unable to complete. Even if we enter into agreements
for the acquisition of properties, these agreements are subject to customary conditions to closing, including the completion of due
diligence investigations and other conditions that are not within our control, which may not be satisfied. In addition, we may be
unable to finance the acquisition on favorable terms or at all. Furthermore, if we acquire assets in new markets or asset classes
where we do not have the same level of market knowledge or experience as with our current markets and asset classes, then we
may experience weaker than anticipated performance. Our inability to identify, negotiate, finance or consummate property
acquisitions, or acquire properties on favorable terms, or at all, could impede our growth and have a material adverse effect on
us.
Our future acquisitions may not yield the returns we expect, and we may otherwise be unable to operate acquired properties
to meet our financial expectations, which could have a material adverse effect on us.
Our future acquisitions and our ability to successfully operate the properties we acquire in such acquisitions may be exposed to
the following significant risks:
•
even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the
purchase price;
• we may acquire properties that are not accretive to our results upon acquisition, and we may not be able to successfully manage
and lease those properties to meet our expectations;
• we may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
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• we may be unable to integrate new acquisitions quickly and efficiently, particularly acquisitions of portfolios of properties,
into our existing operations, and, as a result, our results of operations and financial condition could be adversely affected;
• market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and
• we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to
unknown liabilities, such as liabilities for clean up of undisclosed environmental contamination, claims by tenants, vendors
or other persons dealing with the former owners of such properties, liabilities incurred in the ordinary course of business and
claims for indemnification by general partners, trustees, officers and others indemnified by the former owners of such
properties.
If our future acquisitions do not yield the returns we expect, and we are otherwise unable to operate acquired properties to meet
our financial expectations, it could have a material adverse effect on us.
We may not be able to control our operating expenses, or our operating expenses may remain constant or increase, even if our
revenues do not increase, which could have a material adverse effect on us.
Operating expenses associated with owning a property include real estate taxes, insurance, loan payments maintenance, repair and
renovation costs, the cost of compliance with governmental regulation (including zoning) and the potential for liability under
applicable laws. If our operating expenses increase, our results of operations may be adversely affected. Moreover, operating
expenses are not necessarily reduced when circumstances such as market factors, competition or reduced occupancy cause a
reduction in revenues from the property. As a result, if revenues decline, we may not be able to reduce our operating expenses
associated with the property. An increase in operating expenses or the inability to reduce operating expenses commensurate with
revenue reductions could have a material adverse effect on us.
Partnership or real estate venture investments could be adversely affected by our lack of sole decision-making authority, our
reliance on partners’ or co-venturers’ financial condition and disputes between us and our partners or co-venturers, which
could have a material adverse effect on us.
As of December 31, 2017, approximately 12.6% of our assets measured by total square feet were held through real estate ventures,
and we expect to co-invest in the future with other third parties through partnerships, real estate ventures or other entities, acquiring
noncontrolling interests in or sharing responsibility for managing the affairs of a property, partnership, real estate venture or other
entity. In particular, we expect to use real estate ventures as a significant source of equity capital to fund our development strategy.
Consequently, with respect to any such third-party arrangement, we would not be in a position to exercise sole decision-making
authority regarding the property, partnership, real estate venture or other entity, or structure of ownership and may, under certain
circumstances, be exposed to risks not present were a third party not involved, including the possibility that partners or co-venturers
might become bankrupt or fail to fund their share of required capital contributions, and we may be forced to make contributions
to maintain the value of the property. Partners or co-venturers may have economic or other business interests or goals that are
inconsistent with our business interests or goals and may be in a position to take action or withhold consent contrary to our policies
or objectives. In some instances, partners or co-venturers may have competing interests in our markets that could create conflict
of interest issues. These investments may also have the potential risk of impasses on decisions, such as a sale, because neither we
nor the partner or co-venturer would have full control over the partnership or real estate venture. We and our respective partners
or co-venturers may each have the right to trigger a buy-sell right or forced sale arrangement, which could cause us to sell our
interest, or acquire our partners’ or co-venturers’ interest, or to sell the underlying asset, either on unfavorable terms or at a time
when we otherwise would not have initiated such a transaction. In addition, a sale or transfer by us to a third party of our interests
in the partnership or real estate venture may be subject to consent rights or rights of first refusal in favor of our partners or co-
venturers, which would in each case restrict our ability to dispose of our interest in the partnership or real estate venture. Where
we are a limited partner or non-managing member in any partnership or limited liability company, if the entity takes or expects
to take actions that could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in
that entity, including by contributing our interest to a subsidiary of ours that is subject to corporate level income tax. Disputes
between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our
officers and/or trustees from focusing their time and effort on our business. Consequently, actions by or disputes with partners or
co-venturers might result in subjecting assets owned by the partnership or real estate venture to additional risk. In addition, we
may in certain circumstances be liable for the actions of our third-party partners or co-venturers. Our real estate ventures may be
subject to debt, and the refinancing of such debt may require equity capital calls. We will review the qualifications and previous
experience of any partners and co-venturers, although we may not obtain financial information from, or undertake independent
investigations with respect to, prospective partners or co-venturers. In addition, any cash distributions from real estate ventures
will be subject to the operating agreements of the real estate ventures, which may limit distributions, the timing of distributions
or specify certain preferential distributions among the respective parties. The occurrence of any of the risks described above could
have a material adverse effect on us.
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We may be unable to renew leases, lease vacant space or re-let space as leases expire, which could have a material adverse
effect on us.
As of December 31, 2017, leases representing 8.9% of our share of the office and retail square footage in our Operating Portfolio
will expire during the year ended December 31, 2018 and 12.3% of our share of the square footage of the assets in our office and
other portfolios was unoccupied and not generating rent. We cannot assure you that expiring leases will be renewed or that our
assets will be re-let at rental rates equal to or above current average rental rates or that substantial free rent, tenant improvements,
early termination rights or below-market renewal options will not be offered to attract new tenants or retain existing tenants.
In addition, our ability to lease our multifamily assets at favorable rates, or at all, may be adversely affected by any increase in
supply and/or deterioration in the multifamily market, which is dependent upon the overall level of spending in the economy; and
spending is adversely affected by, among other things, job losses and unemployment levels, recession, personal debt levels, housing
market conditions, stock market volatility and uncertainty about the future.
If the rental rates on new leases at our assets decrease, our existing tenants do not renew their leases or we do not re-let a significant
portion of our available space and space for which leases expire, it could have a material adverse affect on us.
We depend on major tenants in our office portfolio, and the bankruptcy, insolvency or inability to pay rent of any of these
tenants could have a material adverse effect on us.
As of December 31, 2017, the 20 largest office and retail tenants in our operating portfolio represented approximately 49.3% of
our share of total annualized office and retail rent. In many cases, through tenant improvement allowances and other concessions,
we have made substantial upfront investments in leases with our major tenants that we may not recover if they fail to pay rent
through the end of the lease term.
The inability of a major tenant to pay rent, or the bankruptcy or insolvency of a major tenant, may adversely affect the income
produced by our Operating Portfolio. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such
tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject
and terminate its lease with us. If a lease is rejected by a tenant in bankruptcy, we may have only a general unsecured claim for
damages that is limited in amount and may only be paid to the extent that funds are available and in the same percentage as is paid
to all other holders of unsecured claims. Moreover, any claim against this tenant for unpaid, future rent would be subject to a
statutory cap that might be substantially less than the remaining rent owed under the lease.
If any of our major tenants were to experience a downturn in its business, or a weakening of its financial condition resulting in its
failure to make timely rental payments or causing it to default under its lease, we may experience delays in enforcing our rights
as landlord and may incur substantial costs in protecting our investment. Any such event could have a material adverse effect on
us.
We derive a significant portion of our revenues from five of our assets.
As of December 31, 2017, five of our assets in the aggregate generated approximately 25% of our share of annualized rent. The
occurrence of events that have a negative impact on one or more of these assets, such as a natural disaster that damages one or
more of these assets, would have a much larger adverse effect on our revenues than a corresponding occurrence affecting a less
significant property. A substantial decline in the revenues generated by one or more of these assets could have a material adverse
effect on us.
We derive most of our revenues from office assets and are subject to risks that affect the businesses of our office tenants, which
are generally financial, legal and other professional firms as well as the federal government and defense contractors.
As of December 31, 2017, our 51 operating office assets generated approximately 80.9% of our share of annualized rent. As a
result, the occurrence of events that have a negative impact on the market for office space, such as increased unemployment in
the Washington, DC metropolitan area, would have a much larger adverse effect on our revenues than a corresponding occurrence
affecting our other segments. Our office tenants are generally financial, legal and other professional firms, as well as the federal
government and defense contractors. Consequently, we are subject to factors that affect the financial, legal and professional services
industries or the federal government generally, including the state of the economy, stock market volatility, and the level of
unemployment. These factors could adversely affect the financial condition of our office tenants and the willingness of firms to
lease space in our office buildings, which in turn could have a material adverse effect on us.
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Some of our assets depend on anchor or major retail tenants to attract shoppers and could be adversely affected by the loss of,
or a store closure by, one or more of these tenants.
Some of our assets are anchored by large, nationally recognized tenants. These tenants may experience a downturn in their business
that may significantly weaken their financial condition. As a result, these tenants may fail to comply with their contractual
obligations to us, seek concessions to continue operations or declare bankruptcy, any of which could result in the termination of
these tenants’ leases. In addition, some of our tenants may cease operations at stores in our assets while continuing to pay rent.
Moreover, mergers or consolidations among large retail establishments could result in the closure of existing stores or duplicate
or geographically overlapping store locations, which could include stores at our assets.
Loss of, or a store closure by, an anchor or significant tenant could decrease customer traffic, thereby decreasing sales for our
other tenants at the applicable retail property. If sales of our other tenants decrease, they may be unable to pay their minimum
rents or expense recovery charges. These circumstances may significantly reduce our occupancy level or the rent we receive from
our retail assets, and we may not have the right to re-lease vacated space or we may be unable to re-lease vacated space at attractive
rents or at all. Moreover, if a significant tenant or anchor store defaults, we may experience delays and costs in enforcing our rights
as landlord to recover amounts due to us under the terms of our agreements with those parties.
The occurrence of any of the situations described above, particularly if it involves an anchor or major tenant with leases in multiple
locations, could have a material adverse effect on us.
Our Placemaking business model depends in significant part on a retail component, which frequently involves retail assets
embedded or adjacent to our office and/or multifamily assets, making us subject to risks that affect the retail environment
generally, such as competition from discount and online retailers, weakness in the economy, consumer spending and the
financial condition of large retail companies, any of which could adversely affect market rents for retail space and the willingness
or ability of retailers to lease space in our retail assets.
We own and operate retail real estate assets and, consequently, are subject to factors that affect the retail environment generally,
as well as the market for retail space. The retail environment and the market for retail space have previously been, and could again
be, adversely affected by increasing competition from online retailers and other online businesses, discount retailers and outlet
malls, weakness in national, regional and local economies, consumer spending and consumer confidence, adverse financial
condition of some large retailing companies, ongoing consolidation in the retail sector and an excess amount of retail space in a
number of markets. Increases in online consumer spending may significantly affect our retail tenants’ ability to generate sales in
their stores. This inability to generate sales may cause retailers to, among other things, close stores, decrease the size of new or
existing stores, ask for concessions or go bankrupt, all of which could have a material adverse effect on us.
Additionally, our Placemaking model depends in significant part on a retail component, which frequently involves retail assets
embedded in or adjacent to our office and/or multifamily assets and if our retail assets lose tenants, whether to the proliferation
of e-commerce business or otherwise, it could have a material adverse effect on us.
If we fail to reinvest in and redevelop our assets so as to maintain their attractiveness to retailers and shoppers, then retailers or
shoppers may perceive that shopping at other venues or online is more convenient, cost-effective or otherwise more attractive,
which could negatively affect our ability to rent retail space at our assets.
Any of the foregoing factors could adversely affect the financial condition of our retail tenants, the willingness of retailers to lease
space from us, and the success of our Placemaking business model, which could have a material adverse effect on us.
The composition of our portfolio by asset type may change over time, which could expose us to different asset class risks than
if our portfolio composition remained static.
We own office, multifamily and other assets, with office representing 80.9% of our annualized rent and 64.5% of our portfolio
based on square footage. Therefore, our results of operations are more affected by conditions in the office market than markets
for other asset types. If the composition of our portfolio changes, however, then we would become more exposed to the risks and
markets of other asset classes. Under our current business plan, we expect that multifamily assets will become a greater proportion
of our portfolio. If we are successful in executing the current business plan, then we will become more exposed to the risks of the
multifamily market and we may not manage those assets as well as our office assets, any of which could have a material adverse
effect on us.
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Real estate is a competitive business.
We compete with numerous acquirers, developers, owners and operators of commercial real estate including other REITs, private
real estate funds, domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships and individual
investors, some of which may have greater financial resources and be willing to accept lower returns on their investments than
we are. The principal means of competition in leasing are lease terms (including rent charged and tenant improvement allowances),
location, services provided and the nature and condition of the asset to be leased. If our competitors offer space at rental rates
below current market rates, below the rental rates we currently charge our tenants, in better locations within our markets, in higher
quality assets or offer better services, we may lose potential tenants and we may be pressured to reduce our rental rates below
those we currently charge to retain tenants when our tenants’ leases expire.
Our success depends upon, among other factors, trends of the global, national, regional and local economies, the financial condition
and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation
costs, taxes, governmental regulations, legislation and population and employment trends.
We depend on leasing space to tenants on economically favorable terms and collecting rent from tenants who may not be able
to pay.
Our financial results depend significantly on leasing space in our assets to tenants on economically favorable terms. In addition,
because a majority of our income is derived from renting real property, our income, funds available to pay indebtedness and funds
available for distribution to shareholders will decrease if our tenants cannot pay their rent or if we are not able to maintain occupancy
levels on favorable terms. If a tenant does not pay its rent, we might not be able to enforce our rights as landlord without delays
and might incur substantial legal and other costs. During periods of economic adversity, there may be an increase in the number
of tenants that cannot pay their rent and an increase in vacancy rates, which could have a material adverse effect on us.
We may find it necessary to make rent or other concessions and/or significant capital expenditures to improve our assets to
retain and attract tenants, which could have a material adverse effect on us.
We may find it necessary to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit
remodeling and other improvements or provide additional services to our tenants. As a result, we may have to make significant
capital or other expenditures to retain tenants whose leases expire and to attract new tenants in sufficient numbers. If the necessary
capital is unavailable, we may be unable to make such expenditures. This could result in non-renewals by tenants upon expiration
of their leases and our vacant space remaining untenanted, which could have a material adverse effect on us.
Affordable housing and tenant protection regulations may limit our ability to increase rents and pass through new or
increased operating expenses to our tenants.
Certain states and municipalities have adopted laws and regulations imposing restrictions on the timing or amount of rent increases
and other tenant protections. As of December 31, 2017, approximately 5% of the multifamily units in our Operating Portfolio were
designated as affordable housing. In addition, Washington, DC and Montgomery County, Maryland have laws that require, in
certain circumstances, an owner of a multifamily rental property to allow tenant organizations the option to purchase the building
at a market price if the owner attempts to sell the property. We expect to continue operating and acquiring assets in areas that either
are subject to these types of laws or regulations or where such laws or regulations may be enacted in the future. Such laws and
regulations limit our ability to charge market rents, increase rents, evict tenants or recover increases in our operating expenses and
could make it more difficult for us to dispose of assets in certain circumstances.
Our success depends on our senior management team whose continued service is not guaranteed, and the loss of one or more
of these persons could adversely affect our ability to manage our business and to implement our growth strategies, or could
create a negative perception in the capital markets.
Our success and our ability to implement and manage anticipated future growth depend, in large part, upon the efforts of our senior
management team, who have extensive market knowledge and relationships, and exercise substantial influence over our operational,
financing, acquisition and disposition activity. Members of our senior management team have national or regional industry
reputations that attract business and investment opportunities and assist us in negotiations with lenders, existing and potential
tenants and other industry participants. The loss of services of one or more members of our senior management team, or our
inability to attract and retain similarly qualified personnel, could adversely affect our business, diminish our investment
opportunities and weaken our relationships with lenders, business partners, existing and prospective tenants and industry
participants, which could have a material adverse effect on us.
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The actual density of our future development pipeline and/or any particular future development parcel may not be consistent
with our estimated potential development density.
As of December 31, 2017, we estimate that our 43-asset future development pipeline will total over approximately 21.4 million
square feet (17.9 million square feet at our share) of estimated potential development density. We caution you not to place undue
reliance on the potential development density estimates for our future development pipeline and/or any particular future
development parcel because they are based solely on our estimates, using data available to us, and our business plans as of
December 31, 2017. The actual density of our future development pipeline and/or any particular future development parcel may
differ substantially from our estimates based on numerous factors, including our inability to obtain necessary zoning, land use and
other required entitlements, legal challenges to our plans by activists and others, as well as building, occupancy and other required
governmental permits and authorizations, and changes in the entitlement, permitting and authorization processes that restrict or
delay our ability to develop, redevelop or use our future development pipeline at anticipated density levels. Moreover, we may
strategically choose not to develop, redevelop or use our future development pipeline to its maximum potential development
density or may be unable to do so as a result of factors beyond our control, including our ability to obtain financing on terms and
conditions that we find acceptable, or at all, to fund our development activities. We can provide no assurance that the actual density
of our future development pipeline and/or any particular future development parcel will be consistent with our estimated potential
development density.
We may not be able to realize potential incremental annualized rent from our office, multifamily or other lease-up opportunities.
Based on current market demand in our submarkets and the efforts of our dedicated in-house leasing teams, we believe we can
increase our occupancy and revenue at certain office, multifamily and retail assets. However, we cannot assure you that we will
be able to realize potential incremental annualized rent from our office, multifamily or other lease-up opportunities. Our ability
to increase our occupancy and revenue at certain office, multifamily and other assets may be adversely affected by an increase in
supply and/or deterioration in the office, multifamily or other markets. In addition, if our competitors offer space at rental rates
below current asking rates or below our in-place rates, we may experience difficulties attracting new tenants or retaining existing
tenants and may be pressured to reduce our rental rates below those we currently charge or to offer more substantial free rent,
tenant improvements, early termination rights or below-market renewal options in order to attract or retain tenants. We caution
you not to place undue reliance on our belief that we can increase our occupancy and revenue at certain office, multifamily and
retail assets.
Revenues from our third-party asset management and real estate services business may decline more quickly than expected,
which could have a material adverse effect on us.
Our third-party asset management and real estate services business provides fee-based real estate services to the JBG Legacy
Funds and third parties. Our expectation is that the fund portion of this business will wind down over the next several years, but
the wind down could accelerate and the business could be less profitable than anticipated. Although we expect to receive fees for
the services provided to the funds as they wind down, the amount of those fees will decrease significantly as the number of assets
under management is reduced. In addition to reduced revenue, if we cannot reduce our general and administrative expenses to
correspond to the decreasing asset management fees, our profitability will be negatively affected. Fees from management of real
estate ventures and third parties may also be negatively affected if management contracts are terminated or if we are unable to
secure new sources of fee-based revenue. Any of the foregoing could have a material adverse effect on us.
We may from time to time be subject to litigation, which could have a material adverse effect on us.
We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others
to which we may be subject from time to time may result in defense costs, settlements, fines or judgments against us, some of
which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured
could have a material adverse effect on us. In addition, certain litigation or the resolution of certain litigation may affect the
availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flow,
expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and trustees.
Some of our potential losses may not be covered by insurance.
We maintain general liability insurance as well as all-risk property and rental value insurance coverage, with sub-limits for certain
perils such as floods and earthquakes on each of our properties. However, there can be no assurance that losses incurred by us will
be covered by these insurance policies. We maintain coverage for terrorism acts including terrorism involving nuclear, biological,
chemical and radiological terrorism events, as defined by the Terrorism Risk Insurance Program Reauthorization Act, which expires
in December 2020. We will continue to monitor the state of the insurance market and the scope and costs of coverage for acts of
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terrorism. However, we cannot provide assurance that such coverage will be available on commercially reasonable terms in the
future.
Our mortgage loans are generally non-recourse and contain customary covenants requiring adequate insurance coverage. Although
we believe that we currently have adequate insurance coverage for purposes of these agreements, we may not be able to obtain
an equivalent amount of coverage at reasonable costs in the future. If lenders insist on greater coverage than we are able to obtain,
it could adversely affect the ability to finance or refinance the properties.
Compliance or failure to comply with the Americans with Disabilities Act or other safety regulations and requirements could
result in substantial costs.
The Americans with Disabilities Act ("ADA") generally requires that public buildings, including our assets, meet certain federal
requirements related to access and use by disabled persons. Noncompliance could result in the imposition of fines by the federal
government or the award of damages to private litigants and/or legal fees to their counsel. If, under the ADA, we are required to
make substantial alterations and capital expenditures in one or more of our assets, including the removal of access barriers, it could
have a material adverse effect on us.
Our assets are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety
requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know
whether existing requirements will change or whether compliance with future requirements will require significant unanticipated
expenditures that will affect our cash flow and results of operations.
Terrorist attacks, such as those of September 11, 2001, may adversely affect the value of our assets and our ability to generate
revenue.
Our assets are located in the Washington, DC metropolitan area, which has been and may be in the future the target of actual or
threatened terrorism activity. As a result, some tenants in this market may choose to relocate their businesses to other markets or
to lower-profile office buildings within this market that may be perceived to be less likely targets of future terrorist activity. This
could result in an overall decrease in the demand for office space in this market generally or in our assets in particular, which
could increase vacancies in our assets or necessitate that we lease our assets on less favorable terms or both. In addition, future
terrorist attacks in the Washington, DC metropolitan area could directly or indirectly damage our assets, both physically and
financially, or cause losses that materially exceed our insurance coverage. Properties that are occupied by federal government
tenants may be more likely to be the target of a future attack. As of December 31, 2017, 27 of our assets had federal government
agencies as tenants. As a result of the foregoing, the value of our assets and our ability to generate revenues could decline materially,
which could have a material adverse effect on us.
If one of our tenants were designated a "Prohibited Person" by the Office of Foreign Assets Control, we could be materially
adversely effected.
Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the United States Department of the
Treasury ("OFAC") maintains a list of persons designated as terrorists or who are otherwise blocked or banned ("Prohibited
Persons") from conducting business or engaging in transactions in the United States and thereby restricts our doing business with
such persons. In addition, our leases, loans and other agreements may require us to comply with OFAC and related requirements,
and any failure to do so may result in a breach of such agreements. If a tenant or other party with whom we conduct business is
placed on the OFAC list or is otherwise a party with whom we are prohibited from doing business, we may be required to terminate
the lease or other agreement. Any such termination could result in a loss of revenue and negative publicity and could otherwise
have a material adverse effect on us.
Our business and operations would suffer in the event of system failures.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal
information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses,
unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or
accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional
costs to remedy damages caused by such disruptions. Any of the foregoing could have a material adverse effect on us.
The occurrence of cyber incidents, or a deficiency in our cybersecurity, could negatively impact our business by causing a
disruption to our operations, a compromise or corruption of our confidential information, regulatory enforcement and other
legal proceedings and/or damage to our business relationships, all of which could negatively impact our financial results.
15
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information
resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include unauthorized
persons gaining access to systems to disrupt operations, corrupt data, or steal confidential information. As our reliance on technology
has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our primary risks that could
directly result from the occurrence of a cyber incident are theft of assets; operational interruption; regulatory enforcement, lawsuits
and other legal proceedings; damage to our relationship with our tenants; and private data exposure. We have implemented
processes, procedures and controls to help mitigate these risks, but despite these measures and our increased awareness of a risk
of a cyber incident, a cyber incident could have a material adverse effect on us.
We have a limited operating history as a REIT and may not be able to successfully operate as a REIT.
We have a limited operating history as a REIT. We cannot assure you that the experience of our senior management team will be
sufficient to successfully operate our company as a REIT. We have control systems and procedures to maintain our qualification
as a REIT, and these efforts could place a significant strain on our management systems, infrastructure and other resources. Failure
to maintain our qualification as a REIT would have a material adverse effect on us.
Risks Related to the Formation Transaction
We have a limited history operating as an independent company, and our historical financial information is not necessarily
representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable
indicator of our future results.
The historical information included herein covering periods prior to the Formation Transaction refers to our business as operated
by Vornado and JBG separately from each other. Our historical financial information included herein covering periods prior to
the Formation Transaction is derived from the consolidated financial statements and accounting records of Vornado and does not
include the results of the assets contributed by JBG for any period prior to completion of the Formation Transaction. Accordingly,
the historical financial information included herein does not necessarily reflect the financial condition, results of operations or
cash flows that we would have achieved as a separate, publicly traded company during the periods presented or those that we will
achieve in the future. Factors that could cause our results to differ from those reflected in our historical financial information and
which may adversely impact our ability to receive similar results in the future may include, but are not limited to, the following:
•
Prior to the Formation Transaction, our business was operated by Vornado or JBG, as applicable, as part of their broader
organizations, rather than as an independent company. Vornado and JBG performed various management functions for our
business, such as accounting, information technology and finance. Vornado continues to provide some of these functions to
us, as described in Note 18 to our consolidated and combined financial statements included herein, and we provide some of
these functions on our own behalf through the management business we acquired from JBG. Our historical financial results
reflect allocations of expenses from Vornado for such functions and may be less than the expenses we would have incurred
had we operated as a separate, publicly traded company. We may need to make certain investments to replicate or outsource
from other providers certain facilities, systems, infrastructure and personnel previously provided by Vornado. Continuing to
develop our ability to operate as a separate, publicly traded company is costly and difficult. We may not be able to operate
our business efficiently or at comparable costs to when we were not a separate, publicly traded company, and our profitability
may decline;
• Although we have entered into certain transition and other separation-related agreements with Vornado, these arrangements
may not fully capture the benefits we have enjoyed as a result of being integrated with Vornado and may result in us paying
higher charges than in the past for these services. In addition, services provided to us under the Transition Services Agreement
will generally only be provided for up to 24 months following the completion of the Formation Transaction in July 2017, and
this may not be sufficient to meet our needs. As a separate, independent company, we may be unable to obtain goods and
services at the prices and terms obtained prior to the Formation Transaction, which could decrease our overall profitability.
As a separate, independent company, we may also not be as successful in negotiating favorable tax treatments and credits
with governmental entities. Likewise, it may be more difficult for us to attract and retain desired tenants. This could have an
adverse effect on our business, results of operations and financial condition;
Generally, our working capital requirements and capital for our general business purposes, including acquisitions and capital
expenditures, have historically been satisfied as part of the company-wide cash management policies of Vornado or of JBG,
as applicable. Going forward, we may need to obtain additional financing from banks, through public offerings or private
placements of debt or equity securities, strategic relationships or other arrangements, which may not be on terms as favorable
to those obtained by Vornado or JBG, and the cost of capital for our business may be higher than Vornado’s or JBG’s cost of
capital prior to the Formation Transaction; and
•
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• As a separate public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and
the Dodd-Frank Act and are required to prepare our financial statements according to the rules and regulations required by
the SEC. We are required to develop and implement control systems and procedures to satisfy our periodic and current reporting
requirements under applicable SEC regulations and comply with NYSE listing standards, and this transition could place a
significant strain on our management systems, infrastructure and other resources. We cannot assure you that the past experience
of our senior management team will be sufficient to successfully operate as a publicly traded company.
Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating
as an independent company. For additional information about the past financial performance of our business and the basis of
presentation of the historical combined financial statements, refer to "Selected Historical Combined Financial Data,"
"Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements
and accompanying notes included herein.
We are dependent on Vornado to provide certain services to us pursuant to a Transition Services Agreement, and it may be
difficult to replace the services provided under such agreement.
Prior to the Formation Transaction, we relied on Vornado to provide certain financial, administrative and other support functions
to operate our business, and we will continue to rely on Vornado for certain of these services on a transitional basis pursuant to
the Transition Services Agreement that we entered into with Vornado. See Note 18 to our consolidated and combined financial
statements included herein. In addition, it may be difficult for us to replace the services provided by Vornado under the Transition
Services Agreement, and the terms of any agreements to replace such services may be less favorable to us. Any failure by Vornado
in the performance of such services, or any failure on our part to successfully transition these services away from Vornado by the
expiration of the Transition Services Agreement in July of 2019, could have a material adverse effect on us.
We could be required to indemnify Vornado for certain material tax obligations that could arise as addressed in the Tax Matters
Agreement.
The Tax Matters Agreement that we entered into with Vornado provides special rules that allocate tax liabilities if the distribution
of JBG SMITH shares by Vornado, together with certain related transactions, is not tax-free. Under the Tax Matters Agreement,
we may be required to indemnify Vornado against any taxes and related amounts and costs resulting from (i) an acquisition of all
or a portion of our equity securities or our assets, whether by merger or otherwise, (ii) other actions or failures to act by us, or
(iii) any of our representations or undertakings being incorrect or violated. In addition, under the Tax Matters Agreement, we are
liable for any taxes attributable to us and our subsidiaries, unless such taxes are imposed on us or any of the REITs contributed
by Vornado (i) with respect to a period before the distribution as a result of any action taken by Vornado after the distribution, or
(ii) with respect to any period as a result of Vornado’s failure to qualify as a REIT for the taxable year of Vornado that includes
the distribution.
Unless Vornado and JBG SMITH are both REITs immediately after the distribution of JBG SMITH from Vornado and at all
times during the two years thereafter, JBG SMITH could be required to recognize certain corporate-level gains for tax purposes.
Section 355(h) of the Code provides that tax-free treatment will not be available unless, as relevant here, Vornado and JBG SMITH
are both REITs immediately after the distribution.
In addition, the Treasury Department and the IRS recently released temporary Treasury regulations pursuant to which, subject to
certain exceptions, a REIT must recognize corporate-level gain if it acquires property from a non-REIT "C" corporation in certain
so-called "conversion" transactions and engages in a Section 355 transaction within ten years of such conversion. For this purpose,
a conversion transaction refers to the qualification of a non-REIT "C" corporation as a REIT or the transfer of property owned by
a non-REIT "C" corporation to a REIT. JBG SMITH or its subsidiaries have acquired property pursuant to conversion transactions
within ten years of the distribution. One of the exceptions to the recognition of corporate-level gain applies to a distribution
described in Section 355 of the Code in which the distributing corporation and the controlled corporation are both REITs
immediately after such distribution and at all times during the two years thereafter.
We believe that each of Vornado and JBG SMITH qualifies as a REIT and intends to operate in a manner so that each qualified
immediately after the distribution and will qualify at all times during the two years after the distribution. However, if either Vornado
or JBG SMITH failed to qualify as a REIT immediately after the distribution of JBG SMITH from Vornado or fails to qualify at
any time during the two years after the distribution, then, for our taxable year that includes the distribution, the IRS may assert
that JBG SMITH would have to recognize corporate-level gain on assets acquired in conversion transactions. The Treasury
Department recently issued a notice identifying the temporary Treasury regulations as a significant tax regulation that imposes an
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undue financial burden on U.S. taxpayers and/or adds undue complexity to the federal tax laws, pursuant to Executive Order 13789
(issued April 21, 2017). In its two reports to the President pursuant to Executive Order 13789, the Treasury Department has
indicated that it intends to propose reforms to mitigate the burdens of the regulation. It is unclear the exact form any such proposed
reforms would take and what the impact of such reforms would be on JBG SMITH.
We may not be able to engage in potentially desirable strategic or capital-raising transactions for the 24-month period following
the Formation Transaction. In addition, if we were able to engage in such transactions, we could be liable for adverse tax
consequences resulting therefrom.
To preserve the tax-free treatment of the Formation Transaction, for the two-year period following the Formation Transaction, we
are prohibited, except in specific circumstances, from: (i) entering into any transaction pursuant to which all or a portion of our
shares would be acquired, whether by merger or otherwise, (ii) issuing equity securities beyond certain thresholds and except in
certain circumscribed manners, (iii) repurchasing common shares, (iv) ceasing to actively conduct certain of our businesses, or
(v) taking or failing to take any other action that prevents the distribution of JBG SMITH shares by Vornado and certain related
transactions from being tax-free.
These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may
maximize the value of our business.
Potential indemnification liabilities to Vornado pursuant to the Separation and Distribution Agreement (the "Separation
Agreement") could have a material adverse effect on us.
The Separation Agreement with Vornado governs our ongoing relationship with Vornado. Among other things, the Separation
Agreement provides for indemnification obligations designed to make us financially responsible for substantially all liabilities
that may exist relating to our business activities, whether incurred prior to or after the Formation Transaction, as well as those
obligations of Vornado that we assumed pursuant to the Separation Agreement. If we are required to indemnify Vornado under
the circumstances set forth in this agreement, we may be subject to substantial liabilities.
There may be undisclosed liabilities of the Vornado and JBG assets contributed to us in the Formation Transaction that might
expose us to potentially large, unanticipated costs.
Prior to entering into the Master Transaction Agreement ("MTA"), each of Vornado and JBG performed diligence with respect to
the business and assets of the other. However, these diligence reviews were necessarily limited in nature and scope, and may not
have adequately uncovered all of the contingent or undisclosed liabilities that we assumed in connection with the Formation
Transaction, many of which may not be covered by insurance. The MTA does not provide for indemnification for these types of
liabilities by either party post-closing, and, therefore, we may not have any recourse with respect to such unexpected liabilities.
Any such liabilities could cause us to experience losses, which may be significant, which could have a material adverse effect on
us.
Certain of our trustees and executive officers may have actual or potential conflicts of interest because of their previous or
continuing equity interest in, or positions at, Vornado or JBG, as applicable, including members of our senior management,
who have an ownership interest in the JBG Legacy Funds and own carried interests in certain JBG legacy Funds and in certain
of our real estate ventures that entitles them to receive additional compensation if the fund or real estate venture achieves
certain return thresholds.
Some of our trustees and executive officers are persons who are or have been employees of Vornado or were employees of JBG.
Because of their current or former positions with Vornado or JBG, certain of our trustees and executive officers own Vornado
common shares or other Vornado equity awards or equity interests in certain JBG Legacy Funds and related entities. In addition,
one of our trustees continues to serve as chief executive officer and chairman of the Board of Trustees of Vornado. Ownership of
Vornado common shares or interests in the JBG Legacy Funds, or service as a trustee or managing partner, as applicable, at either
company, could create, or appear to create, potential conflicts of interest.
Certain of the JBG Legacy Funds own assets that were not contributed to us in the combination (the "JBG Excluded Assets"),
which JBG Legacy Funds are owned in part by members of our senior management. In addition, although the asset management
and property management fees associated with the JBG Excluded Assets were assigned to us upon completion of the Formation
Transaction, the general partner and managing member interests in the JBG Legacy Funds held by former JBG executives (who
became members of our management team) were not transferred to us and remain under the control of these individuals. As a
result, our management’s time and efforts may be diverted from the management of our assets to management of the JBG Legacy
Funds, which could adversely affect the execution of our business plan and our results of operations and cash flow.
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In addition, members of our senior management have an ownership interest in the JBG Legacy Funds and own carried interests
in each fund and in certain of our real estate ventures that entitles them to receive additional compensation if the fund or real estate
venture achieves certain return thresholds. As a result, members of our senior management could be incentivized to spend time
and effort maximizing the cash flow from the assets being retained by the JBG Legacy Funds and certain real estate ventures,
particularly through sales of assets, which may accelerate payments of the carried interest but would reduce the asset management
and other fees that would otherwise be payable to us with respect to the JBG Excluded Assets. These actions could adversely
impact our results of operations and cash flow.
Other potential conflicts of interest with the JBG Legacy Funds include transactions with these funds and competition for tenants.
We have, and in the future we may, enter into transactions with the JBG Legacy Funds, such as purchasing assets from them. Any
such transaction would create a conflict of interest as a result of our management team’s interests on both sides of the transaction,
because we manage the JBG Legacy Funds and because members of our management own interests in the general partner or other
managing entities of the funds. We may compete for tenants with the JBG Legacy Funds and because we typically manage the
assets of the JBG Legacy Funds, we may have a conflict of interest when competing for a tenant if the tenant is interested in assets
owned by us and the JBG Legacy Funds. Any of the above described conflicts of interest could have a material adverse effect on
us.
Vornado is not required to present investments to us that satisfy our investment guidelines before pursuing such opportunities
on Vornado’s behalf.
Our agreements with Vornado do not require Vornado to present to us investment opportunities that satisfy our investment guidelines
before Vornado pursues such opportunities. While Vornado advised us at the time of the Formation Transaction that it did not
intend to make acquisitions within the Washington, DC metropolitan area after the Formation Transaction, should it choose to do
so, Vornado is free to direct investment opportunities away from us, and we may be unable to compete with Vornado in pursuing
such opportunities. In addition, our declaration of trust provides that a trustee who is also a trustee, officer, employee or agent of
Vornado or any of Vornado’s affiliates has no duty to communicate or present any business opportunity to us.
We may not achieve some or all of the expected benefits, including expected synergies, of the Formation Transaction.
JBG SMITH is a new public company with significantly more revenues, assets and employees than management of the company
was responsible for prior to the combination and many members of management, including our CEO, did not have experience
running a public company prior to our formation. A primary initial focus of our management team has been integrating the operations
of the Vornado and JBG assets that were contributed to us in the Formation Transaction, which, consequently, has required a
significant amount of their time and attention. In addition, as part of our integration plan, we expect to realize cost reductions, or
synergies, compared to the cost of managing the assets contributed to us by Vornado and JBG separately and compared to the
current cost of managing our assets. We may, however, overestimate the amount of synergies or fail to realize all or any of the
synergies, which could cause our costs to be higher than expected. Furthermore, if our management team is unable to effectively
manage a large, public company or successfully integrate the operations of the Vornado and JBG assets, then it could have a
material adverse effect on us.
In connection with the Formation Transaction, Vornado agreed to indemnify us for certain pre-distribution liabilities and
liabilities related to Vornado assets. However, there can be no assurance that these indemnities will be sufficient to protect us
against the full amount of such liabilities, or that Vornado’s ability to satisfy its indemnification obligation will not be impaired
in the future.
Pursuant to the Separation Agreement, Vornado agreed to indemnify us for certain liabilities. However, third parties could seek
to hold us responsible for any of the liabilities that Vornado agreed to retain, and there can be no assurance that Vornado will be
able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Vornado any
amounts for which we are held liable, such indemnification may be insufficient to fully offset the financial impact of such liabilities
and/or we may be temporarily required to bear these losses while seeking recovery from Vornado.
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Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act could have a material adverse effect on our business and share price.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the Dodd-
Frank Act and are required to prepare our financial statements according to the rules and regulations required by the SEC. In
addition, the Exchange Act requires that we file annual, quarterly and current reports. Our failure to prepare and disclose this
information in a timely manner or to otherwise comply with applicable law could subject us to penalties under federal securities
laws, expose us to lawsuits and restrict our ability to access financing.
In addition, the Sarbanes-Oxley Act requires that we, among other things, establish and maintain effective internal controls and
procedures for financial reporting and disclosure purposes. Internal control over financial reporting is complex and may be revised
over time to adapt to changes in our business, or changes in applicable accounting rules. We cannot assure you that our internal
control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a
prior period for which we had previously believed that internal controls were effective. If we are not able to maintain or document
effective internal control over financial reporting, our independent registered public accounting firm will not be able to certify as
to the effectiveness of our internal control over financial reporting.
Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis, or may
cause our company to restate previously issued financial information, and thereby subject us to adverse regulatory consequences,
including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a
negative reaction in the financial markets due to a loss of investor confidence in our company and the reliability of our financial
statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered
public accounting firm report a material weakness in our internal control over financial reporting. Any of the foregoing could have
a material adverse effect on us.
Risks Related to Our Indebtedness and Financing
We have a substantial amount of indebtedness, which may limit our financial and operating activities and expose us to the risk
of default under our debt obligations.
As of December 31, 2017, we had approximately $2.2 billion aggregate principal amount of consolidated debt outstanding and
our unconsolidated real estate ventures had approximately $1.2 billion aggregate principal amount of debt outstanding ($396.3
million at our share), resulting in a total of over $2.6 billion aggregate principal amount of debt outstanding at our share. A portion
of our outstanding debt is guaranteed by our operating partnership, and we may incur significant additional debt to finance future
acquisition and development activities.
Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our assets or to pay the
dividends currently contemplated. Our level of debt and the limitations imposed on us by our debt agreements could have significant
adverse consequences, including the following:
our cash flow may be insufficient to meet our required principal and interest payments;
•
• we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely
affect our ability to meet operational needs;
• we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of
our original indebtedness;
• we may be forced to dispose of one or more of our assets, possibly on unfavorable terms or in violation of certain covenants
to which we may be subject;
• we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations;
and
•
our default under any loan with cross-default provisions could result in a default on other indebtedness.
If any one of these events were to occur, it could have a material adverse effect on us.
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Our debt agreements include restrictive covenants, requirements to maintain financial ratios and default provisions, which
could limit our flexibility and our ability to make distributions and require us to repay the indebtedness prior to its maturity.
The mortgages on our assets contain customary negative covenants that, among other things, limit our ability, without the prior
consent of the lender, to further mortgage the property and to reduce or change insurance coverage. We have a $1.4 billion credit
facility under which we have significant borrowing capacity. Additionally, our debt agreements contain customary covenants that,
among other things, restrict our ability to incur additional indebtedness and may restrict our ability to engage in material asset
sales, mergers, consolidations and acquisitions, and restrict our ability to make capital expenditures. These debt agreements, in
some cases, also subject us to guarantor and liquidity covenants, and our credit facility requires, and other future debt may require,
us to maintain various financial ratios. Some of our debt agreements contain cash flow sweep requirements and mandatory escrows,
and our property mortgages generally require mandatory prepayments upon disposition of underlying collateral. Our ability to
borrow is subject to compliance with these and other covenants, and failure to comply with our covenants could cause a default
under the applicable debt instrument, and we may then be required to repay such debt with capital from other sources or give
possession of a property to the lender. Under those circumstances, other sources of capital may not be available to us, or may be
available only on unattractive terms.
We may not be able to obtain capital to make investments.
Because the Code requires us, as a REIT, to distribute at least 90% of our taxable income, excluding net capital gains, to our
shareholders, we depend primarily on external financing to fund the growth of our business. There is a separate requirement to
distribute net capital gains or pay a corporate level tax in lieu thereof. Our access to debt or equity financing depends on the
willingness of third parties to lend or make equity investments and on conditions in the capital markets generally. There can be
no assurance that new financing will be available or available on acceptable terms.
Our future development plans are capital intensive. To complete these plans, we anticipate financing this construction and
development through asset sales, real estate ventures with third parties, recapitalizations of assets, and public or private equity
offerings, or a combination thereof. Similarly, these plans require an even more significant amount of debt financing. If we are
unable to obtain the required debt or equity capital, then we will not be able to execute our business plan, which could have a
material adverse effect on us.
For information about our available sources of funds, see "Management’s Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources" and the notes to the consolidated and combined financial statements
included herein.
High mortgage rates and/or unavailability of mortgage debt may make it difficult for us to finance or refinance properties,
which could reduce the number of properties we can acquire or retain, our net income and the amount of cash distributions
we can make.
If mortgage debt is not available at reasonable rates, or if lenders currently under contractual obligations to lend to us fail to perform
on such obligations, we may not be able to finance the purchase of properties. If we place mortgages on properties, we may be
unable to refinance the properties when the loans become due, or refinance on favorable terms or at all, including as a result of
increases in interest rates or a decline in the value of our portfolio or portions thereof. If principal payments due at maturity cannot
be refinanced, extended or paid with proceeds from other capital transactions, such as new equity issuances, our operating cash
flow may not be sufficient in all years to repay all maturing debt. This, in turn, could reduce cash available for distribution to our
shareholders and may hinder our ability to raise more capital by issuing more shares or by borrowing more money. In addition,
payments of principal and interest made to service our debts may leave us with insufficient cash to make distributions necessary
to meet the distribution requirements imposed on REITs under the Code. As a result, we may be forced to postpone capital
expenditures necessary for the maintenance of our properties, we may have to dispose of one or more properties on terms that
would otherwise be unacceptable to us or we may be forced to allow the mortgage holder to foreclose on a property, any of the
foregoing could have a material adverse effect on us.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a
property or group of properties subject to mortgage debt.
Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness
secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property collateralizing
loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall
value of our portfolio of properties. For tax purposes, a foreclosure on any of our properties that is subject to a nonrecourse
mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured
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by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would
recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the
REIT distribution requirements imposed by the Code.
Variable rate debt is subject to interest rate risk that could increase our interest expense, increase the cost to refinance and
increase the cost of issuing new debt.
As of December 31, 2017, $664.0 million of our outstanding consolidated debt was subject to instruments that bear interest at
variable rates, and we may also borrow additional money at variable interest rates in the future. Unless we have made arrangements
that hedge against the risk of rising interest rates, increases in interest rates would increase our interest expense under these
instruments, increase the cost of refinancing these instruments or issuing new debt, and adversely affect our cash flow and our
ability to service our indebtedness and make distributions to our shareholders, which could, in turn, adversely affect the market
price of our common shares. Based on our aggregate variable rate debt outstanding as of December 31, 2017, an increase of 100
basis points in interest rates would result in a hypothetical increase of approximately $6.7 million in interest expense on an annual
basis. The amount of this change includes the benefit of swaps and caps we currently have in place.
Failure to hedge effectively against interest rate changes could have a material adverse effect on us.
The REIT provisions of the Code impose certain restrictions on our ability to utilize hedges, swaps and other types of derivatives
to hedge our liabilities. Subject to these restrictions, we may enter into hedging transactions to protect ourselves from the effects
of interest rate fluctuations on floating rate debt. Our hedging transactions may include entering into interest rate cap agreements
or interest rate swap agreements. These agreements involve risks, such as the risk that such arrangements would not be effective
in reducing our exposure to interest rate changes or that a court could rule that such an agreement is not legally enforceable. In
addition, interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates, which could reduce
the overall returns on our investments. Failure to hedge effectively against interest rate changes could have a material adverse
effect on us. In addition, while such agreements would be intended to lessen the impact of rising interest rates on us, they could
also expose us to the risk that the other parties to the agreements would not perform, and that the hedging arrangements may not
be effective in reducing our exposure to interest rate changes. Moreover, there can be no assurance that our hedging arrangements
will qualify as highly effective cash flow hedges under Financial Accounting Standards Board, or FASB, Accounting Standards
Codification, or ASC, Topic 815, Derivatives and Hedging, or that our hedging activities will have the desired beneficial impact
on our results of operations. Furthermore, should we desire to terminate a hedging agreement, there could be significant costs and
cash requirements involved to fulfill our obligation under the hedging agreement. Any of the foregoing could have a material
adverse effect on us.
We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in
shareholder dilution and limit our ability to sell or refinance such assets.
In the future, we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for
partnership interests in our operating partnership, which may result in shareholder dilution through the issuance of common limited
partnership units ("OP Units") that may be exchanged for common shares. This acquisition structure may have the effect of, among
other things, reducing the amount of tax depreciation we could deduct (as compared to a transaction where we do not inherit the
contributor’s tax basis but acquire tax basis equal to the value of the consideration exchanged) until the OP units issued in such
transactions are redeemed for cash or converted into common shares. While no such protection arrangements existed at December
31, 2017, in the future we may agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions
on our ability to dispose of, or refinance the debt on, the acquired properties for specified periods of time. Similarly, we may be
required to incur or maintain debt we would otherwise not incur or maintain so that we can allocate the debt to the contributors
to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable
absent such restrictions.
Our decision to dispose of real estate assets would change the holding period assumption in our valuation analyses, which
could result in material impairment losses and adversely affect our financial results.
We evaluate real estate assets for impairment based on the projected cash flow of the asset over our anticipated holding period. If
we change our intended holding period, due to our intention to sell or otherwise dispose of an asset, then under GAAP, we must
reevaluate whether that asset is impaired. Depending on the carrying value of the property at the time we change our intention
and the amount that we estimate we would receive on disposal, we may record an impairment loss that would adversely affect our
financial results. This loss could be material to our results of operations in the period that it is recognized, which could have a
material adverse effect on us.
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Risks Related to the Real Estate Industry
Real estate investments’ value and income fluctuate due to various factors.
The value of real estate fluctuates depending on conditions in the general economy and the real estate business. These conditions
may also adversely impact our revenues and cash flows.
The factors that affect the value of our real estate include, among other things:
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global, national, regional and local economic conditions;
competition from other available space;
local conditions such as an oversupply of space or a reduction in demand for real estate in the area;
how well we manage our assets;
the development and/or redevelopment of our assets;
changes in market rental rates;
the timing and costs associated with property improvements and rentals;
• whether we are able to pass all or portions of any increases in operating costs through to tenants;
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changes in real estate taxes and other expenses;
whether tenants and users consider a property attractive;
the financial condition of our tenants, including the extent of tenant bankruptcies or defaults;
availability of financing on acceptable terms or at all;
inflation or deflation;
fluctuations in interest rates;
our ability to obtain adequate insurance;
changes in zoning laws and taxation;
government regulation;
consequences of any armed conflict involving, or terrorist attack against, the United States or individual acts of violence in
public spaces;
potential liability under environmental or other laws or regulations;
natural disasters;
general competitive factors; and
climate changes.
The rents or sales proceeds we receive and the occupancy levels at our assets may decline as a result of adverse changes in any
of these factors. If rental revenues, sales proceeds and/or occupancy levels decline, we generally would expect to have less cash
available to pay indebtedness and for distribution to shareholders. In addition, some of our major expenses, including mortgage
payments, real estate taxes and maintenance costs generally do not decline when the related rents decline.
It may be difficult to buy and sell real estate quickly, which may limit our flexibility.
Real estate investments are relatively difficult to buy and sell quickly. Consequently, we may have limited ability to vary our
portfolio promptly in response to changes in economic or other conditions. Moreover, our ability to buy, sell, or finance real estate
assets may be adversely affected during periods of uncertainty or unfavorable conditions in the credit markets as we, or potential
buyers of our assets, may experience difficulty in obtaining financing.
Our property taxes could increase due to property tax rate changes or reassessment, which could have a material adverse effect
on us.
Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay certain state and local taxes on our
properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed
or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially from
what we have paid in the past and such increases may not be covered by tenants pursuant to our lease agreements. An increase in
the property taxes we pay could have a material adverse effect on us.
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We may incur significant costs to comply with environmental laws, and environmental contamination may impair our ability
to lease and/or sell real estate.
Our operations and assets are subject to various federal, state and local laws and regulations concerning the protection of the
environment including air and water quality, hazardous or toxic substances and health and safety. Under some environmental laws,
a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances
released at a property. The owner or operator may also be held liable to a governmental entity or to third parties for property
damage or personal injuries and for investigation and clean-up costs incurred by those parties because of the contamination. These
laws often impose liability without regard to whether the owner or operator knew of the release of the substances or caused such
release. The presence of contamination or the failure to remediate contamination may impair our ability to sell or lease real estate
or to borrow using the real estate as collateral. Other laws and regulations govern indoor and outdoor air quality including those
that can require the abatement or removal of asbestos-containing materials in the event of damage, demolition, renovation or
remodeling, and also govern emissions of and exposure to asbestos fibers in the air. The maintenance and removal of lead paint
and certain electrical equipment containing polychlorinated biphenyls (PCBs) are also regulated by federal and state laws. We are
also subject to risks associated with human exposure to chemical or biological contaminants such as molds, pollens, viruses and
bacteria which, above certain levels, can be alleged to be connected to allergic or other health effects and symptoms in susceptible
individuals. Our predecessor companies may be subject to similar liabilities for activities of those companies in the past. We could
incur fines for environmental noncompliance and be held liable for the costs of remedial action with respect to the
foregoing regulated substances or related claims arising out of environmental contamination or human exposure at or from our
assets.
Most of our assets have been subjected to varying degrees of environmental assessment at various times. To date, these
environmental assessments have not revealed any environmental condition material to our business. However, identification of
new compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, human
exposure to contamination or changes in cleanup or compliance requirements could result in significant costs to us.
In addition, we may become subject to costs or taxes, or increases therein, associated with natural resource or energy usage (such
as a "carbon tax"). These costs or taxes could increase our operating costs and decrease the cash available to pay our obligations
or distribute to equity holders.
If we default on or fail to renew at expiration the ground leases for land on which some of our assets are located or other
long-term leases, our results of operations could be adversely affected.
We own leasehold interests in certain land on which some of our assets are located. If we default under the terms of any of these
ground leases, we may be liable for damages and could lose our leasehold interest in the property or our option to purchase the
underlying fee interest in such assets. In addition, unless we purchase the underlying fee interests in the land on which a particular
property is located, we will lose our right to operate the property or we will continue to operate it at much lower profitability,
which would significantly adversely affect our results of operations. In addition, if we are perceived to have breached the terms
of a ground lease, the fee owner may initiate proceedings to terminate the lease. As of December 31, 2017, the remaining weighted
average term of our ground leases, including unilateral as-of-right extension rights available to us, was approximately 67.1 years.
Our share of annualized rent from assets subject to ground leases as of December 31, 2017 was approximately $53.8 million, or
9.6% of total annualized rent.
Climate change may adversely affect our business.
Climate change, including rising sea levels, extreme weather and changes in precipitation and temperature, may result in physical
damage to, a decrease in demand for and/or a decrease in rent from and value of our properties located in the areas affected by
these conditions. We own a number of assets in low-lying areas close to sea level, making those assets susceptible to a rise in sea
level. If sea levels were to rise, we may incur material costs to protect our low-lying assets or sustain damage, a decrease in value
or total loss to those assets. Furthermore, our insurance premiums may increase as a result of the threat of climate change or the
effects of climate change may not be covered by our insurance policies. In addition, changes in federal and state legislation and
regulations on climate change could result in increased capital expenditures to improve the energy efficiency of our existing
properties or other related aspects of our properties in order to comply with such regulations or otherwise adapt to climate change.
Any of the above could have a material and adverse effect on us.
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Risks Related to Our Organization and Structure
Tax consequences to holders of JBG SMITH LP limited partnership units upon a sale of certain of our assets may cause the
interests of our senior management to differ from your own.
Some holders of JBG SMITH LP limited partnership units, including members of our senior management, may suffer different
and more adverse tax consequences than holders of our common shares upon the sale of certain of the assets owned by our operating
partnership, and therefore these holders may have different objectives regarding the appropriate pricing, timing and other material
terms of any sale or refinancing of certain assets, or whether to sell such assets at all.
Our declaration of trust and bylaws, the partnership agreement of our operating partnership and Maryland law contain
provisions that may delay, defer or prevent a change of control transaction that might involve a premium price for our common
shares or that our shareholders otherwise believe to be in their best interest.
Our declaration of trust contains ownership limits with respect to our shares.
Generally, to maintain our qualification as a REIT, no more than 50% in value of our outstanding shares of beneficial interest may
be owned, directly or indirectly, by five or fewer individuals at any time during the last half of our taxable year. The Code defines
"individuals" for purposes of the requirement described in the preceding sentence to include some types of entities. Our declaration
of trust authorizes our Board of Trustees to take such actions as it determines are necessary or advisable to preserve our qualification
as a REIT. Our declaration of trust prohibits, among other things, the actual, beneficial or constructive ownership by any person
of more than 7.5% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series.
For these purposes, our declaration of trust includes a "group" as that term is used for purposes of Section 13(d)(3) of the Exchange
Act in the definition of "person." Our Board of Trustees may exempt a person, prospectively or retroactively, from these ownership
limits if certain conditions are satisfied.
This ownership limit and the other restrictions on ownership and transfer of our shares contained in our declaration of trust may:
•
•
discourage a tender offer or other transactions or a change in management or of control that might involve a premium price
for our common shares or that our shareholders might otherwise believe to be in their best interest; or
result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and,
as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.
Provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer
or seeking other change of control transactions that might involve a premium price for our common shares or that our shareholders
might otherwise believe to be in their best interest.
Provisions of the Maryland General Corporation Law, or "MGCL", may have the effect of inhibiting a third party from making a
proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of common
shares with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
•
•
"business combination" provisions that, subject to limitations, prohibit business combinations between us and an "interested
shareholder" (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an
affiliate thereof or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the
voting power of our then-outstanding voting shares at any time within the two-year period immediately prior to the date in
question) for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter
impose fair price and/or supermajority shareholder voting requirements on these combinations; and
"control share" provisions that provide that a shareholder’s "control shares" of our company (defined as shares that, when
aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges
of voting power in electing trustees) acquired in a "control share acquisition" (defined as the direct or indirect acquisition of
ownership or control of issued and outstanding "control shares") have no voting rights with respect to their control shares,
except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be
cast on the matter, excluding all interested shares.
As permitted by the MGCL, we have elected in our bylaws to opt out of the business combination and control share provisions
of the MGCL. However, we cannot assure you that our Board of Trustees will not opt to be subject to such provisions of the MGCL
in the future, including opting to be subject to such provisions retroactively.
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The limited partnership agreement of our operating partnership requires the approval of the limited partners with respect to
certain extraordinary transactions involving JBG SMITH, which may reduce the likelihood of such transactions being
consummated, even if they are in the best interests of, and have been approved by, our shareholders.
The limited partnership agreement of JBG SMITH LP as amended and restated in connection with the Formation Transaction,
provides that we may not engage in a merger, consolidation or other combination with or into another person, a sale of all or
substantially all of our assets, or a reclassification, recapitalization or a change in outstanding shares (except for changes in par
value, or from par value to no par value, or as a result of a subdivision or combination of our common shares), which we refer to
collectively as an extraordinary transaction, unless specified criteria are met. In particular, with respect to any extraordinary
transaction, if partners will receive consideration for their limited partnership units and if we seek the approval of our shareholders
for the transaction (or if we would have been required to obtain shareholder approval of any such extraordinary transaction but
for the fact that a tender offer shall have been accepted with respect to a sufficient number of our common shares to permit
consummation of such extraordinary transaction without shareholder approval), then the limited partnership agreement prohibits
us from engaging in the extraordinary transaction unless we also obtain "partnership approval." To obtain "partnership approval,"
we must obtain the consent of our limited partners (including us and any limited partners majority owned, directly or indirectly,
by us) representing a percentage interest in JBG SMITH LP that is equal to or greater than the percentage of our outstanding
common shares required (or that would have been required in the absence of a tender offer) to approve the extraordinary transaction,
provided that we and any limited partners majority owned, directly or indirectly, by us will be deemed to have provided consent
for our partnership units solely in proportion to the percentage of our common shares approving the extraordinary transaction (or,
if there is no shareholder vote with respect to such extraordinary transaction because a tender offer shall have been accepted with
respect to a sufficient number of our common shares to permit consummation of the extraordinary transaction without shareholder
approval, the percentage of our common shares with respect to which such tender offer shall have been accepted).
The limited partners of JBG SMITH LP may have interests in an extraordinary transaction that differ from those of common
shareholders, and there can be no assurance that, if we are required to seek "partnership approval" for such a transaction, we will
be able to obtain it. As a result, if a sufficient number of limited partners oppose such an extraordinary transaction, the limited
partnership agreement may prohibit us from consummating it, even if it is in the best interests of, and has been approved by, our
shareholders.
Until the 2020 annual meeting of shareholders, we will have a classified Board of Trustees, and that may reduce the likelihood
of certain takeover transactions.
Our declaration of trust divides our Board of Trustees into three classes. The initial terms of the first, second and third classes will
expire at the first, second and third annual meetings of shareholders, held following the Formation Transaction. At the 2018 annual
shareholders meeting, shareholders will elect successors to trustees of the first class for a two-year term and, at the 2019 annual
shareholders meeting, successors to trustees of the second class for a one-year term. Commencing with the 2020 annual meeting
of shareholders, each trustee shall be elected annually for a term of one year and shall hold office until the next succeeding annual
meeting and until a successor is duly elected and qualifies. There is no cumulative voting in the election of trustees. Until the 2020
annual meeting of the shareholders, our Board is classified, which may reduce the possibility of a tender offer or an attempt to
change control, even though a tender offer or change in control might be in the best interest of our shareholders.
We may issue additional shares in a manner that could adversely affect the likelihood of takeover transactions.
Our declaration of trust authorizes the Board of Trustees, without shareholder approval, to:
•
•
•
•
cause us to issue additional authorized but unissued common or preferred shares;
classify or reclassify, in one or more classes or series, any unissued common or preferred shares;
set the preferences, rights and other terms of any classified or reclassified shares that we issue; and
amend our declaration of trust to increase the number of shares of beneficial interest that we may issue.
The Board of Trustees could establish a class or series of common or preferred shares whose terms could delay, deter or prevent
a change in control or other transaction that might involve a premium price or otherwise be in the best interest of our shareholders,
although the Board of Trustees does not now intend to establish a class or series of common or preferred shares of this kind. Our
declaration of trust and bylaws contain other provisions that may delay, deter or prevent a change in control or other transaction
that might involve a premium price or otherwise be in the best interest of our shareholders.
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Substantially all of our assets are owned by subsidiaries. We depend on dividends and distributions from these subsidiaries.
The creditors of these subsidiaries are entitled to amounts payable to them by the subsidiaries before the subsidiaries may pay
any dividends or other distributions to us.
Substantially all of our assets are held through JBG SMITH LP which holds substantially all of its assets through wholly owned
subsidiaries. JBG SMITH LP’s cash flow is dependent on cash distributions to it by its subsidiaries, and in turn, substantially all
of our cash flow is dependent on cash distributions to us by JBG SMITH LP. The creditors of each of our subsidiaries are entitled
to payment of that subsidiary’s obligations to them when due and payable before distributions may be made by that subsidiary to
its equity holders. In addition, the operating agreements governing some of our subsidiaries which are parties to real estate joint
ventures may have restrictions on distributions which could limit the ability of those subsidiaries to make distributions to JBG
SMITH LP. Thus, JBG SMITH LP’s ability to make distributions to holders of its units, including us, depends on its subsidiaries’
ability first to satisfy their obligations to their creditors, and then to make distributions to JBG SMITH LP. Likewise, our ability
to pay dividends to our shareholders depends on JBG SMITH LP’s ability first to satisfy its obligations, if any, to its creditors and
make distributions payable to holders of preferred units (if any), and then to make distributions to us.
In addition, our participation in any distribution of the assets of any of our subsidiaries upon the liquidation, reorganization or
insolvency of the subsidiary, occurs only after the claims of the creditors, including trade creditors, and preferred security holders,
if any, of the applicable direct or indirect subsidiaries are satisfied.
Our rights and the rights of our shareholders to take action against our Trustees and officers are limited.
As permitted by Maryland law, under our declaration of trust, trustees and officers shall not be liable to us and our shareholders
for money damages, except for liability resulting from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the trustee or officer that was material to the
cause of action adjudicated.
In addition, our declaration of trust requires us to indemnify our trustees and officers for actions taken by them in those and certain
other capacities to the maximum extent permitted by Maryland law. The Maryland REIT law permits a REIT to indemnify and
advance expenses to its trustees, officers, employees and agents to the same extent as permitted by the MGCL for directors and
officers of a Maryland corporation. Generally, Maryland law permits a Maryland corporation to indemnify its present and former
directors and officers except in instances where the person seeking indemnification acted in bad faith or with active and deliberate
dishonesty, actually received an improper personal benefit in money, property or services or, in the case of a criminal proceeding,
had reasonable cause to believe that his or her actions were unlawful. Under Maryland law, a Maryland corporation also may not
indemnify a director or officer in a suit by or in the right of the corporation in which the director or officer was adjudged liable to
the corporation or for a judgment of liability on the basis that a personal benefit was improperly received. A court may order
indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the
director or officer did not meet the prescribed standard of conduct; however, indemnification for an adverse judgment in a suit by
us or in our right, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses.
As a result, we and our shareholders may have more limited rights against our trustees and officers than might otherwise exist.
Accordingly, if actions taken in good faith by any of our trustees or officers impede the performance of our company, your ability
to recover damages from such trustee or officer will be limited.
Risks Related to Our Status as a REIT
We may fail to qualify or remain qualified as a REIT and may be required to pay income taxes at corporate rates.
Although we believe that we are organized and intend to operate so as to qualify as a REIT for federal income tax purposes, we
may fail to remain so qualified. Qualifications are governed by highly technical and complex provisions of the Code for which
there are only limited judicial or administrative interpretations and depend on various facts and circumstances that are not entirely
within our control. In addition, legislation, new regulations, administrative interpretations or court decisions may significantly
change the relevant tax laws and/or the federal income tax consequences of qualifying as a REIT. If, with respect to any taxable
year, we fail to maintain our qualification as a REIT and do not qualify under statutory relief provisions, we could not deduct
distributions to shareholders in computing our taxable income and would have to pay federal income tax on our taxable income
at regular corporate rates. If we had to pay federal income tax, the amount of money available to distribute to shareholders and
pay our indebtedness would be reduced for the year or years involved, and we would not be required to make distributions to
shareholders in that taxable year and in future years until we were able to qualify as a REIT. In addition, we would also be
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disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost, unless we
were entitled to relief under the relevant statutory provisions.
REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan.
For us to qualify to be taxed as a REIT, and assuming that certain other requirements are also satisfied, we generally must distribute
at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital
gains, to our shareholders each year, so that U.S. federal corporate income tax does not apply to earnings that we distribute. To
the extent that we satisfy this distribution requirement and qualify for taxation as a REIT, but distribute less than 100% of our
REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be
subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4%
nondeductible excise tax if the actual amount that we distribute to our shareholders in a calendar year is less than a minimum
amount specified under U.S. federal income tax laws. We intend to distribute 100% of our REIT taxable income to our shareholders
out of assets legally available therefor.
From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing between the
recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of
reserves, or required debt or amortization payments. Further, under amendments to the Code made by federal tax reform legislation ,
which was signed into law on December 22, 2017 and which we refer to as the 2017 Tax Act, income must be accrued for U.S.
federal income tax purposes no later than when such income is taken into account as revenue in our financial statements, subject
to certain exceptions, which could also create mismatches between REIT taxable income and the receipt of cash attributable to
such income. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable
terms, sell assets at disadvantageous prices, distribute amounts that would otherwise be invested in future acquisitions, capital
expenditures or repayment of debt, or make taxable distributions of our shares or debt securities to make distributions sufficient
to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and avoid corporate income tax
and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Further, amounts
distributed will not be available to fund investment activities. Thus, compliance with the REIT requirements may hinder our ability
to grow, which could adversely affect the value of our shares. Any restrictions on our ability to incur additional indebtedness or
make certain distributions could preclude us from meeting the 90% distribution requirement. Decreases in funds from operations
due to unfinanced expenditures for acquisitions of assets or increases in the number of shares outstanding without commensurate
increases in funds from operations would each adversely affect our ability to maintain distributions to our shareholders.
Consequently, there can be no assurance that we will be able to make distributions at the anticipated distribution rate or any other
rate.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends, which could depress the
market price of our common shares if perceived as a less attractive investment.
The maximum tax rate applicable to income from "qualified dividends" payable by non REIT corporations to U.S. shareholders
that are individuals, trusts and estates is 20%, and a 3.8% Medicare tax may also apply. Dividends payable by REITs, however,
generally are not eligible for this reduced rate. Commencing with taxable years beginning on or after January 1, 2018 and continuing
through 2025, the 2017 Tax Act temporarily reduces the effective tax rate on ordinary REIT dividends (i.e., dividends other than
capital gain dividends and dividends attributable to certain qualified dividend income received by us) for U.S. holders of our
common shares that are individuals, estates or trusts by permitting such holders to claim a deduction in determining their taxable
income equal to 20% of any such dividends they receive. Taking into account the 2017 Tax Act’s reduction in the maximum
individual federal income tax rate from 39.6% to 37%, this results in a maximum effective rate of federal income tax (exclusive
of the 3.8% Medicare tax) on ordinary REIT dividends of 29.6% through 2025, as compared to the 20% maximum federal income
tax rate applicable to qualified dividend income received from a non-REIT corporation (although the maximum effective rate
applicable to such dividends, after taking into account the 21% federal income tax applicable to non-REIT corporations, is 36.8%).
Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, investors who are individuals,
trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the shares of non REIT
corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the per share trading
price of our common shares.
The tax imposed on REITs engaging in "prohibited transactions" may limit our ability to engage in transactions that would
be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales
or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of
business. Although we and our subsidiary REITs believe that we have held, and intend to continue to hold, our properties for
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investment and do not intend to hold any properties that could be characterized as held for sale to customers in the ordinary course
of our business unless a sale or disposition qualifies under a statutory safe harbor applicable to REITs, such characterization is a
factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that
we will always be able to make use of the available safe harbor. In the case of some of our properties held through partnerships
with third parties, our ability to dispose of such properties in a manner that satisfies the statutory safe harbor depends in part on
the action of third parties over which we have no control or only limited influence.
If our operating partnership failed to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify
as a REIT and suffer other adverse consequences.
We believe that our operating partnership will be treated as a partnership for U.S. federal income tax purposes. As a partnership,
our operating partnership will not be subject to U.S. federal income tax on its income. Instead, each of its partners, including us,
will be allocated, and may be required to pay tax with respect to, its share of our operating partnership’s income. We cannot assure
you, however, that the IRS will not challenge the status of our operating partnership or that a court would not sustain such a
challenge. If the IRS were successful in treating our operating partnership as an entity taxable as a corporation for U.S. federal
income tax purposes we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly,
we would cease to qualify as a REIT. Also, the failure of our operating partnership or any subsidiary partnership to qualify as a
partnership could cause the entity to become subject to U.S. federal, state or local corporate income tax, which would reduce
significantly the amount of cash available for debt service and for distribution to us.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, income that
we generate from transactions intended to hedge our interest rate and certain types of foreign currency risk generally will be
excluded from gross income for purposes of the 75% and 95% gross income tests applicable to REITs if the instrument hedges
interest rate or foreign currency risk on liabilities used to carry or acquire real estate assets or certain other types of foreign currency
risk, and such instrument is properly identified. Income from certain hedges entered into in connection with the termination of a
hedging transaction described in the preceding sentence, where the property or indebtedness that was the subject of the prior
hedging transaction was extinguished or disposed of, will also be excluded from gross income for purposes of the 75% and 95%
gross income tests. Income from hedging transactions that do not meet these requirements will generally constitute non qualifying
income for purposes of both the 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of
hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the cost
of our hedging activities, because our TRS would be subject to tax on gains, or could expose us to greater risks associated with
changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax
benefit, except to the extent they can be carried forward and used to offset future taxable income in the TRS.
Our subsidiary REITs may be subject to a corporate tax on recognized gain if some properties are sold within five years of their
acquisition.
To the extent that our operating partnership contributes appreciated properties to a subsidiary REIT that were acquired in the
Formation Transaction from tax partnerships in which investors that are C corporations under the Code hold interests, the subsidiary
REIT will be subject to a corporate level tax on the portion of the net built in gain attributable to the C corporation investors’
interests that would have otherwise been taxable to such investors if such gain is recognized by the subsidiary REIT as the result
of a sale of any such property within a five year period following the contribution of the properties to the subsidiary REIT. This
corporate level tax will be borne proportionately by all of the holders of OP Units, including us. In the alternative, we may cause
our operating partnership to elect to cause the recognition of such net built in gain at the time of the contribution of the properties
to the subsidiary REIT (a so called deemed sale election). In this case, the taxable recognized gain would be allocated to the
C corporation investors by the operating partnership (expected to be with respect to the operating partnership’s 2017 tax year),
which would increase the operating partnership’s basis in the stock of the subsidiary REIT (as to the C corporation investors only)
by the amount of net built in gain allocated to such investors. We will decide, as general partner of the operating partnership,
whether or not to cause the operating partnership to make such a deemed sale election.
Our ownership of TRSs will be limited, and we will be required to pay a 100% penalty tax on certain income or deductions if
our transactions with our TRSs are not conducted on arm’s length terms.
We own an interest in certain TRSs, and may establish additional TRSs in the future. A TRS is a corporation other than a REIT
in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a TRS. If a
TRS owns more than 35% percent of the total voting power or value of the outstanding securities of another corporation, such
other corporation will also be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS may
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generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT.
A TRS is subject to U.S. federal, state and local income tax as a regular C corporation, and its after-tax net income is available
for distribution to the parent REIT but is not required to be distributed. As a result of the enactment of the 2017 Tax Act, effective
for taxable years beginning on or after January 1, 2018 our domestic TRSs are subject to U.S. federal income tax on their taxable
income at a maximum rate of 21% (as well as applicable state and local income tax), but net operating loss, or NOL, carryforwards
of TRS losses arising in taxable years beginning after December 31, 2017 may be deducted only to the extent of 80% of TRS
taxable income in the carryforward year (computed without regard to the NOL deduction). In contrast to prior law, which permitted
unused NOL carryforwards to be carried back two years and forward 20 years, the 2017 Tax Act provides that losses arising in
taxable years ending after December 31, 2017 can no longer be carried back but can be carried forward indefinitely. In addition,
a 100% excise tax will be imposed on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s
length basis. Rules also limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is
subject to an appropriate level of corporate taxation.
A REIT’s ownership of securities of a TRS is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25%
(20% for taxable years beginning after December 31, 2017) of our total assets may be represented by securities (including securities
of one or more TRSs), other than those securities includable in the 75% asset test. We anticipate that the aggregate value of the
stock and securities of our TRSs and other nonqualifying assets will be less than 25% of the value of our total assets through
December 31, 2017 (and less than 20% of the value of our total assets after that date), and we will monitor the value of these
investments to ensure compliance with applicable ownership limitations. In addition, we intend to structure our transactions with
our TRSs to ensure that they are entered into on arm’s length terms to avoid incurring the 100% excise tax described above. There
can be no assurance, however, that we will be able to comply with the TRS asset limitation or to avoid application of the 100%
excise tax discussed above.
Our ability to provide certain services to our tenants may be limited by the REIT provisions of the Code, or we may have to
provide such services through a TRS.
As a REIT, we generally cannot provide services to our tenants other than those that are customarily provided by landlords, and
we cannot derive income from a third party that provides such services. If we forego providing such services to our tenants, we
may be at a disadvantage to competitors who are not subject to the same restrictions. However, we can provide such non customary
services to tenants or share in the revenue from such services if we do so through a TRS, though income earned through the TRS
will be subject to corporate income taxes.
We face possible adverse changes in tax laws, which may result in an increase in our tax liability and adverse consequences
to our shareholders.
At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended.
We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment
to any existing U.S. federal income tax law, regulation or administrative interpretation will be adopted, promulgated or become
effective and any such law, regulation, or interpretation may take effect retroactively. Any such change in, or any new, U.S. federal
income tax law, regulation or administrative interpretation, could have a material adverse effect on us.
In particular, the 2017 Tax Act, which generally takes effect for taxable years beginning on or after January 1, 2018 (subject to
certain exceptions), makes many significant changes to the U.S. federal income tax laws that will profoundly impact the taxation
of individuals, corporations (both regular C corporations as well as corporations that have elected to be taxed as REITs), and the
taxation of taxpayers with overseas assets and operations. A number of changes that affect noncorporate taxpayers will expire at
the end of 2025 unless Congress acts to extend them. These changes will impact us and our shareholders in various ways, some
of which are adverse or potentially adverse compared to prior law. To date, the IRS has issued only limited guidance with respect
to certain of the new provisions, and there are numerous interpretive issues that will require guidance. It is highly likely that
technical corrections legislation will be needed to clarify certain aspects of the new law and give proper effect to Congressional
intent. There can be no assurance, however, that technical clarifications or changes needed to prevent unintended or unforeseen
tax consequences will be enacted by Congress in the near future.
Additionally, the rules of Section 355 of the Code and the Treasury regulations promulgated thereunder, which apply to determine
the taxability of the Formation Transaction, have been the subject of change and may continue to be the subject of change, possibly
with retroactive application, which could have a negative effect on us and our shareholders. If such changes occur, we may be
required to pay additional taxes on our assets or income. These increased tax costs could have a material adverse effect on us.
30
Other legislative proposals could be enacted in the future that could affect REITs and their shareholders. Prospective investors are
urged to consult their tax advisors regarding the effect of the 2017 Tax Act and any other potential tax law changes on an investment
in our common shares.
Risks Related to Our Common Shares
We cannot guarantee the timing, amount, or payment of dividends on our common shares.
Although we expect to pay regular cash dividends, the timing, declaration, amount and payment of future dividends to shareholders
will fall within the discretion of our Board of Trustees. Our Board of Trustees’ decisions regarding the payment of dividends will
depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, limitations under
our financing arrangements, industry practice, legal requirements, regulatory constraints, and other factors that it deems relevant.
Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and access the capital markets.
We cannot guarantee that we will pay a dividend in the future.
Future offerings of debt or equity securities, which would be senior to our common shares upon liquidation, and/or preferred
equity securities, which may be senior to our common shares for purposes of dividend distributions or upon liquidation, may
adversely affect the per share trading price of our common shares.
In the future, we may attempt to increase our capital resources by offering debt or equity securities (or causing our operating
partnership to issue debt securities), including medium-term notes, senior or subordinated notes and classes or series of preferred
shares. Upon liquidation, holders of our debt securities and preferred shares and lenders with respect to other borrowings will be
entitled to receive our available assets prior to distribution to the holders of our common shares. Additionally, any convertible or
exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our
common shares and may result in dilution to owners of our common shares. Holders of our common shares are not entitled to
preemptive rights or other protections against dilution. Our preferred shares, if issued, could have a preference on liquidating
distributions or a preference on dividend payments that could limit our ability pay dividends to the holders of our common shares.
Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing or nature of our future offerings.
Your percentage of ownership in our company may be diluted in the future.
Your percentage of ownership in us may be diluted because of equity issuances for acquisitions, capital market transactions or
otherwise. We also have granted and anticipate continuing to grant compensatory equity awards to our trustees, officers, employees,
advisors and consultants who provide services to us. Such awards have a dilutive effect on our earnings per share, which could
adversely affect the market price of our common shares.
In addition, our declaration of trust authorizes us to issue, without the approval of our shareholders, one or more classes or series
of preferred shares having such designation, voting powers, preferences, rights and other terms, including preferences over our
common shares with respect to dividends and distributions, as our Board of Trustees generally may determine. The terms of one
or more classes or series of preferred shares could dilute the voting power or reduce the value of our common shares. For example,
we could grant the holders of preferred shares the right to elect some number of our trustees in all events or on the occurrence of
specified events, or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences
we could assign to holders of preferred shares could affect the residual value of our common shares.
From time to time we may seek to make one or more material acquisitions. The announcement of such a material acquisition
may result in a rapid and significant decline in the price of our common shares.
We are continuously looking at material transactions that we believe will maximize shareholder value. However, an announcement
by us of one or more significant acquisitions could result in a quick and significant decline in the price of our common shares.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute forward-looking statements within the meaning of the federal securities laws.
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 Annual Report on Form 10-K.
31
In particular, information included under "Business," "Risk Factors," and "Management’s Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements. 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 a discussion of factors that
could materially affect the outcome of our forward-looking statements, see "Risk Factors" in this Annual Report on Form 10-K.
You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K or the date of any document incorporated by reference. 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 Annual Report on Form 10-K.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved comments from the staff of the SEC as of the date of this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
Note on presentation of "at share" information. We present certain financial information and metrics "at JBG SMITH Share,"
which refers to our ownership percentage of consolidated and unconsolidated assets in real estate ventures. Financial information
"at JBG SMITH Share" is calculated on an entity-by-entity basis. "At JBG SMITH Share" information, which we also refer to as
being "at share," "our pro rata share" or "our share," is not, and is not intended to be, a presentation in accordance with GAAP.
Because as of December 31, 2017, approximately 12.6% of our assets, as measured by total square feet, were held through real
estate ventures, we believe this form of presentation, which includes our economic interests in the unconsolidated real estate
ventures, provides investors important information regarding a significant component of our portfolio, its composition, performance
and capitalization. We classify our portfolio as “operating,” “near-term development” or “future development.” “Near-term
development” refers to assets that have substantially completed the entitlement process and on which we intend to commence
construction within 18 months following December 31, 2017, subject to market conditions. We had no near-term development
assets as of December 31, 2017. “Future development” refers to assets that are development opportunities on which we do not
intend to commence construction within 18 months of December 31, 2017 where we (i) own land or control the land through a
ground lease or (ii) are under a long-term conditional contract to purchase, or enter into a leasehold interest with respect to land.
The tables below provide information about each of our office, multifamily, other, near-term development and future development
portfolios as of December 31, 2017. Many of our future development parcels are adjacent to or an integrated component of operating
office, multifamily or other assets in our portfolio. A significant number of our assets included in the tables below are held through
real estate ventures with third parties or are subject to ground leases. In addition to other information, the tables below indicate
our percentage ownership, whether the assets are consolidated or unconsolidated and whether the asset is subject to a ground lease.
Office Assets
Office Assets
DC
Universal Buildings
2101 L Street
Bowen Building
1730 M Street (3)
1233 20th Street
Executive Tower
1600 K Street
L’Enfant Plaza Office-East (3)
L’Enfant Plaza Office-North
L’Enfant Plaza Retail (3)
The Warner
Investment Building
The Foundry
1101 17th Street
%
Ownership C/U (1)
Same Store (2)
YTD
2016-2017
Total
Square
Feet
%
Leased
Office %
Occupied
Retail %
Occupied
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
49.0 % U
49.0 % U
49.0 % U
55.0 % U
5.0 % U
9.9 % U
55.0 % U
32
Y
Y
Y
Y
N
Y
N
N
N
N
Y
Y
N
Y
686,919
380,375
231,402
205,360
151,695
129,739
84,601
437,518
305,157
143,614
585,040
401,400
233,533
215,675
97.7 %
98.7 %
86.1 %
92.5 %
86.8 %
79.7 %
92.6 %
89.7 %
84.7 %
78.1 %
98.6 %
91.3 %
91.2 %
97.0 %
98.9 %
99.0 %
86.1 %
92.2 %
87.2 %
80.0 %
91.0 %
89.9 %
83.8 %
100.0 %
99.6 %
91.1 %
92.4 %
98.4 %
99.6 %
100.0 %
—
100.0 %
—
88.6 %
100.0 %
—
85.9 %
79.0 %
90.4 %
100.0 %
70.3 %
82.7 %
%
Ownership C/U (1)
Same Store (2)
YTD
2016-2017
Total
Square
Feet
%
Leased
Office %
Occupied
Retail %
Occupied
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
100.0 % C
10.0 % U
18.0 % U
18.0 % U
100.0 % C
100.0 % C
100.0 % C
18.0 % U
18.0 % U
Y
Y
Y
Y
N
Y
Y
Y
Y
Y
Y
Y
Y
Y
N
Y
Y
Y
Y
Y
Y
N
N
N
Y
N
N
Y
N
N
N
N
Y
N
N
N
639,431
507,336
505,754
489,997
446,176
466,975
444,905
402,172
393,527
384,026
361,193
343,245
336,159
333,838
305,039
283,812
282,920
277,003
249,281
202,736
160,817
145,768
138,350
74,701
79,755
77,528
25,152
56,965
246,145
144,483
105,723
270,628
214,300
13,633
62,875
39,836
93.6 %
82.2 %
99.9 %
78.7 %
94.8 %
89.3 %
82.5 %
75.6 %
89.8 %
84.4 %
76.2 %
98.0 %
100.0 %
95.3 %
99.5 %
50.8 %
45.6 %
100.0 %
98.8 %
86.7 %
62.4 %
100.0 %
100.0 %
100.0 %
93.3 %
55.9 %
100.0 %
100.0 %
100.0 %
91.4 %
79.8 %
68.7 %
98.4 %
100.0 %
97.6 %
61.9 %
91.9 %
82.4 %
95.6 %
80.2 %
93.2 %
83.7 %
82.7 %
74.8 %
89.9 %
82.1 %
73.5 %
98.9 %
100.0 %
96.2 %
100.0 %
48.4 %
45.6 %
100.0 %
100.0 %
83.1 %
61.4 %
100.0 %
100.0 %
100.0 %
—
57.5 %
100.0 %
—
100.0 %
86.6 %
81.8 %
67.6 %
98.9 %
—
97.2 %
51.7 %
100.0 %
100.0 %
—
75.5 %
—
100.0 %
100.0 %
100.0 %
95.2 %
100.0 %
89.9 %
95.8 %
100.0 %
100.0 %
100.0 %
100.0 %
—
100.0 %
—
—
—
—
100.0 %
100.0 %
93.5 %
—
—
100.0 %
—
96.0 %
40.4 %
82.2 %
100.0 %
100.0 %
100.0 %
100.0 %
13,704,212
88.5%
87.9%
93.5%
Office Assets
VA
Courthouse Plaza 1 and 2 (3)
2345 Crystal Drive
2121 Crystal Drive
1550 Crystal Drive (4)
RTC-West (4)
2231 Crystal Drive
2011 Crystal Drive
2451 Crystal Drive
Commerce Executive (4)
1235 S. Clark Street
241 18th Street S.
251 18th Street S.
1215 S. Clark Street
201 12th Street S.
800 North Glebe Road
1225 S. Clark Street
2200 Crystal Drive
1901 South Bell Street
2100 Crystal Drive
200 12th Street S.
2001 Jefferson Davis Highway
Summit I (5)
Summit II (4) (5)
1800 South Bell Street (4)
Crystal City Shops at 2100
Wiehle Avenue Office Building
1831 Wiehle Avenue (4)
Crystal Drive Retail
Pickett Industrial Park
Rosslyn Gateway-North
Rosslyn Gateway-South
MD
7200 Wisconsin Avenue
One Democracy Plaza* (3)
4749 Bethesda Avenue Retail
11333 Woodglen Drive
NoBe II Office (4)
Total / Weighted Average
Recently Delivered
VA
RTC - West Retail
100.0 % C
N
40,025
77.8 %
—
48.4 %
91.7%
Operating - Total / Weighted Average
13,744,237
88.5%
87.9%
33
Office Assets
Under Construction
DC
1900 N Street (3) (6)
L’Enfant Plaza Office-Southeast
VA
CEB Tower at Central Place (3)
MD
4747 Bethesda Avenue (7)
Under Construction - Total / Weighted Average
Total / Weighted Average
Totals at JBG SMITH Share
Operating assets
Under construction assets
%
Ownership C/U (1)
Same Store (2)
YTD
2016-2017
Total
Square
Feet
%
Leased
Office %
Occupied
Retail %
Occupied
100.0 % C
49.0 % U
100.0 % C
100.0 % C
N
N
N
N
271,433
215,185
29.6 %
65.1 %
529,997
73.3 %
287,183
1,303,798
69.8 %
62.1%
15,048,035
86.2%
11,829,162
1,194,043
88.0 %
61.8 %
87.2 %
92.9 %
_______________
Note: At 100% share. Excludes our 10% subordinated interests in five commercial buildings held through a real estate venture in which we have no economic
interest.
* Not Metro-served.
(1)
(2)
"C" denotes a consolidated interest. "U" denotes an unconsolidated interest.
"Y" denotes an asset as same store and "N" denotes an asset as non-same store. Same store refers to assets that were in service for the entirety of both periods
being compared, except for assets for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
No JBG Assets are considered same store.
(3) Asset is subject to a ground lease.
(4)
The following assets contain space that is held for development or not otherwise available for lease. This out-of-service square footage is excluded from
area, leased, and occupancy metrics in the above table.
Office Asset
1550 Crystal Drive
RTC - West
Commerce Executive
Summit II
1800 South Bell Street
1831 Wiehle Avenue
NoBe II Office
In-Service
Not Available
for Lease
489,997
446,176
393,527
138,350
74,701
25,152
39,836
18,293
19,911
14,085
6,480
146,079
50,039
96,983
(5)
(6)
(7)
In January 2018, we entered into an agreement for the sale of Summit I and II. See Note 20 to the financial statements for additional information.
Subsequent to December 31, 2017, we recapitalized the asset through a real estate venture, which will reduce our ownership percentage from 100.0% to
55.0% as contributions are funded. See Note 20 to the financial statements for additional information.
Includes JBG SMITH’s lease for approximately 80,200 square feet.
34
%
Ownership C/U (1)
Same Store (2)
YTD
2016-2017
Number
of
Units
Total
Square
Feet
%
Leased
Multifamily
%
Occupied
Retail
%
Occupied
Multifamily Assets
Multifamily Assets
DC
Fort Totten Square
WestEnd25
The Gale Eckington
Atlantic Plumbing
VA
RiverHouse Apartments
The Bartlett
220 20th Street
2221 South Clark Street
Fairway Apartments*
MD
Falkland Chase-South & West
Falkland Chase-North (3)
Galvan
The Alaire (4)
The Terano (3) (4)
Operating - Total / Weighted Average
Under Construction
DC
West Half
965 Florida Avenue (5)
1221 Van Street
Atlantic Plumbing C
MD
100.0% C
100.0% C
5.0% U
64.0% U
100.0% C
100.0% C
100.0% C
100.0% C
10.0% U
100.0% C
100.0% C
1.8% U
18.0% U
1.8% U
95.4% C
96.1% C
100.0% C
100.0% C
7900 Wisconsin Avenue
50.0% U
Under Construction - Total
Total
Totals at JBG SMITH Share
Operating assets
Under construction assets
_______________
Note: At 100% share.
* Not Metro-served.
N
Y
N
N
Y
N
Y
Y
N
N
N
N
N
N
N
N
N
N
N
345
283
603
310
384,316
273,264
466,716
245,527
1,670
1,322,016
619,372
271,790
93.3 %
98.1 %
94.2 %
96.4 %
94.7 %
95.2 %
96.8 %
699
265
216
346
268
162
356
279
214
171,080
100.0 %
370,850
93.5 %
222,949
106,159
390,650
266,497
195,864
97.7 %
97.8 %
92.4 %
92.5 %
90.7 %
86.7 %
95.8 %
91.8 %
93.1 %
93.7 %
94.1 %
94.3 %
100.0 %
92.3 %
96.6 %
95.1 %
88.5 %
91.9 %
88.1 %
100.0 %
—
100.0 %
100.0 %
100.0 %
100.0 %
83.3 %
—
—
—
—
96.8 %
100.0 %
76.2 %
6,016
5,307,050
94.8%
93.0%
98.1%
465
433
291
256
388,174
336,092
226,546
225,531
322
359,025
1,767
1,535,368
7,783
6,842,418
4,232
3,647,031
95.6 %
93.8 %
99.8 %
1,568
1,325,142
(1)
(2)
(3)
"C" denotes a consolidated interest. "U" denotes an unconsolidated interest.
"Y" denotes an asset as same store and "N" denotes an asset as non-same store. Same store refers to assets that were in service for the entirety of both periods
being compared, except for assets for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
No JBG Assets are considered same store.
The following assets contain space that is held for development or not otherwise available for lease. This out-of-service square footage is excluded from
area, leased, and occupancy metrics in the above table.
Multifamily Asset
In-Service
Not Available
for Lease
Falkland Chase - North
The Terano
106,159
195,864
13,284
3,904
(4) Asset is subject to a ground lease.
(5) Ownership percentage reflects expected dilution of JBG SMITH's real estate venture partner as contributions are funded during the construction of the asset.
As of December 31, 2017, JBG SMITH's ownership interest was 67.6%.
35
Other Assets
Other Assets
Retail
DC
North End Retail
VA
Vienna Retail*
Stonebridge at Potomac Town Center-Phase I*
Total / Weighted Average
Hotel
VA
100.0%
100.0%
10.0%
C
C
U
Crystal City Marriott Hotel
100.0%
C
Operating - Total
Under Construction
VA
Stonebridge at Potomac Town Center-Phase II*
10.0%
U
Total
Totals at JBG SMITH Share
Operating assets
Under construction assets
_______________
Note: At 100% share.
* Not Metro-served.
%
Ownership C/U (1)
Same Store (2)
YTD 2016-2017
Total
Square
Feet (3)
%
Leased
%
Occupied
N
Y
N
Y
N
27,432
100.0 %
99.0 %
8,547
100.0 %
100.0 %
462,633
498,612
93.9 %
94.3%
93.9 %
94.2%
266,000
(345 Rooms)
764,612
41,050
100.0 %
805,662
348,242
96.5 %
96.2 %
4,105
100.0 %
(1)
(2)
"C" denotes a consolidated interest. "U" denotes an unconsolidated interest.
"Y" denotes an asset as same store and "N" denotes an asset as non-same store. Same store refers to assets that were in service for the entirety of both periods
being compared, except for assets for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
No JBG Assets are considered same store.
Near-Term Developments
As of December 31, 2017, we had no near-term development assets.
36
Future Developments
Region
Owned
DC
DC Emerging
DC CBD
VA
Pentagon City
Reston
Crystal City
Other VA
MD
Silver Spring
Greater Rockville
Number of
Assets
Estimated Potential Development Density (SF)
Total
Office
Multifamily
Retail
7
1
8
5
6
9
5
1,426,900
336,200
1,763,100
312,100
324,400
636,500
1,105,800
—
1,105,800
9,000
11,800
20,800
4,572,800
1,429,100
2,999,100
144,600
4,193,100
2,982,400
951,300
1,282,800
620,000
496,400
2,683,600
2,088,200
394,300
25
12,699,600
3,828,300
8,165,200
1
4
5
1,276,300
126,500
1,402,800
—
19,200
19,200
1,156,300
88,600
1,244,900
226,700
274,200
60,600
706,100
120,000
18,700
138,700
Total / weighted average
38
15,865,500
4,484,000
10,515,900
865,600
Estimated
Commercial
SF /
Multifamily
Units to be
Replaced (1)
Estimated Total
Investment
(In thousands)
— $
—
—
—
102,680 SF /
15 units
74,701 SF
22,203 SF
199,584 SF /
15 units
162 units
7,170 SF
7,170 SF /
162 units
206,754 SF /
177 units
$
77,143
51,093
128,236
163,284
92,596
143,575
33,122
432,577
40,198
4,029
44,227
605,040
Optioned (2)
DC
DC Emerging
VA
Other VA
Total / weighted average
4
1
5
2,045,100
78,800
1,750,400
215,900
— $
131,432
Total / Weighted Average
43
17,921,900
4,562,800
12,276,700
1,082,400
11,300
2,056,400
—
78,800
10,400
1,760,800
900
216,800
—
— $
206,754 SF /
177 units
$
1,019
132,451
737,491
_______________
Note: At JBG SMITH share.
(1) Represents management's estimate of the total office and/or retail rentable square feet and multifamily units that would need to be redeveloped to access
some of the estimated potential development density.
(2) As of December 31, 2017, the weighted average remaining term for the optioned future development assets is 5.8 years.
Major Tenants
The following table sets forth information for our 10 largest tenants by annualized rent for the year ended December 31, 2017:
Tenant
GSA
Family Health International
Lockheed Martin Corporation
Arlington County
Paul Hastings LLP
Greenberg Traurig LLP
Baker Botts
Public Broadcasting Service
WeWork
Accenture LLP
Total
________________
At JBG SMITH Share
Number of
Leases
Square Feet
% of Total
Square Feet
Annualized
Rent
(In thousands)
% of Total
Annualized
Rent
2,579,525
320,791
274,361
241,288
125,863
115,315
85,090
140,885
122,271
102,756
4,108,145
82
9
5
9
5
1
2
5
3
1
122
37
24.4 % $
3.0 %
2.6 %
2.3 %
1.2 %
1.1 %
0.8 %
1.3 %
1.2 %
1.0 %
38.9 % $
103,149
15,641
13,493
11,608
9,478
8,904
6,796
5,707
5,553
5,545
185,874
22.3 %
3.4 %
2.9 %
2.5 %
2.1 %
1.9 %
1.5 %
1.2 %
1.2 %
1.2 %
40.2 %
Note: Includes all in-place leases as of December 31, 2017 for office and retail space within JBG SMITH's operating portfolio.
Lease Expirations
The following table sets forth as of December 31, 2017 the anticipated expirations of tenant leases in our consolidated portfolio
for each year from 2018 through 2026 and thereafter, assuming no exercise of renewal options or early termination rights:
Year of Lease Expiration
Month-to-Month
2018
2019
2020
2021
2022
2023
2024
2025
2026
Number
of Leases
77
193
174
187
130
126
74
80
57
69
Square
Feet
126,322
945,626
1,182,027
1,472,239
1,044,166
1,437,614
462,611
646,725
417,943
387,140
At JBG SMITH Share
% of
Total
Square
Feet
Annualized
Rent
(in
thousands)
% of
Total
Annualized
Rent
Annualized
Rent Per
Square Foot
1.2 % $
8.9 %
11.2 %
13.9 %
9.9 %
13.6 %
4.4 %
6.1 %
4.0 %
3.7 %
2,949
40,977
53,758
69,613
47,870
66,269
18,683
29,030
16,299
17,316
99,555
0.6 % $
8.9 %
11.6 %
15.1 %
10.4 %
14.3 %
4.0 %
6.3 %
3.5 %
3.7 %
21.6 %
23.34
43.33
45.48
47.28
45.84
46.10
40.39
44.89
39.00
44.73
40.58
Estimated
Annualized
Rent Per
Square Foot at
Expiration (1)
23.34
$
43.72
46.65
49.37
49.58
49.36
45.85
52.42
45.34
51.89
51.87
48.81
Thereafter
155
2,453,264
23.1 %
In Place Leases - Total/
Weighted Average
1,322
10,575,677
100.0% $
462,319
100.0% $
43.72
$
____________________
Note: Includes all leases for office and retail space within JBG SMITH's operating portfolio.
(1) Represents monthly base rent before free rent, plus tenant reimbursements, as of lease expiration multiplied by 12 and divided by square feet. Triple net
leases are converted to a gross basis by adding tenant reimbursements to monthly base rent. Tenant reimbursements at lease expiration are estimated by
escalating tenant reimbursements as of December 31, 2017, or management’s estimate thereof, by 2.75% annually through the lease expiration year.
ITEM 3. 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 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Dividends
Our common shares began regular way trading on the New York Stock Exchange, or NYSE, on July 18, 2017, under the symbol
"JBGS." On March 5, 2018, there were 882 holders of record of our common shares. This does not reflect individuals or other
entities who hold their shares in "street name." The following table sets forth the high and low closing prices and the cash dividends
declared on our common shares by quarter for 2017 as applicable:
38
High Price Per Share
Low Price per Share
Dividends Declared Per
Common Share (1)
2017
Third quarter (July 18 - September 30)
$
Fourth quarter
37.24
$
35.64
32.08
$
30.79
—
0.45
_______________
(1) Of the total dividends declared, dividends declared in December 2017 of $0.225 per common share were paid in January 2018.
Future declarations of dividends will be made at the discretion of our Board of Trustees and will depend upon cash generated by
our operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions
of the Code and such other factors as our Board of Trustees deems relevant. To qualify for the beneficial tax treatment accorded
to REITs under the Code, we are currently required to make distributions to holders of our shares in an amount equal to at least
90% of our REIT taxable income as defined in Section 857 of the Code.
The annual dividend amounts are different from dividends as calculated for federal income tax purposes. Distributions to the extent
of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to a shareholder as
ordinary dividend income. Distributions in excess of current and accumulated earnings and profits will be treated as a nontaxable
reduction of the shareholder’s basis in such shareholder’s shares, to the extent thereof, and thereafter as taxable capital gain.
Distributions that are treated as a reduction of the shareholder’s basis in its shares will have the effect of increasing the amount
of gain, or reducing the amount of loss, recognized upon the sale of the shareholder’s shares. No assurances can be given regarding
what portion, if any, of distributions in 2018 or subsequent years will constitute a return of capital for federal income tax purposes.
During a year in which a REIT earns a net long-term capital gain, the REIT can elect under Section 857(b)(3) of the Code to
designate a portion of dividends paid to shareholders as capital gain dividends. If this election is made, the capital gain dividends
are generally taxable to the shareholder as long-term capital gains.
Performance Graph
This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference
into any of our filings of under the Securities Act or the Exchange Act.
The graph below compares the cumulative total return of our common shares, the S&P MidCap 400 Index and the FTSE NAREIT
Equity Office Index, from July 18, 2017 (the completion date of the Formation Transaction) through December 31, 2017. The
comparison assumes $100 was invested on July 18, 2017 in our common shares and in each of the foregoing indexes and assumes
reinvestment of dividends, as applicable. We have included the FTSE NAREIT Equity Office Index because we believe that it is
representative of the industry in which we compete and is relevant to an assessment of our performance. There can be no assurance
that the performance of our shares will continue in line with the same or similar trends depicted in the graph below.
39
JBG SMITH Properties
S&P MidCap 400 Index
FTSE NAREIT Equity Office Index
07/18/17
100.00
100.00
100.00
07/31/17
95.27
99.90
98.56
08/31/17
87.89
98.37
97.48
09/30/17
91.86
102.22
99.26
10/31/17
83.81
104.54
98.39
11/30/17
90.07
108.38
101.15
12/31/17
94.51
108.61
102.57
Period Ending
Sales of Unregistered Shares
In connection with the Separation, on July 17, 2017, JBG SMITH LP issued 100.6 million OP Units to VRLP in exchange for the
contribution by VRLP of Vornado’s Washington, DC business (including interests in entities holding properties). In addition, we
issued 94.7 million common shares to Vornado in exchange for the contribution by Vornado of the 94.7 million OP Units that
Vornado received in the distribution by VRLP. The OP Units and common shares issued to VRLP and Vornado, respectively, were
issued in reliance upon an exemption from registration pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended,
which exempts transactions by an issuer not involving any public offering. Neither of these offerings was a “public offering”
because only one person was involved in each transaction, neither JBG SMITH nor JBG SMITH LP has engaged in general
solicitation or advertising with regard to the issuance and sale of the OP Units and common shares to VRLP and Vornado, and
neither JBG SMITH nor JBG SMITH LP has offered securities to the public in connection with such issuances and sales to VRLP
and Vornado.
In connection with the Combination, on July 18, 2017, we issued 23.2 million common shares and JBG SMITH LP issued 13.9
million OP Units as consideration for contribution of the JBG Assets, which were issued in reliance upon an exemption from
registration pursuant to Regulation D under the Securities Act of 1933, as amended, which exempts transactions by an issuer not
involving any public offering. Among other things, JBG SMITH and JBG SMITH LP relied on the fact that there was no general
solicitation or advertising with regard to the issuance and sale of these securities. The OP Units are redeemable for cash or, at our
election, common shares, beginning August 1, 2018, subject to certain limitations.
Repurchases of Equity Securities
During the year ended December 31, 2017, we did not repurchase any of our equity securities.
40
Equity Compensation Plan Information
Information regarding equity compensation plans is presented in Part III, Item 12 of this Annual Report on Form 10-K and
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The following table includes selected consolidated and combined financial data set forth as of and for each of the five years in the
period ended December 31, 2017. The consolidated balance sheet as of December 31, 2017 reflects the consolidation of properties
that are wholly owned and properties in which we own less than 100% interest, including JBG SMITH LP, but in which we have
a controlling interest. The consolidated and combined statement of operations for the year ended December 31, 2017 includes our
consolidated accounts and the combined accounts of the Vornado Included Assets. Accordingly, the results presented for the year
ended December 31, 2017 reflect the operations, comprehensive income (loss), and changes in cash flows and equity on a carved-
out and combined basis for the period from January 1, 2017 through the date of the Separation and on a consolidated basis
subsequent to the Separation. Consequently, our results for the periods before and after the Formation Transaction are not directly
comparable. The financial data for the periods prior to the Separation are derived from audited combined financial statements.
This selected financial data should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition
and Results of Operations", and our audited consolidated and combined financial statements and related notes included in Part II,
Items 7 and 8 of this Annual Report on Form 10-K.
41
Statement of Operations Data:
Total revenue
Depreciation and amortization
Property operating
Real estate taxes
General and administrative:
Corporate and other
Third-party real estate services
Share-based compensation related to Formation
Transaction
Transaction and other costs
Total operating expenses
Operating income (loss)
Loss from unconsolidated real estate ventures, net
Interest and other income, net
Interest expense
Loss on extinguishment of debt
Gain on bargain purchase
Income (loss) before income tax benefit (expense)
Income tax benefit (expense)
Net income (loss)
Net loss attributable to redeemable noncontrolling interests
Net loss attributable to noncontrolling interest
Net income (loss) attributable to common shareholders
Earnings (loss) per common share:
Basic
Diluted
Weighted average number of common shares
outstanding - basic and diluted
Dividends declared per common share
Balance Sheet Data:
Real estate, net
Total assets
Mortgages payable, net
Revolving credit facility
Unsecured term loan, net
Redeemable noncontrolling interests
Total equity
Cash Flow Statement Data:
Provided by operating activities
Used in investing activities
Year Ended December 31,
2017
2016
2015
2014
2013
$
543,013
$
478,519
$
470,607
$
472,923
$
476,311
161,659
111,055
66,434
47,131
51,919
29,251
127,739
595,188
(52,175)
(4,143)
1,788
133,343
100,304
57,784
48,753
19,066
—
6,476
365,726
112,793
(947)
2,992
144,984
101,511
58,874
44,424
18,217
—
—
368,010
102,597
(4,283)
2,557
112,046
101,597
56,165
46,188
18,308
—
—
334,304
138,619
(1,278)
1,338
108,571
99,069
55,361
46,652
16,984
—
—
326,637
149,674
(4,444)
129
(58,141)
(51,781)
(50,823)
(57,137)
(65,813)
(701)
24,376
(88,996)
9,912
(79,084)
7,328
3
—
—
63,057
(1,083)
61,974
—
—
(71,753) $
61,974
(0.70) $
(0.70) $
0.62
0.62
$
$
—
—
50,048
(420)
49,628
—
—
49,628
0.49
0.49
$
$
—
—
81,542
(242)
81,300
—
—
81,300
0.81
0.81
$
$
—
—
79,546
12,480
92,026
—
—
92,026
0.92
0.92
105,359
100,571
100,571
100,571
100,571
0.45
$
— $
— $
— $
—
$
$
$
$
$ 5,014,467
$ 3,224,622
$ 3,129,973
$ 3,011,407
$ 2,968,056
6,071,807
2,025,692
115,751
46,537
609,129
3,660,640
1,165,014
3,575,878
1,302,956
3,357,744
1,277,889
3,226,203
1,180,480
—
—
—
—
—
—
—
—
—
—
—
—
2,974,814
2,121,984
2,059,491
1,988,915
1,966,321
$
74,183
$
159,541
$
178,230
$
187,386
$
176,255
(7,676)
(258,807)
(236,617)
(239,336)
(98,349)
(73,711)
Provided by (used in) financing activities
239,787
51,083
122,671
33,353
42
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated and combined financial statements and notes thereto
appearing in Item 8 - Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Organization and Basis of Presentation
JBG SMITH was organized by Vornado as a Maryland REIT on October 27, 2016 (capitalized on November 22, 2016). JBG
SMITH was formed for the purpose of receiving, via the Separation on July 17, 2017, substantially all of the assets and liabilities
of Vornado’s Washington, DC segment, which are referred to as the Vornado Included Assets. On July 18, 2017, JBG SMITH
acquired the JBG Assets of JBG in the Combination. Substantially all of our assets are held by, and our operations are conducted
through, JBG SMITH LP.
Prior to the Separation from Vornado, JBG SMITH was a wholly owned subsidiary of Vornado and had no material assets or
operations. On July 17, 2017, Vornado distributed 100% of the then outstanding common shares of JBG SMITH on a pro rata
basis to the holders of its common shares. Prior to such distribution by VRLP, Vornado's operating partnership, distributed OP
Units in JBG SMITH LP on a pro rata basis to the holders of VRLP's common limited partnership units, consisting of Vornado
and the other common limited partners of VRLP. Following such distribution by VRLP and prior to such distribution by Vornado,
Vornado contributed to JBG SMITH all of the OP Units it received in exchange for common shares of JBG SMITH. Each Vornado
common shareholder received one JBG SMITH common share for every two Vornado common shares held as of the close of
business on July 7, 2017 (the "Record Date"). Vornado and each of the other limited partners of VRLP received one JBG SMITH
LP OP Unit for every two common limited partnership units in VRLP held as of the close of business on the Record Date. Our
operations are presented as if the transfer of the Vornado Included Assets had been consummated prior to all historical periods
presented in the accompanying consolidated and combined financial statements at the carrying amounts of such assets and liabilities
reflected in Vornado’s books and records.
The following is a discussion of the historical results of operations and liquidity and capital resources of JBG SMITH as of
December 31, 2017 and 2016, and for each of the three years in the period ended December 31, 2017, which includes results prior
to the consummation of the Separation. The historical results presented prior to the consummation of the Separation include the
Vornado Included Assets, all of which were under common control of Vornado until July 17, 2017. Unless otherwise specified,
the discussion of the historical results prior to July 18, 2017 does not include the results of the JBG Assets. Consequently, our
results for the periods before and after the Formation Transaction are not directly comparable.
References to the financial statements refer to our consolidated and combined financial statements as of December 31, 2017 and
2016, and for each of the three years in the period ended December 31, 2017. References to the balance sheets refer to our
consolidated and combined balance sheets as of December 31, 2017 and 2016. References to the statement of operations refer to
our consolidated and combined statements of operations for each of the three years in the period ended December 31, 2017.
References to the statement of cash flows refer to our consolidated and combined statements of cash flows for each of the three
years in the period ended December 31, 2017.
The accompanying financial statements are prepared in accordance with GAAP. GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and revenue and expenses during the reporting periods. Actual
results could differ from these estimates. The historical financial results for the Vornado Included Assets reflect charges for certain
corporate costs allocated by the former parent which we believe are reasonable. These charges were based on either actual costs
incurred or a proportion of costs estimated to be applicable to the Vornado Included Assets based on an analysis of key metrics,
including total revenues. Such costs do not necessarily reflect what the actual costs would have been if the Vornado Included Assets
had been operating as a separate standalone public company. These charges are discussed further in Note 18 to the financial
statements included herein.
We intend to elect to be taxed as a REIT under sections 856-860 of 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. Prior to the Separation, Vornado operated
as a REIT and distributed 100% of taxable income to its shareholders, accordingly, no provision for federal income taxes has been
made in the accompanying financial statements for the periods prior to the Separation. We intend to adhere to these requirements
and maintain our REIT status in future periods.
As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions to shareholders. Future distributions
will be declared and paid at the discretion of our Board of Trustees and will depend upon cash generated by operating activities,
43
our financial condition, capital requirements, annual dividend requirements under the REIT provisions of the Code, as amended,
and such other factors as our Board of Trustees deems relevant.
We also participate in the activities conducted by subsidiary entities which have elected to be treated as TRSs under the Code. As
such, we are subject to federal, state, and local taxes on the income from these activities. Income taxes attributable to our TRSs
are accounted for under the asset and liability method. Under the asset and liability method, deferred income taxes arise from
temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which
will result in taxable or deductible amounts in the future.
We aggregate our operating segments into three reportable segments (office, multifamily, and third-party real estate services) based
on the economic characteristics and nature of our assets and services.
We compete with a large number of property owners and developers. Our success depends upon, among other factors, trends
affecting national and local economies, the financial condition and operating results of current and prospective tenants, the
availability and cost of capital, interest rates, construction and renovation costs, taxes, governmental regulations and legislation,
population trends, zoning laws, and our ability to lease, sublease or sell our assets at profitable levels. Our success is also subject
to our ability to refinance existing debt on acceptable terms as it comes due.
Overview
We own and operate a portfolio of high-quality office and multifamily assets, many of which are amenitized with ancillary retail.
Our portfolio reflects our longstanding strategy of owning and operating assets within Metro-served submarkets in the Washington,
DC metropolitan area that have high barriers to entry and key urban amenities, including being within walking distance of a Metro
station.
As of December 31, 2017, our Operating Portfolio consists of 69 operating assets comprising 51 office assets totaling over 13.7
million square feet (11.8 million square feet at our share), 14 multifamily assets totaling 6,016 units (4,232 units at our share) and
four other assets totaling approximately 765,000 square feet (348,000 square feet at our share). Additionally, we have (i) ten assets
under construction comprising four office assets totaling approximately 1.3 million square feet (1.2 million square feet at our
share), five multifamily assets totaling 1,767 units (1,568 units at our share) and one other asset totaling approximately 41,100
square feet (4,100 square feet at our share); and (iii) 43 future development assets totaling approximately 21.4 million square feet
(17.9 million square feet at our share) of estimated potential development density.
Key highlights of operating results for the year ended December 31, 2017 included:
•
•
•
•
•
a net loss of $71.8 million, or $0.70 per diluted common share, for the year ended December 31, 2017 as compared to net
income of $62.0 million, or $0.62 per diluted common share, for the year ended December 31, 2016. The net loss for the year
ended December 31, 2017 included transaction and other costs of $127.7 million and a gain on bargain purchase of $24.4
million;
a decrease in operating office portfolio leased and occupied percentages to 88.0% leased and 87.2% occupied as of
December 31, 2017 from 88.2% and 87.5% as of September 30, 2017;
a decrease in operating multifamily portfolio leased and occupancy percentages to 95.6% leased and 93.8% occupied as of
December 31, 2017 from 96.2% and 94.6% as of September 30, 2017;
the leasing of approximately 1.7 million square feet, or 1.6 million square feet at our share, at an initial rent (1) of $45.92 per
square foot and a GAAP-basis weighted average rent per square foot of $47.19 for the year ended December 31, 2017; and
an increase in same store (2) NOI of 6.5% to $272.0 million for the year ended December 31, 2017 as compared to $255.3
million for the year ended December 31, 2016.
_________________
(1) Represents the cash basis weighted average starting rent per square foot, which excludes free rent and periodic rent steps.
(2) 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. Excludes the JBG
Assets acquired in the Combination.
Additionally, investing and financing activity during the year ended December 31, 2017 included:
•
•
the issuance of 94.7 million common shares and 5.8 million OP Units in connection with the Separation (see Note 1 to the
financial statements for more information);
the issuance of 23.2 million common shares and 13.9 million OP Units in connection with the Combination (see Note 3 to
the financial statements for more information);
44
•
•
•
•
•
the closing of a $1.4 billion credit facility, consisting of a $1.0 billion revolving credit facility maturing in July 2021, with
two six-month extension options, a delayed draw $200.0 million unsecured term loan maturing in January 2023 and a delayed
draw $200.0 million unsecured term loan maturing in July 2024;
the prepayment of mortgages payable with an aggregate principal balance of $250.0 million;
the execution of interest rate swap agreements with an aggregate notional value of $856.9 million to convert variable interest
rates applicable to our unsecured term loan and certain mortgages payable to fixed rates;
the payment of dividends during 2017 of $0.225 per common share. Dividends declared in December 2017 of $0.225 per
common share were paid in January 2018; and
the investment of $210.6 million in development costs, construction in progress and real estate additions.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP, requires management to make estimates and assumptions that
in certain circumstances may significantly impact our financial results. These estimates are prepared using management’s best
judgment, after considering past and current events and economic conditions. In addition, certain information relied upon by
management in preparing such estimates includes internally generated financial and operating information, external market
information, when available, and when necessary, information obtained from consultations with third-party experts. Actual results
could differ from these estimates. We consider an accounting estimate to be critical if changes in the estimate could have a material
impact on our consolidated and combined results of operations or financial condition.
Our significant accounting policies are more fully described in Note 2 to the financial statements included in Part II, Item 8 of this
Annual Report on Form 10-K; however, the most critical accounting policies, which involve the use of estimates and assumptions
as to future uncertainties and, therefore, may result in actual amounts that differ from estimates, are as follows:
Business Combinations
We account for business combinations, including the acquisition of real estate, using the acquisition method pursuant to which we
recognize and measure the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree at their
acquisition date fair values. Accordingly, we estimate the fair values of acquired tangible assets (consisting of real estate, cash and
cash equivalents, tenant and other receivables, investments in unconsolidated real estate ventures and other assets, as applicable),
identified intangible assets and liabilities (consisting of the value of in-place leases, above- and below-market leases, options to
enter into ground leases and management contracts, as applicable), assumed debt and other liabilities, and noncontrolling interests,
as applicable, based on our evaluation of information and estimates available at that date. Based on these estimates, we allocate
the purchase price to the identified assets acquired and liabilities assumed. Any excess of the purchase price over the estimated
fair value of the net assets acquired is recorded as goodwill. Any excess of the fair value of assets acquired over the purchase price
is recorded as a gain on bargain purchase. If, up to one year from the acquisition date, information regarding the fair value of the
net assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments are made on a prospective
basis to the purchase price allocation, which may include adjustments to identified assets, assumed liabilities, and goodwill or the
gain on bargain purchase, as applicable. The results of operations of acquisitions are prospectively included in our financial
statements beginning with the date of the acquisition. Transaction costs related to business combinations are expensed as incurred
and included in "Transaction and other costs" in our statements of operations.
The fair values of buildings are determined using the "as-if vacant" approach whereby we use discounted income or cash flow
models with inputs and assumptions that we believe are consistent with current market conditions for similar assets. The most
significant assumptions in determining the allocation of the purchase price to buildings are the exit capitalization rate, discount
rate, estimated market rents and hypothetical expected lease-up periods. We assess fair value of land based on market comparisons
and development projects using an income approach of cost plus a margin.
The fair values of identified intangible assets are determined based on the following:
• The value allocable to the above- or below-market component of an acquired in-place lease is determined based upon the
present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between
(i) the contractual amounts to be received pursuant to the lease over its remaining term and (ii) management’s estimate of
the amounts that would be received using market rates over the remaining term of the lease. Amounts allocated to above-
market leases are recorded as "Identified intangible assets" in "Other assets, net" in the balance sheets, and amounts allocated
to below-market leases are recorded as "Lease intangible liabilities" in "Other liabilities, net" in the balance sheets. These
intangibles are amortized to "Property rentals" in our statements of operations over the remaining terms of the respective
leases.
•
Factors considered in determining the value allocable to in-place leases during hypothetical lease-up periods related to space
that is leased at the time of acquisition include (i) lost rent and operating cost recoveries during the hypothetical lease-up
45
period and (ii) theoretical leasing commissions required to execute similar leases. These intangible assets are recorded as
"Identified intangible assets" in "Other assets, net" in the balance sheets and are amortized to "Depreciation and amortization
expenses" in our statements of operations over the remaining term of the existing lease.
• The fair value of the in-place property management, leasing, asset management, and development and construction
management contracts is based on revenue and expense projections over the estimated life of each contract discounted using
a market discount rate. These management contract intangibles are amortized to "Depreciation and amortization expenses"
in our statements of operations over the weighted average life of the management contracts.
The fair value of investments in unconsolidated real estate ventures and related noncontrolling interests is based on the estimated
fair values of the identified assets acquired and liabilities assumed of each venture, including future expected cash flows from
promote interests.
The fair value of the mortgages payable assumed was determined using current market interest rates for comparable debt financings.
The fair values of the interest rate swaps and caps are based on the estimated amounts we would receive or pay to terminate the
contract at the acquisition date and are determined using interest rate pricing models and observable inputs. The carrying value of
cash, restricted cash, working capital balances, leasehold improvements and equipment, and other assets acquired and liabilities
assumed approximates fair value.
Real Estate
Real estate is carried at cost, net of accumulated depreciation and amortization. Maintenance and repairs are expensed as incurred
and are included in "Property operating expenses" in our statements of operations. As real estate is undergoing redevelopment
activities, all property operating expenses directly associated with and attributable to the redevelopment, including interest expense,
are capitalized to the extent that we believe such costs are recoverable through the value of the property. The capitalization period
ends when redevelopment activities are substantially complete. General and administrative costs are expensed as incurred.
Depreciation requires an estimate of the useful life of each property and improvement as well as an allocation of the costs associated
with a property to its various components. Depreciation is recognized on a straight line basis over estimated useful lives, which
range from three to 40 years. Tenant improvements are amortized on a straight line basis over the lives of the related leases, which
approximate the useful lives of the tenant improvements.
Construction in progress, including land, is carried at cost, and no depreciation is recorded. Real estate undergoing significant
renovations and improvements is considered to be under development. All direct and indirect costs related to development activities
are capitalized into "Construction in progress, including land" on our balance sheets, except for certain demolition costs, which
are expensed as incurred. Direct development costs incurred include: pre-development expenditures directly related to a specific
project, development and construction costs, interest, insurance and real estate taxes. Indirect development costs include: employee
salaries and benefits, travel and other related costs that are directly associated with the development. Our method of calculating
capitalized interest expense is based upon applying our weighted average borrowing rate to the actual accumulated expenditures
if the property does not have property specific debt. If the property is encumbered by specific debt, we will capitalize both the
interest incurred applicable to that debt and additional interest expense using our weighted average borrowing rate for any
accumulated expenditures in excess of the principal balance of the debt encumbering the property. The capitalization of such
expenses ceases when the real estate is ready for its intended use, but no later than one-year from substantial completion of major
construction activity. If we determine that a project is no longer viable, all pre-development project costs are immediately expensed.
Our assets and related intangible assets are individually reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset
exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Estimates
of future cash flows are based on our current plans, intended holding periods and available market information at the time the
analyses are prepared. An impairment loss is recognized if the carrying amount of the asset is not recoverable and is measured
based on the excess of the property’s carrying amount over its estimated fair value. If our estimates of future cash flows, anticipated
holding periods, or fair values change, based on market conditions or otherwise, our evaluation of impairment charges may be
different and such differences could be material to our financial statements. Estimates of future cash flows are subjective and are
based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from
actual results.
Real estate is classified as held for sale when all the necessary criteria are met. The criteria include (i) management, having the
authority to approve action, commits to a plan to sell the property in its present condition, (ii) the sale of the property is at a price
reasonable in relation to its current fair value and (iii) the sale is probable and expected to be completed within one year. Real
estate held for sale is carried at the lower of carrying amounts or estimated fair value less disposal costs. Depreciation and
amortization is not recognized on real estate classified as held for sale.
46
Investments in and Advances to Real Estate Ventures
We analyze our real estate ventures to determine whether the entities should be consolidated. If it is determined that these investments
do not require consolidation because the entities are not VIEs in accordance with the Consolidation Topic of the FASB ASC, we
are not considered the primary beneficiary of the entities determined to be VIEs, we do not have voting control, and/or the limited
partners (or non-managing members) have substantive participatory rights, then the selection of the accounting method used to
account for our investments in unconsolidated real estate ventures is generally determined by our voting interests and the degree
of influence we have over the entity. Management uses its judgment when determining if we are the primary beneficiary of, or
have a controlling financial interest in, an entity in which we have a variable interest. Factors considered in determining whether
we have the power to direct the activities that most significantly impact the entity’s economic performance include risk and reward
sharing, experience and financial condition of the other partners, voting rights, involvement in day-to-day capital and operating
decisions and the extent of our involvement in the entity.
We use the equity method of accounting for investments in unconsolidated real estate ventures when we own 20% or more of the
voting interests and have significant influence but do not have a controlling financial interest, or if we own less than 20% of the
voting interests but have determined that we have significant influence. Under the equity method, we record our investments in
and advances to these entities in our balance sheets, and our proportionate share of earnings or losses earned by the real estate
venture is recognized in "Income (loss) from unconsolidated real estate ventures, net" in the accompanying statements of operations.
We earn revenues from the management services we provide to unconsolidated entities. These fees are determined in accordance
with the terms specific to each arrangement and may include property and asset management fees or transactional fees for leasing,
acquisition, development and construction, financing, and legal services provided. We account for this revenue gross of our
ownership interest in each respective real estate venture and recognize such revenue in "Third-party real estate services, including
reimbursements" in our statements of operations. Our proportionate share of related expenses is recognized in "Income (loss) from
unconsolidated real estate ventures, net" in our statements of operations. We may also earn incremental promote distributions if
certain financial return benchmarks are achieved upon ultimate disposition of the underlying properties. Management fees are
recognized when earned, and promote fees are recognized when certain earnings events have occurred, and the amount is
determinable and collectible. Any promote fees are reflected in "Income (loss) from unconsolidated real estate ventures, net" in
our statements of operations.
On a periodic basis, we evaluate our investments in unconsolidated entities for impairment. We assess whether there are any
indicators, including underlying property operating performance and general market conditions, that the value of our investments
in unconsolidated real estate ventures may be impaired. An investment in a real estate venture is considered impaired if we determine
that its fair value is less than the net carrying value of the investment in that real estate venture on an other-than-temporary basis.
Cash flow projections for the investments consider property level factors such as expected future operating income, trends and
prospects, as well as the effects of demand, competition and other factors. We consider various qualitative factors to determine if
a decrease in the value of our investment is other-than-temporary. These factors include age of the venture, our intent and ability
to retain our investment in the entity, financial condition and long-term prospects of the entity and relationships with our partners
and banks. If we believe that the decline in the fair value of the investment is temporary, no impairment charge is recorded. If our
analysis indicates that there is an other-than temporary impairment related to the investment in a particular real estate venture, the
carrying value of the venture will be adjusted to an amount that reflects the estimated fair value of the investment.
Revenue Recognition
Property rentals income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported
on a straight-line basis over the non-cancellable term of the lease, which includes the effects of periodic step-ups in rent and rent
abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space or
controls the physical use of the leased space and the leased space is substantially ready for its intended use. In circumstances where
we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a
reduction of property rentals revenue on a straight-line basis over the term of the lease. Differences between rental income recognized
and amounts due under the respective lease agreements are recorded as an increase or decrease to "Deferred rent receivable, net"
on our balance sheets. Property rentals also includes the amortization/accretion of acquired above-and below-market leases.
Tenant reimbursements provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective
assets. Tenant reimbursements are accrued in the same periods as the related expenses are incurred.
Third-party real estate services revenue, including reimbursements, is determined in accordance with the terms specific to each
arrangement and may include property and asset management fees or transactional fees for leasing, acquisition, development and
construction, financing, and legal services provided. These fees are determined in accordance with the terms specific to each
arrangement and are recognized as the related services are performed. Development and construction fees earned from providing
services to our unconsolidated real estate ventures are recorded on a percentage of completion basis.
47
Share-Based Compensation
We granted OP Units, formation awards ("Formation Awards"), long-term incentive partnership units ("LTIP Units"), LTIP Units
with time-based vesting requirements (“Time-Based LTIP Units”) and Performance-Based LTIP Units to our trustees, management
and employees in connection with the Separation and Combination. Fair value is determined, depending on the type of award,
using the Monte Carlo method or post-vesting restriction periods, which is intended to estimate the fair value of the awards at the
grant date using dividend yields and expected volatilities that are primarily based on available implied data and peer group
companies' historical data. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The
shortcut method is used for determining the expected life used in the valuation method.
Compensation expense is based on the fair value of our common shares at the date of the grant and is recognized ratably over the
vesting period using a graded vesting attribution model. We account for forfeitures as they occur.
Recent Accounting Pronouncements
See Note 2 to the financial statements for a description of the potential impact of the adoption of any new accounting
pronouncements.
Results of Operations
Comparison of the Year Ended December 31, 2017 to 2016
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 year ended December 31, 2017 as compared to the same period
in 2016:
Property rentals revenue
Tenant reimbursements revenue
Third-party real estate services revenue, including reimbursements
Depreciation and amortization expense
Property operating expense
Real estate taxes expense
General and administrative expense:
$
Corporate and other
Third-party real estate services
Share-based compensation related to Formation Transaction
Transaction and other costs
Loss from unconsolidated real estate ventures, net
Interest expense
Loss on extinguishment of debt
Gain on bargain purchase
Net loss attributable to redeemable noncontrolling interests
______________
* Not meaningful.
Year Ended December 31,
2017
2016
% Change
(In thousands)
$
436,625
37,985
63,236
161,659
111,055
66,434
47,131
51,919
29,251
127,739
4,143
58,141
701
24,376
7,328
401,595
37,661
33,882
133,343
100,304
57,784
48,753
19,066
—
6,476
947
51,781
—
—
—
8.7 %
0.9 %
86.6 %
21.2 %
10.7 %
15.0 %
(3.3)%
172.3 %
*
1,872.5 %
337.5 %
12.3 %
*
*
*
Property rentals revenue increased by approximately $35.0 million, or 8.7%, to $436.6 million in 2017 from $401.6 million in
2016. The increase was primarily due to revenues of $31.4 million associated with the JBG Assets acquired in the Combination
and an increase of $3.6 million in revenues associated with the Vornado Included Assets that were the existing assets in the prior
period. The $3.6 million increase in revenues associated with existing assets is primarily due to an increase in occupancy and
associated rentals at The Bartlett multifamily asset as the property was placed into service in the second quarter of 2016 and rent
commencements at 1215 S. Clark St, partially offset by a decrease in revenues at 1700 M Street and 1770 Crystal Drive, which
were taken out of service.
48
Tenant reimbursements revenue increased by approximately $324,000, or 0.9%, to $38.0 million in 2017 from $37.7 million in
2016. Revenue associated with existing assets decreased by $2.8 million, primarily due to lower construction services provided
to tenants and lower operating expenses, partially offset by an increase of $3.1 million associated with the assets acquired in the
Combination.
Third-party real estate services revenue, including reimbursements, increased by approximately $29.4 million, or 86.6%, to $63.2
million in 2017 from $33.9 million in 2016. The increase was primarily due to the real estate services business acquired in the
Combination, partially offset by lower management fees and leasing commissions from existing arrangements with third-parties.
Depreciation and amortization expense increased by approximately $28.3 million, or 21.2%, to $161.7 million for 2017 from
$133.3 million in 2016. The increase was primarily due to depreciation and amortization expense associated with the assets acquired
in the Combination.
Property operating expense increased by approximately $10.8 million, or 10.7%, to $111.1 million in 2017 from $100.3 million
in 2016. The increase was primarily due to property operating expenses of $10.4 million associated with the assets acquired in the
Combination and an increase of approximately $400,000 associated with existing assets due primarily to higher bad debt expense,
partially offset by lower tenant services expense and lower utilities.
Real estate tax expense increased by approximately $8.7 million, or 15.0%, to $66.4 million in 2017 from $57.8 million in 2016.
The increase was primarily due to real estate tax expense of $4.8 million associated with the assets acquired in the Combination,
an increase in the tax assessments and lower capitalized real estate taxes.
General and administrative expense: corporate and other decreased by approximately $1.6 million, or 3.3%, to $47.1 million for
2017 from $48.8 million in 2016. The decrease was due to lower corporate allocated overhead costs associated with our former
parent, partially offset by an increase in general operating expenses associated with the operations acquired in the Combination.
General and administrative expense: third-party real estate services increased by approximately $32.9 million, or 172.3%, to $51.9
million in 2017 from $19.1 million in 2016 primarily due to the real estate services business acquired in the Combination.
General and administrative expense: share-based compensation related to Formation Transaction of $29.3 million in 2017 consists
of expense related to share-based compensation issued in connection with the Formation Transaction.
Transaction and other costs of $127.7 million in 2017 consists primarily of fees and expenses incurred in connection with the
Formation Transaction, including severance and transaction bonus expense of $40.8 million, investment banking fees of $33.6
million, legal fees of $13.9 million and accounting fees of $10.8 million.
Loss from unconsolidated real estate ventures, net increased by approximately $3.2 million to $4.1 million in 2017 from $947,000
in 2016. The increase in the loss was primarily due to losses from interests in real estate ventures acquired in the Combination,
partially offset by an increase in equity income of approximately $2.5 million primarily from the refinancing of the Warner Building
mortgage loan in May 2016 at a lower interest rate and for a lower outstanding principal amount.
Interest expense increased by approximately $6.4 million, or 12.3%, to $58.1 million for 2017 from $51.8 million in 2016. The
increase was primarily due to $3.3 million of interest expense associated with the assets acquired in the Combination and lower
capitalized interest related to The Bartlett multifamily asset which was placed into service during the second quarter of 2016.
Loss on extinguishment of debt of $701,000 in 2017 is related to the prepayment of mortgages payable.
The gain on bargain purchase of approximately $24.4 million in 2017 represents the estimated fair value of the identifiable net
assets acquired in excess of the purchase consideration in the Combination. The purchase consideration was based on the fair value
of the common shares and OP Units issued in the Combination. See Note 3 to the financial statements for additional information.
Net loss attributable to redeemable noncontrolling interests of approximately $7.3 million in 2017 relates to the allocation of net
loss to the noncontrolling interests in JBG SMITH LP and 965 Florida Avenue.
Comparison of the Year Ended December 31, 2016 to 2015
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 year ended December 31, 2016 as compared to the same period
in 2015:
49
Property rentals revenue
Tenant reimbursements revenue
Third-party real estate services revenue, including reimbursements
Depreciation and amortization expense
Property operating expense
Real estate taxes expense
General and administrative expense:
$
Corporate and other
Third-party real estate services
Transaction and other costs
Loss from unconsolidated real estate ventures, net
Interest expense
______________
* Not meaningful.
Year Ended December 31,
2016
2015
% Change
(In thousands)
$
401,595
37,661
33,882
133,343
100,304
57,784
48,753
19,066
6,476
947
51,781
389,810
40,476
29,467
144,984
101,511
58,874
44,424
18,217
—
4,283
50,823
3.0 %
(7.0)%
15.0 %
(8.0)%
(1.2)%
(1.9)%
9.7 %
4.7 %
*
(77.9)%
1.9 %
Property rentals revenue increased by approximately $11.8 million, or 3.0%, to $401.6 million in 2016 from $389.8 million in
2015. The increase was primarily due to (i) The Bartlett multifamily asset being placed into service during the second quarter of
2016, (ii) 2221 South Clark Street being placed into service beginning in the third quarter of 2015 and (iii) higher average office
occupancy.
Tenant reimbursements revenue decreased by approximately $2.8 million, or 7.0%, to $37.7 million in 2016 from $40.5 million
in 2015. The decrease was primarily due to a decrease in real estate taxes at certain of our office assets and a decrease in tenant
services.
Third-party real estate services revenue, including reimbursements, increased by approximately $4.4 million, or 15.0%, to $33.9
million in 2016 from $29.5 million in 2015. The increase was primarily due to an increase in leasing fees as a result of higher
leasing activity in 2016.
Depreciation and amortization expense decreased by approximately $11.6 million, or 8.0%, to $133.3 million in 2016 from $145.0
million in 2015. The decrease was primarily due to 1150 17th Street and 1726 M Street, which were taken out of service during
the second quarter of 2016 to prepare for the development of a new Class A office building.
Property operating expense decreased by approximately $1.2 million, or 1.2%, to $100.3 million in 2016 from $101.5 million in
2015. The decrease was primarily due to a reduction in utility expenses.
Real estate tax expense decreased by approximately $1.1 million, or 1.9%, to $57.8 million in 2016 from $58.9 million in 2015.
The decrease was primarily due to lower tax assessments on certain of our office assets.
General and administrative expense: corporate and other increased by approximately $4.3 million, or 9.7%, to $48.8 million in
2016 from $44.4 million in 2015. The increase was due to higher payroll and benefits in 2016, including lower capitalized amounts
and an increase in allocated overhead costs by Vornado.
General and administrative expense: third-party real estate services increased by approximately $849,000, or 4.7%, to $19.1 million
in 2016 from $18.2 million in 2015 primarily due to higher payroll and benefits.
Transaction and other costs of $6.5 million in 2016 consists primarily of fees and expenses incurred in connection with the Formation
Transaction.
Loss from unconsolidated real estate ventures, net decreased by approximately $3.3 million, or 77.9%, to $947,000 in 2016 from
$4.3 million in 2015. The decrease was primarily due to our share of interest savings from the refinancing of the Warner Building
in May 2016 at a lower interest rate and lower outstanding principal balance.
Interest expense increased by approximately $1.0 million, or 1.9%, to $51.8 million for 2016 from $50.8 million in 2015. The
increase was primarily due to (i) $4.4 million of interest on higher average outstanding payable balances to Vornado, partially
50
offset by (ii) lower interest rates resulting from the refinancing of RiverHouse apartments in April 2015 and the Bowen Building
in June 2016.
NOI and Same Store NOI
In this section, we present NOI, which is a non-GAAP financial measure that we use to assess a segment’s performance. The most
directly comparable GAAP measure is net income (loss) attributable to common shareholders. We use NOI internally as a
performance measure and believe NOI provides useful information to investors regarding our financial condition and results of
operations because it reflects only property related revenue (which includes base rent, tenant reimbursements and other operating
revenue) less operating expense, before deferred rent and related party management fees. Management uses NOI as a supplemental
performance measure for our assets and believes it provides useful information to investors because it reflects only those revenue
and expense items that are incurred at the asset level, excluding non-cash items. In addition, NOI is considered by many in the
real estate industry to be a useful starting point for determining the value of a real estate asset or group of assets. However, because
NOI excludes depreciation and amortization and captures neither the changes in the value of our assets that result from use or
market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating
performance of our assets, all of which have real economic effect and could materially impact the financial performance of our
assets, the utility of NOI as a measure of the operating performance of our assets is limited. NOI presented by us may not be
comparable to NOI reported by other REITs that define these measures differently. We believe that 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.
We also provide certain information on a "same store" basis. 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 except for properties for which
significant redevelopment, renovation or repositioning occurred during either of the periods being compared. While there is
judgment surrounding changes in designations, a property is removed from the same store pool when a property is considered to
be a property 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 operating
income. A development property or property under construction 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.
For the year ended December 31, 2017, all of the JBG Assets and two Vornado Included Assets (The Bartlett and 1800 South Bell
Street) were not included in the same store comparison as they were not in service during portions of the periods being compared.
Same store NOI increased by $16.7 million, or 6.5%, for the year ended December 31, 2017 as compared to the year ended
December 31, 2016. The increase in same store NOI was primarily due to the expiration of rent abatements, the expiration of
payments associated with the assumption of lease liabilities and higher property rental revenue from lease commencements.
The following table reflects the reconciliation of net income (loss) attributable to common shareholders to NOI and same store
NOI for the periods presented:
51
Net income (loss) attributable to common shareholders
Add:
Depreciation and amortization expense
General and administrative expense:
Corporate and other
Third-party real estate services
Share-based compensation related to Formation Transaction
Transaction and other costs
Interest expense
Loss on extinguishment of debt
Income tax expense (benefit)
Less:
Third-party real estate services, including reimbursements
Other income
Loss from unconsolidated real estate ventures, net
Interest and other income (loss), net
Gain on bargain purchase
Net loss attributable to redeemable noncontrolling interests
Net loss attributable to noncontrolling interest
Consolidated NOI
NOI attributable to consolidated JBG Assets (1)
Proportionate NOI attributable to unconsolidated JBG Assets (2)
Proportionate NOI attributable to unconsolidated real estate ventures (3)
Non-cash rent adjustments (4)
Other adjustments (5)
Total adjustments
NOI
Non-same store NOI (6)
Same store NOI (7)
Growth in same store NOI
Number of properties
Year Ended December 31,
2017
2016
(In thousands)
$
(71,753)
$
61,974
161,659
133,343
48,753
19,066
—
6,476
51,781
—
1,083
33,882
5,381
(947)
2,992
—
—
—
281,168
39,641
11,692
7,326
(13,030)
(13,670)
31,959
313,127
57,828
255,299
47,131
51,919
29,251
127,739
58,141
701
(9,912)
63,236
5,167
(4,143)
1,788
24,376
7,328
3
297,121
25,165
8,646
21,515
(6,715)
3,819
52,430
349,551
77,547
$
272,004
$
6.5%
36
___________________________________________________
(1) NOI attributable to consolidated JBG Assets for 2017 is for the period January 1, 2017 to July 17, 2017.
(2) Proportionate NOI attributable to unconsolidated JBG Assets for 2017 is for the period January 1, 2017 to July 17, 2017.
(3) Proportionate NOI attributable to unconsolidated real estate ventures includes Vornado Included Assets for all of 2017 and 2016 and JBG
Assets for 2017 for the period July 18, 2017 to December 31, 2017.
(4) Adjustment to exclude straight-line rent, above/below market lease amortization and lease incentive amortization.
(5) Adjustment to include other income and payments associated with assumed lease liabilities related to operating properties, and exclude
(6)
(7)
incidental income generated by development assets and commercial lease termination revenue.
Includes the results for properties that were not owned, operated and in service for the entirety of both periods being compared and properties
for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
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.
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. As a result of the Formation Transaction, we redefined 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 (office, multifamily, and third-party real estate services) based on the
52
economic characteristics and nature of our assets and services. In connection therewith, we have reclassified the prior period
segment financial data to conform to the current period presentation.
The CODM measures and evaluates the performance of our operating segments, with the exception of the third-party real estate
services business, based on the NOI of properties within each segment. With respect to the third-party real estate services business,
the CODM reviews revenues 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
disclosed separately in the statements of operations and discussed in the preceding pages under "Results of Operations.”
Rental revenue is calculated as property rentals plus tenant reimbursements. Rental expense is calculated as property operating
expenses plus real estate taxes. NOI is calculated as rental revenue less rental expense. See Note 16 to the financial statements for
the reconciliation of net income (loss) attributable common shareholders to consolidated NOI for each of the three years in the
period ended December 31, 2017.
Rental revenue:
Office
Multifamily
Other
Eliminations of intersegment activity
Total rental revenue
Rental expense:
Office
Multifamily
Other
Eliminations of intersegment activity
Total rental expense
Consolidated NOI:
Office
Multifamily
Other
Eliminations of intersegment activity
Consolidated NOI
Year Ended December 31,
2017
2016
2015
(In thousands)
$
375,528
90,821
11,166
(2,905)
474,610
$
351,317
66,855
24,080
(2,996)
439,256
144,317
35,237
13,539
(15,604)
177,489
137,243
24,231
11,892
(15,278)
158,088
231,211
55,584
(2,373)
12,699
297,121
$
214,074
42,624
12,188
12,282
281,168
$
347,179
55,861
29,682
(2,436)
430,286
137,834
20,628
16,641
(14,718)
160,385
209,345
35,233
13,041
12,282
269,901
$
$
Comparison of the Year Ended December 31, 2017 to 2016
Office: Rental revenue increased by $24.2 million, or 6.9%, to $375.5 million in 2017 from $351.3 million in 2016. Consolidated
NOI increased by $17.1 million, or 8.0%, to $231.2 million in 2017 from $214.1 million in 2016. The increase in rental revenue
and consolidated NOI is primarily due to the Combination and higher rents due to rent commencements at 1215 S. Clark St.
Multifamily: Rental revenue increased by $24.0 million, or 35.8%, to $90.8 million in 2017 from $66.9 million in 2016. Consolidated
NOI increased by $13.0 million, or 30.4%, to $55.6 million in 2017 from $42.6 million in 2016. The increase in rental revenue
and consolidated NOI is primarily due to the Combination and an increase in occupancy and associated rentals at The Bartlett
which was placed into service in the second quarter of 2016.
Other: Rental revenue decreased by $12.9 million, or 53.6%, to $11.2 million in 2017 from $24.1 million in 2016. Consolidated
NOI decreased by $14.6 million, or 119.5%, to a loss of $2.4 million in 2017 from $12.2 million of income in 2016. The decrease
in rental revenue and increase in net operating loss is primarily due to properties which were taken out of service, including 1700
M Street and 1770 Crystal Drive.
Comparison of the Year Ended December 31, 2016 to 2015
Office: Rental revenue increased by $4.1 million, or 1.2%, to $351.3 million in 2016 from $347.2 million in 2015. Consolidated
NOI increased by $4.7 million, or 2.3%, to $214.1 million in 2016 from $209.3 million in 2015. The increase in rental revenue
53
and consolidated NOI is primarily due to higher average office occupancy and higher rents due to rent commencements at 1215
S. Clark St.
Multifamily: Rental revenue increased by $11.0 million, or 19.7%, to $66.9 million in 2016 from $55.9 million in 2015. Consolidated
NOI increased by $7.4 million, or 21.0%, to $42.6 million in 2016 from $35.2 million in 2015. The increase in rental revenue and
consolidated NOI is primarily due to an increase in occupancy and associated rentals at The Bartlett which was placed into service
in the second quarter of 2016 and 2221 South Clark Street which was placed into service in the third quarter of 2015.
Other: Rental revenue decreased by $5.6 million, or 18.9%, to $24.1 million in 2016 from $29.7 million in 2015. Consolidated
NOI decreased by $853,000, or 6.5%, to $12.2 million in 2016 from $13.0 million in 2015. The decrease in rental revenue and
consolidated NOI is primarily due to 1700 M which was taken out of service during the second quarter of 2016.
Liquidity and Capital Resources
Property rental income is our primary source of operating cash flow and is dependent on a number of factors including occupancy
levels and rental rates, as well as our tenants’ ability to pay rent. In addition, we have a third-party real estate services business
that 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. Other sources of liquidity to fund cash requirements include proceeds from financings
and asset sales. We anticipate that cash flows from continuing operations and proceeds from financings, recapitalizations and asset
sales, together with existing cash balances, will be adequate to fund our business operations, debt amortization, capital expenditures,
dividends to shareholders and distributions to holders of OP Units over the next 12 months.
Financing Activities
The following is a summary of mortgages payable as of December 31, 2017 and 2016:
Weighted Average
Effective
Interest Rate at
December 31,
2017
3.62%
4.25%
—
December 31,
2017 (1)
2016
(In thousands)
498,253
$
1,537,706
2,035,959
(10,267)
2,025,692
$
547,291
620,327
1,167,618
(2,604)
1,165,014
— $
283,232
$
$
$
Variable rate (2)
Fixed rate (3)
Mortgages payable
Unamortized deferred financing costs and premium/discount, net
Mortgages payable, net
Payable to former parent (4)
__________________________
(1)
(2)
(3)
(4)
Includes mortgages payable assumed in the Combination. See Note 3 to the financial statements for additional information.
Includes variable rate mortgages payable with interest rate cap agreements.
Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements.
Includes amounts payable to former parent as of December 31, 2016 in connection with the Bowen Building and The Bartlett. See Note 18
to the financial statements for additional information.
As of December 31, 2017, the net carrying value of real estate collateralizing our mortgages payable totaled $2.9 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 of our
mortgage loans are recourse to us. As of December 31, 2017, we were not in default under any mortgage loan.
In the Combination, we assumed mortgages payable with an aggregate principal balance of $768.5 million. In addition, we entered
into mortgages payable with an aggregate principal balance of $79.3 million during the year ended December 31, 2017 with an
ability to draw an additional $143.7 million for construction. During the year ended December 31, 2017, we repaid mortgages
payable with an aggregate principal balance of $250.0 million, which includes mortgages payable totaling $64.8 million assumed
in the Combination. We recognized losses on the extinguishment of debt in conjunction with these repayments of $701,000 for
the year ended December 31, 2017.
54
As of December 31, 2017, we had various interest rate swap and cap agreements with an aggregate notional value of $1.4 billion
to swap variable interest rates to fixed rates on certain of our mortgages payable. See Note 15 to the financial statements for
additional information.
On July 18, 2017, we entered into a $1.4 billion credit facility, consisting of a $1.0 billion revolving credit facility maturing in
July 2021, with two six-month extension options, a delayed draw $200.0 million unsecured term loan ("Tranche A-1 Term Loan")
maturing in January 2023 and a delayed draw $200.0 million unsecured term loan ("Tranche A-2 Term Loan") maturing in July
2024. The interest rate for the credit facility varies based on a ratio of our total outstanding indebtedness to a valuation of certain
real property and assets and ranges (a) in the case of the revolving credit facility, from LIBOR plus 1.10% to LIBOR plus 1.50%,
(b) in the case of the Tranche A-1 Term Loan, from LIBOR plus 1.20% to LIBOR plus 1.70% and (c) in the case of the Tranche
A-2 Term Loan, from LIBOR plus 1.55% to LIBOR plus 2.35%. There are various LIBOR options in the credit facility, and we
elected the one-month LIBOR option as of December 31, 2017. In October 2017, we entered into an interest rate swap with a
notional value of $50.0 million to convert the variable interest rate applicable to our Tranche A-1 Term Loan to a fixed interest
rate, providing a base interest rate under the facility agreement of 1.97% per annum. The interest rate swap matures in January
2023, concurrent with the maturity of our Tranche A-1 Term Loan. As of December 31, 2017, we were not in default under our
credit facility.
On July 18, 2017, in connection with the Combination, we drew $115.8 million on the revolving credit facility and $50.0 million
under the Tranche A-1 Term Loan. In connection with the execution of the credit facility, we incurred $11.2 million in debt issuance
costs.
The following is a summary of amounts outstanding under the credit facility as of December 31, 2017:
Revolving credit facility (1)
Tranche A-1 Term Loan
Unamortized deferred financing costs, net
Unsecured term loan, net
__________________________
December 31, 2017
Interest Rate
Balance
(In thousands)
2.66%
3.17%
$
$
$
115,751
50,000
(3,463)
46,537
(1) As of December 31, 2017, letters of credit with an aggregate face amount of $5.7 million were provided under our revolving credit facility.
Long-term Liquidity Requirements
Our long-term capital requirements consist primarily of maturities under our credit facility and mortgage loans, construction
commitments for development and redevelopment projects and costs related to growing our business, including acquisitions. We
intend to fund these requirements through a combination of sources including debt proceeds, proceeds from asset recapitalizations
and sales, capital from institutional partners that desire to form real estate venture relationships with us and available cash.
Contractual Obligations and Commitments
Below is a summary of our contractual obligations and commitments as of December 31, 2017:
Contractual cash obligations
(principal and interest):
Debt obligations (1) (2)
Operating leases (3)
Capital leases and lease assumption
liabilities
Total
2018
2019
2020
2021
2022
Thereafter
$ 2,581,330
$ 438,149
$ 305,909
$ 297,501
$ 272,901
$ 379,286
$ 887,584
707,134
7,564
7,324
6,939
6,484
5,548
673,275
(In thousands)
58,833
6,122
6,749
6,927
7,110
7,297
24,628
Total contractual cash obligations (4)
$ 3,347,297
$ 451,835
$ 319,982
$ 311,367
$ 286,495
$ 392,131
$ 1,585,487
_________________
(1) One-month LIBOR of 1.56% is applied to loans which are variable (no hedge) or variable with an interest rate cap. Additionally, we assumed
no additional borrowings on construction loans.
55
(2) Excludes our proportionate share of unconsolidated real estate venture indebtedness. See additional information in Off-Balance Sheet
Arrangements section below.
Includes ground leases.
(3)
(4) Excludes obligations related to construction or development contracts, since payments are only due upon satisfactory performance under
the contracts. See Commitments and Contingencies section below for additional information.
As of December 31, 2017, we expect to fund additional capital to certain of our unconsolidated investments totaling approximately
$49.3 million, which we anticipate will be primarily expended over the next two to three years.
Subsequent to the Formation Transaction, our Board of Trustees declared two cash dividends of $0.225 per common share. These
dividends were paid in November 2017 and January 2018. See Note 20 to the financial statements for additional information about
events occurring after December 31, 2017.
Summary of Cash Flows
The following summary discussion of our cash flows is based on the statements of cash flows and is not meant to be an all-inclusive
discussion of the changes in our cash flows for the periods presented below.
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Cash Flows for the Year Ended December 31, 2017
Year Ended December 31,
2017
2016
Change
(In thousands)
$
$
74,183
(7,676)
239,787
$
159,541
(258,807)
51,083
(85,358)
251,131
188,704
Cash and cash equivalents and restricted cash were $338.6 million at December 31, 2017, compared to $32.3 million at
December 31, 2016, an increase of $306.3 million. This increase resulted from $74.2 million of net cash provided by operating
activities, $7.7 million of net cash used in investing activities and $239.8 million of net cash provided by financing activities. Our
outstanding debt was $2.2 billion at December 31, 2017, a $1.0 billion increase from the balance at December 31, 2016 primarily
from mortgages payable assumed in the Combination and borrowings under our credit facility.
Net cash provided by operating activities of $74.2 million primarily comprised: (i) $88.4 million of net income (before $191.9
million of non-cash items and $24.4 million gain on bargain purchase) and (ii) $2.6 million of return on capital from unconsolidated
real estate ventures, partially offset by (iii) $16.8 million of net change in operating assets and liabilities. Non-cash adjustments
of $191.9 million primarily include depreciation and amortization, share-based compensation expense, deferred rent, deferred
income tax benefit, net loss from unconsolidated real estate ventures, bad debt expense and other non-cash items.
Net cash used in investing activities of $7.7 million primarily comprised: (i) $210.6 million of development costs, construction in
progress and real estate additions, (ii) $16.3 million of investments in and advances to unconsolidated real estate ventures, (iii)
$8.8 million of acquisition of interests in unconsolidated real estate ventures, net of cash acquired, and (iv) $2.2 million of other
investments, partially offset by (v) $97.4 million of net cash consideration received in connection with the Combination, (vi) $75.0
million of proceeds from the repayment of a receivable by our former parent, and (vii) $50.9 million repayment of notes receivable.
Net cash provided by financing activities of $239.8 million primarily comprised: (i) $366.2 million of proceeds from borrowings
under mortgages payable, (ii) $160.2 million of net contributions from our former parent, (iii) $115.8 million of proceeds from
borrowings under our revolving credit facility, (iv) $50.0 million of proceeds from borrowings under our unsecured term loan,
partially offset by (v) $272.9 million repayment of mortgages payable, (vi) $115.6 million repayment of borrowings by our former
parent, (vii) $31.1 million of dividends and distributions to noncontrolling interests; (viii) $19.3 million of debt issuance costs and
(ix) $17.8 million of capital lease payments.
Cash Flows for the Year Ended December 31, 2016
Cash and cash equivalents and restricted cash were $32.3 million at December 31, 2016, compared to $80.4 million at December
31, 2015, a decrease of $48.2 million. This decrease resulted from $258.8 million of net cash used in investing activities, partially
offset by $159.5 million of net cash provided by operating activities and $51.1 million of net cash provided by financing activities.
Net cash provided by operating activities of $159.5 million primarily comprised: (i) $196.2 million of net income (before $134.2
million of non-cash items) and (ii) $1.5 million of return on capital from unconsolidated real estate ventures, partially offset by
56
(iii) $38.1 million of net change in operating assets and liabilities. Non-cash adjustments of $134.2 million primarily include
depreciation and amortization, deferred rent, share-based compensation expense and other non-cash items.
Net cash used in investing activities of $258.8 million primarily comprised: (i) $237.8 million of development costs, construction
in progress and real estate additions, (ii) $23.0 million of investments in and advances to unconsolidated real estate ventures, and
(iii) $2.0 million of other investments, partially offset by (iv) $4.0 million of proceeds from repayment of a receivable by our
former parent.
Net cash provided by financing activities of $51.1 million primarily comprised: (i) $79.5 million of proceeds from borrowings
from our former parent partially offset by (ii) $24.4 million repayment of mortgages payable and (iii) $3.8 million of net distributions
to our former parent.
Off-Balance Sheet Arrangements
Unconsolidated Real Estate Ventures
We consolidate entities in which we own less than a 100% equity interest if 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 December 31, 2017, we have investments in and advances to unconsolidated real estate ventures totaling $261.8 million.
For the majority of 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
5 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 (1) guarantee portions of the principal, interest and other amounts in connection with
their borrowings, (2) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against
fraud, misrepresentation and bankruptcy) in connection with their borrowings and (3) provide guarantees to lenders and other
third parties for the completion of development projects. We customarily have agreements with our outside 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.
Amounts that may be required to be paid in future periods in relation to budget overruns or operating losses that are also included
in some of our guarantees are not estimable. Guarantees (excluding environmental) terminate either upon the satisfaction of
specified circumstances or repayment of the underlying debt. At times, we have agreements with our outside partners whereby
we agree to reimburse our partner for their share of any payments made by them under certain guarantees. As of December 31,
2017, the aggregate amount of our principal payment guarantees was approximately $31.0 million for our unconsolidated real
estate ventures.
As of December 31, 2017, we expect to fund additional capital to certain of our unconsolidated investments totaling approximately
$49.3 million, which we anticipate will be primarily expended over the next two to three years.
Reconsideration events could cause us to consolidate these unconsolidated real estate ventures and partnerships in the future. We
evaluate reconsideration events as we become aware of them. Some triggers to be considered are additional contributions required
by each partner and each partners’ ability to make those contributions. Under certain of these circumstances, we may purchase
our partner’s interest. Our unconsolidated real estate ventures are held in entities which appear sufficiently stable to meet their
capital requirements; however, if market conditions worsen and our partners are unable to meet their commitments, there is a
possibility we may have to consolidate these entities.
Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $200.0 million per occurrence and in the aggregate, and property and rental
value insurance coverage with limits of $2.0 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 both terrorist
acts and for nuclear, biological, chemical or radiological terrorism events with limits of $2.0 billion per occurrence. These policies
are partially reinsured by third-party insurance providers.
We will continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. We cannot
anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for deductibles and
losses in excess of the insurance coverage, which could be material.
57
Our debt, consisting of mortgage loans secured by our properties, revolving credit facility and unsecured term loans contain
customary covenants requiring adequate insurance coverage. Although we believe that we currently have adequate insurance
coverage, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. If lenders insist on
greater coverage than we are able to obtain, it could adversely affect the ability to finance or refinance our properties.
Construction Commitments
As of December 31, 2017, we have construction in progress that will require an additional $766.0 million to complete ($676.0
million related to our consolidated entities and $90.0 million related to our unconsolidated real estate ventures at our share), based
on our current plans and estimates, which we anticipate will be primarily expended over the next two to three years. These capital
expenditures are generally due as the work is performed, and we expect to finance them with debt proceeds, proceeds from asset
recapitalizations and sales, and available cash.
Other
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.
In connection with the Formation Transaction, we entered into a Tax Matters Agreement with Vornado that provides special rules
that allocate tax liabilities if the distribution of JBG SMITH shares by Vornado, together with certain related transactions, is not
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, or from the taking of certain restricted actions by us.
Inflation
Substantially all of our office and retail leases contain provisions designed to mitigate the adverse impact of inflation. These
provisions generally increase rental rates or reimbursable expenses during the terms of the lease either at (i) fixed rates, (ii) indexed
escalations (based on the Consumer Price Index of other measures) or (iii) the lesser of a fixed rate or an indexed escalation. We
may be adversely impacted by inflation on the leases that do not contain indexed escalation provisions or when the increases
provided by the escalation provisions are less than inflation. In addition, most of our office and retail leases require the tenant to
pay an allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance. We believe
that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above.
The majority of our multifamily properties are subject to one-year leases, which provide us with the opportunity to adjust rental
rates annually and mitigate the impact of inflation. We do not believe inflation has had a material impact on our historical financial
position or results of operations.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on such real estate. These laws often impose such liability without regard to
whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of remediation or
removal of such substances may be substantial and the presence of such substances, or the failure to promptly remediate such
substances, may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In
connection with the ownership and operation of our assets, we may be potentially liable for such costs. The operations of current
and former tenants at our assets have involved, or may have involved, the use of hazardous materials or generated hazardous wastes.
The release of such hazardous materials and wastes could result in us incurring liabilities to remediate any resulting contamination
if the responsible party is unable or unwilling to do so. In addition, our assets are exposed to the risk of contamination originating
from other sources. While a property owner may not be responsible for remediating contamination that has migrated onsite from an
identifiable and viable offsite source, the contaminant’s presence can have adverse effects on operations and the redevelopment of
our assets.
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 the preparation and issuance of a written report. Soil and/or groundwater subsurface testing is conducted at our assets,
when necessary, to further investigate any issues raised by the initial assessment that could reasonably be expected to pose a material
concern to the property or result in us incurring material environmental liabilities as a result of redevelopment. They may not,
however, have included extensive sampling or subsurface investigations. In each case where the environmental assessments have
identified conditions requiring remedial actions required by law, we have initiated appropriate actions.
Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental
58
assessments did not reveal any material environmental contamination that we believe would have a material adverse effect on our
overall business, financial condition or results of operations, or that have not been anticipated and remediated during site
redevelopment as required by law. Nevertheless, there can be no assurance that the identification of new areas of contamination,
changes in the extent or known scope of contamination, the discovery of additional sites or changes in cleanup requirements would
not result in significant cost to us.
ITEM 7A. 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. Our exposure
to a change in interest rates is summarized in the table below.
(Amounts in thousands)
Debt (contractual balances):
Mortgages payable
Variable rate (1)
Fixed rate (2)
Credit facility (variable rate):
Revolving credit facility
Tranche A-1 Term Loan
Pro rata share of debt of unconsolidated entities
(contractual balances):
Variable rate (1)
Fixed rate (2)
December 31, 2017
December 31, 2016
Weighted
Average
Effective
Interest
Rate
Balance
Effect of 1%
Change in
Base Rates
Balance
Weighted
Average
Effective
Interest
Rate
498,253
1,537,706
2,035,959
3.62% $
4.25%
$
115,751
50,000
2.66% $
3.17%
5,052
—
5,052
1,174
507
$
547,291
620,327
$ 1,167,618
2.11%
5.52%
—
—
—
—
158,154
238,138
396,292
4.40% $
3.79%
$
1,604
—
1,604
$
$
17,050
150,150
167,200
1.87%
3.65%
$
$
$
$
$
_________________
(1)
Includes variable rate mortgages payable with interest rate cap agreements.
(2)
Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements.
The fair value of our debt is calculated 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. As of December 31, 2017 and 2016,
the estimated fair value of our consolidated debt was $2.2 billion and $1.2 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. We do not enter into derivative instruments for speculative purposes. As
of December 31, 2017, the fair value of our interest rate swaps and caps consisted of assets totaling $1.5 million included in "Other
assets, net" in our balance sheet, and liabilities totaling $2.6 million included in "Other liabilities, net" in our balance sheet.
Derivative Financial Instruments Designated as Cash Flow Hedges - Certain derivative financial instruments, consisting of interest
rate swap and cap agreements, are designated as cash flow hedges, and are carried at their estimated fair value on a recurring basis.
We assess the effectiveness of our cash flow 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 and is subsequently reclassified into "Interest
expense" in the period that the hedged forecasted transactions affect earnings. Our cash flow 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
59
counterparty by monitoring the credit worthiness 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 and equity.
As of December 31, 2017, we had interest rate swap and cap agreements which convert variable interest rates applicable to our
$50.0 million Tranche A-1 Term Loan and various mortgages payable with an aggregate notional value of $806.9 million to fixed
rates.
Derivative Financial Instruments Not Designated as Hedges - Certain derivative financial instruments, consisting of interest rate
swap and cap agreements, are considered economic hedges, but not designated as accounting hedges, and are carried at their
estimated fair value on a recurring basis. Realized and unrealized gains are recorded in "Interest expense" in the statements of
operations in the period in which the change occurs. As of December 31, 2017, we had various interest rate swap and cap agreements
assumed in the Combination.
60
ITEM 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Consolidated and Combined Balance Sheets as of December 31, 2017 and 2016
Consolidated and Combined Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated and Combined Statements of Comprehensive Income (Loss) for the years ended December 31, 2017,
2016 and 2015
Consolidated and Combined Statements of Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated and Combined Financial Statements
Page
62
63
64
65
66
67
69
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Trustees of
JBG SMITH Properties
Opinion on the Financial Statements
We have audited the accompanying consolidated and combined balance sheets of JBG SMITH Properties and its subsidiaries (the
"Company"), as described in Note 1, as of December 31, 2017 and 2016, and the related consolidated and combined statements
of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31,
2017, and the related notes and schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In
our opinion, the financial statements referred to above present fairly, in all material aspects, the financial position of the Company
as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2017 in conformity with the accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits. We are a public accounting firm registered with the Public Company Oversight
Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of a Matter
As discussed in Note 1 to the consolidated and combined financial statements, the historical financial results reflect charges for
certain corporate costs allocated by Vornado Realty Trust. These costs may not be reflective of the actual costs which would have
been incurred had the Company operated as an independent, standalone entity separate from Vornado Realty Trust.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
March 12, 2018
We have served as the Company's auditor since 2016.
62
JBG SMITH PROPERTIES
Consolidated and Combined Balance Sheet
(In thousands, except par value amounts)
ASSETS
Real estate, at cost:
Land and improvements
Buildings and improvements
Construction in progress, including land
Real estate held for sale
Less accumulated depreciation
Real estate, net
Cash and cash equivalents
Restricted cash
Tenant and other receivables, net
Deferred rent receivable, net
Investments in and advances to unconsolidated real estate ventures
Receivable from former parent
Other assets, net
TOTAL ASSETS
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Liabilities:
Mortgages payable, net
Revolving credit facility
Unsecured term loan, net
Payable to former parent
Accounts payable and accrued expenses
Other liabilities, net
Total liabilities
Commitments and contingencies
Redeemable noncontrolling interests
Shareholders' equity:
Preferred shares, $0.01 par value - 200,000 shares authorized, none issued
Common shares, $0.01 par value - 500,000 shares authorized and 117,955 shares issued and
outstanding at December 31, 2017
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total shareholders' equity of JBG SMITH Properties
Former parent equity
Noncontrolling interests in consolidated subsidiaries
Total equity
December 31,
2017
December 31,
2016
$
1,368,294
$
3,670,268
978,942
8,293
6,025,797
(1,011,330)
5,014,467
316,676
21,881
46,734
146,315
261,811
—
263,923
939,592
3,064,466
151,333
—
4,155,391
(930,769)
3,224,622
29,000
3,263
33,380
136,582
45,776
75,062
112,955
$
$
6,071,807
$
3,660,640
2,025,692
$
1,165,014
115,751
46,537
—
138,607
161,277
—
—
283,232
40,923
49,487
2,487,864
1,538,656
609,129
—
1,180
3,063,625
(95,809)
1,612
2,970,608
—
4,206
2,974,814
—
—
—
—
—
—
—
2,121,689
295
2,121,984
3,660,640
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY $
6,071,807
$
See accompanying notes to the consolidated and combined financial statements.
63
JBG SMITH PROPERTIES
Consolidated and Combined Statements of Operations
(In thousands, except per share data)
REVENUE
Property rentals
Tenant reimbursements
Third-party real estate services, including reimbursements
Other income
Total revenue
EXPENSES
Depreciation and amortization
Property operating
Real estate taxes
General and administrative:
Corporate and other
Third-party real estate services
Share-based compensation related to Formation Transaction
Transaction and other costs
Total operating expenses
OPERATING INCOME (LOSS)
Loss from unconsolidated real estate ventures, net
Interest and other income, net
Interest expense
Loss on extinguishment of debt
Gain on bargain purchase
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE)
Income tax benefit (expense)
NET INCOME (LOSS)
Net loss attributable to redeemable noncontrolling interests
Net loss attributable to noncontrolling interest
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
EARNINGS (LOSS) PER COMMON SHARE:
Basic
Diluted
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - basic and diluted
DIVIDENDS DECLARED PER COMMON SHARE
See accompanying notes to the consolidated and combined financial statements.
Year Ended December 31,
2016
2015
2017
$
436,625
$
401,595
$
389,810
37,985
63,236
5,167
543,013
161,659
111,055
66,434
47,131
51,919
29,251
127,739
595,188
(52,175)
(4,143)
1,788
(58,141)
(701)
24,376
(88,996)
9,912
(79,084)
7,328
3
37,661
33,882
5,381
478,519
133,343
100,304
57,784
48,753
19,066
—
6,476
365,726
112,793
(947)
2,992
(51,781)
—
—
63,057
(1,083)
61,974
—
—
40,476
29,467
10,854
470,607
144,984
101,511
58,874
44,424
18,217
—
—
368,010
102,597
(4,283)
2,557
(50,823)
—
—
50,048
(420)
49,628
—
—
$
$
$
$
(71,753) $
61,974
$
49,628
(0.70) $
(0.70) $
0.62
0.62
$
$
0.49
0.49
105,359
100,571
100,571
0.45
$
— $
—
64
JBG SMITH PROPERTIES
Consolidated and Combined Statements of Comprehensive Income (Loss)
(In thousands)
NET INCOME (LOSS)
$
(79,084) $
61,974
$
49,628
Year Ended December 31,
2016
2015
2017
OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of derivative financial instruments
Reclassification of net loss on derivative financial instruments
Other comprehensive income
COMPREHENSIVE INCOME (LOSS)
Comprehensive loss attributable to redeemable noncontrolling interests
Comprehensive loss attributable to noncontrolling interests
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS
See accompanying notes to the consolidated and combined financial statements.
1,438
399
1,837
—
—
—
—
—
—
(77,247)
61,974
49,628
7,103
3
—
—
—
—
$
(70,141) $
61,974
$
49,628
65
JBG SMITH PROPERTIES
Consolidated and Combined Statements of Equity
(In thousands)
Common Shares
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Former
Parent
Equity
Noncontrolling
Interests
Total
Equity
$ 1,988,347
$
568
$1,988,915
49,628
4,506
16,495
—
—
(53)
49,628
4,506
16,442
2,058,976
515
2,059,491
BALANCE AT JANUARY 1, 2015
Net income attributable to former parent
Deferred compensation shares and options, net
Contributions from former parent, net
BALANCE AT DECEMBER 31, 2015
Net income attributable to former parent
Deferred compensation shares and options, net
Distributions to former parent, net
BALANCE AT DECEMBER 31, 2016
Net loss attributable to common shareholders
— $
— $
— $
(42,729) $
Deferred compensation shares and options, net
Contributions from former parent, net
Issuance of common limited partnership units
at the Separation
—
—
—
Issuance of common shares at the Separation
94,736
Issuance of common shares in connection with
the Combination
23,219
Noncontrolling interests acquired in connection
with the Combination
Dividends declared on common shares
($0.45 per common share)
Distributions to noncontrolling interests
Contributions from noncontrolling interests
Redeemable noncontrolling interest redemption
value adjustment and other comprehensive
income allocation
Other comprehensive income
—
—
—
—
—
—
—
—
—
947
233
—
—
—
—
—
—
—
—
—
2,329,632
864,685
—
—
—
—
(130,692)
—
—
—
—
—
—
—
(53,080)
—
—
—
—
61,974
4,502
(3,763)
2,121,689
(29,024) (1)
1,526
333,020
(96,632)
—
—
—
—
— (2,330,579)
—
—
—
—
—
(225)
1,837
—
—
—
—
—
—
—
—
—
—
(220)
61,974
4,502
(3,983)
295
$2,121,984
(3)
(71,756)
—
—
—
—
—
1,526
333,020
(96,632)
—
864,918
3,586
3,586
—
(53,080)
(171)
499
(171)
499
—
—
(130,917)
1,837
$
4,206
$2,974,814
BALANCE AT DECEMBER 31, 2017
117,955
$
1,180
$ 3,063,625
$
(95,809) $
1,612
$
_______________
(1)
Net loss incurred from January 1, 2017 through July 17, 2017 is attributable to our former parent as it was the sole shareholder through July 17, 2017. See Note 1 for additional
information.
See accompanying notes to the consolidated and combined financial statements.
66
JBG SMITH PROPERTIES
Consolidated and Combined Statements of Cash Flows
(In thousands)
OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Share-based compensation expense
Depreciation and amortization, including amortization of debt issuance costs
Deferred rent
Loss from unconsolidated real estate ventures, net
Amortization of above- and below-market lease intangibles, net
Amortization of lease incentives
Return on capital from unconsolidated real estate ventures
Gain on bargain purchase
Loss on extinguishment of debt
Realized loss on interest rate swaps and caps
Unrealized gain on interest rate swaps and caps
Bad debt expense
Other non-cash items
Deferred tax benefit
Changes in operating assets and liabilities:
Tenant and other receivables
Other assets, net
Accounts payable and accrued expenses
Other liabilities, net
Net cash provided by operating activities
INVESTING ACTIVITIES:
Development costs, construction in progress and real estate additions
Cash and restricted cash received in connection with the Combination, net
Acquisition of interests in unconsolidated real estate ventures, net of cash acquired
Distributions of capital from unconsolidated real estate ventures
Investments in and advances to unconsolidated real estate ventures
Repayment of notes receivable
Other investments
Proceeds from repayment of receivable from former parent
Net cash used in investing activities
FINANCING ACTIVITIES:
Contributions from (distributions to) former parent, net
Repayment of borrowings from former parent
Proceeds from borrowings from former parent
Capital lease payments
Borrowings under mortgages payable
Borrowings under revolving credit facility
Borrowings under unsecured term loan
Repayments of mortgages payable
Debt issuance costs
Dividends paid to common shareholders
Distributions to redeemable noncontrolling interests
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of the year
Year Ended December 31,
2016
2015
2017
$
(79,084) $
61,974
$
49,628
33,693
164,580
(10,388)
4,143
(862)
4,023
2,563
(24,376)
701
27
(1,348)
3,807
3,928
(10,408)
(2,098)
(23,481)
16,160
(7,397)
74,183
(210,593)
97,416
(8,834)
6,929
(16,321)
50,934
(2,207)
75,000
(7,676)
160,203
(115,630)
4,000
(17,827)
366,239
115,751
50,000
(272,905)
(19,287)
(26,540)
(4,556)
357
(18)
239,787
306,294
32,263
4,502
135,072
(15,551)
947
(1,353)
3,592
1,520
—
—
—
—
751
6,236
—
(3,693)
(16,614)
7,667
(25,509)
159,541
(237,814)
—
—
—
(23,027)
—
(1,966)
4,000
(258,807)
(3,763)
—
79,500
—
—
—
—
(24,364)
(70)
—
—
—
(220)
51,083
(48,183)
80,446
4,506
146,985
(10,929)
4,283
(2,797)
2,570
1,348
—
—
—
—
1,407
626
—
(428)
(13,667)
(4,004)
(1,298)
178,230
(234,285)
—
—
—
(7,865)
—
(1,467)
7,000
(236,617)
16,495
(13,600)
96,512
—
341,460
—
—
(315,824)
(2,359)
—
—
—
(13)
122,671
64,284
16,162
Cash and cash equivalents and restricted cash at end of the year
$
338,557
$
32,263
$
80,446
67
JBG SMITH PROPERTIES
Consolidated and Combined Statements of Cash Flows
(In thousands)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
AT END OF THE YEAR:
Cash and cash equivalents
Restricted cash
Cash and cash equivalents and restricted cash
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH
INFORMATION:
Transfer of mortgage payable to former parent
Cash paid for interest (net of capitalized interest of $12,727, $4,076 and $6,437 in
2017, 2016 and 2015)
Accrued capital expenditures included in accounts payable and accrued expenses
Write-off of fully depreciated assets
Accrued lease incentives
Deferred interest on mortgages payable
Cash payments for income taxes
Accrued dividends to common shareholders
Accrued distributions to redeemable noncontrolling interests
Acquisition of consolidated real estate venture (1)
Non-cash transactions related to the Formation Transaction: (2)
Issuance of common limited partnership units at the Separation
Issuance of common shares at the Separation
Issuance of common shares in connection with the Combination
Issuance of common limited partnership units in connection with the Combination
Adjustment to record redeemable noncontrolling interest at redemption value
Contribution from former parent in connection with the Separation
Year Ended December 31,
2016
2015
2017
$
$
316,676
21,881
338,557
$
$
29,000
3,263
32,263
$
$
74,966
5,480
80,446
$
115,630
$
115,022
$
—
52,388
12,445
55,998
—
3,714
3,396
26,540
4,557
5,420
96,632
2,330,579
864,918
359,967
130,692
172,817
45,373
8,851
100,076
—
—
1,165
—
—
—
—
—
—
—
—
—
54,055
29,400
23,155
30,514
—
677
—
—
—
—
—
—
—
—
—
_______________
(1) See Note 11 for additional information.
(2) See Note 3 for information regarding assets, liabilities and noncontrolling interests acquired in the Formation Transaction.
See accompanying notes to the consolidated and combined financial statements.
68
JBG SMITH PROPERTIES
Notes to Consolidated and Combined Financial Statements
For the years ended December 31, 2017, 2016 and 2015
1.
Organization and Basis of Presentation
Organization
JBG SMITH Properties ("JBG SMITH") was organized by Vornado Realty Trust ("Vornado" or "former parent") as a Maryland
real estate investment trust ("REIT") on October 27, 2016 (capitalized on November 22, 2016). JBG SMITH was formed for the
purpose of receiving, via the spin-off on July 17, 2017 (the "Separation"), substantially all of the assets and liabilities of Vornado’s
Washington, DC segment, which operated as Vornado / Charles E. Smith, (the "Vornado Included Assets"). On July 18, 2017, JBG
SMITH acquired the management business and certain assets and liabilities (the "JBG Assets") of The JBG Companies ("JBG")
(the "Combination"). The Separation and the Combination are collectively referred to as the "Formation Transaction." Unless the
context otherwise requires, all references to "we," "us," and "our," refer to the Vornado Included Assets (our predecessor and
accounting acquirer) for periods prior to the Separation and to JBG SMITH for periods after the Separation. References to "our
share" refers to our ownership percentage of consolidated and unconsolidated assets in real estate ventures. Substantially all of
our assets are held by, and our operations are conducted through, JBG SMITH Properties LP ("JBG SMITH LP"), our operating
partnership.
Prior to the Separation from Vornado, JBG SMITH was a wholly owned subsidiary of Vornado and had no material assets or
operations. On July 17, 2017, Vornado distributed 100% of the then outstanding common shares of JBG SMITH on a pro rata
basis to the holders of its common shares. Prior to such distribution by Vornado, Vornado Realty L.P. ("VRLP"), Vornado's operating
partnership, distributed common limited partnership units ("OP Units") in JBG SMITH LP on a pro rata basis to the holders of
VRLP's common limited partnership units, consisting of Vornado and the other common limited partners of VRLP. Following such
distribution by VRLP and prior to such distribution by Vornado, Vornado contributed to JBG SMITH all of the OP Units it received
in exchange for common shares of JBG SMITH. Each Vornado common shareholder received one JBG SMITH common share
for every two Vornado common shares held as of the close of business on July 7, 2017 (the "Record Date"). Vornado and each of
the other limited partners of VRLP received one JBG SMITH LP OP Unit for every two common limited partnership units in
VRLP held as of the close of business on the Record Date. Our operations are presented as if the transfer of the Vornado Included
Assets had been consummated prior to all historical periods presented in the accompanying consolidated and combined financial
statements at the carrying amounts of such assets and liabilities reflected in Vornado’s books and records.
In connection with the Separation, JBG SMITH issued 94.7 million common shares and JBG SMITH LP issued 5.8 million OP
Units to parties other than JBG SMITH. In connection with the Combination, JBG SMITH issued 23.2 million common shares
and JBG SMITH LP issued 13.9 million OP Units to parties other than JBG SMITH. As of the completion of the Formation
Transaction there were 118.0 million JBG SMITH common shares outstanding and 19.8 million JBG SMITH LP OP Units
outstanding that were owned by parties other than JBG SMITH. As of December 31, 2017, we, as its sole general partner, controlled
JBG SMITH LP and owned 85.6% of its OP Units.
We own and operate a portfolio of high-quality office and multifamily assets, many of which are amenitized with ancillary retail.
Our portfolio reflects our longstanding strategy of owning and operating assets within Metro-served submarkets in the Washington,
DC metropolitan area that have high barriers to entry and key urban amenities, including being within walking distance of a Metro
station.
As of December 31, 2017, our Operating Portfolio consists of 69 operating assets comprising 51 office assets totaling over 13.7
million square feet (11.8 million square feet at our share), 14 multifamily assets totaling 6,016 units (4,232 units at our share) and
four other assets totaling approximately 765,000 square feet (348,000 square feet at our share). Additionally, we have (i) ten assets
under construction comprising four office assets totaling approximately 1.3 million square feet (1.2 million square feet at our
share), five multifamily assets totaling 1,767 units (1,568 units at our share) and one other asset totaling approximately 41,100
square feet (4,100 square feet at our share); and (ii) 43 future development assets totaling approximately 21.4 million square feet
(17.9 million square feet at our share) of estimated potential development density.
Our revenues are derived primarily from leases with office and multifamily tenants, including fixed rents and reimbursements
from tenants for certain expenses such as real estate taxes, property operating expenses, and repairs and maintenance. In addition,
we have a third-party real estate services business that provides fee-based real estate services to the legacy funds formerly organized
by The JBG Companies ("JBG Legacy Funds") and other third parties.
69
As of December 31, 2017, five of our assets in the aggregate generated approximately 25% of our share of annualized rent. Only
the U.S. federal government accounted for 10% or more of our rental revenue, which consists of property rentals and tenant
reimbursements, during each of the three years in the period ended December 31, 2017 as follows:
(Dollars in thousands)
Year Ended December 31,
2016
2015
2017
Rental revenue from the U.S. federal government
$
92,192
$
103,864
$
102,951
Percentage of office segment rental revenue
Percentage of total rental revenue
24.5%
19.4%
29.6%
23.6%
29.7%
23.9%
Basis of Presentation
The accompanying consolidated and combined financial statements and notes are prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). All intercompany transactions and balances have been eliminated.
The accompanying consolidated and combined financial statements include the accounts of JBG SMITH and our wholly owned
subsidiaries and those other entities, including JBG SMITH LP, in which we have a controlling financial interest, including where
we have been determined to be the primary beneficiary of a variable interest entity ("VIE"). See Note 6 for additional information
on our consolidated VIEs. The portions of the equity and net income (loss) of consolidated subsidiaries that are not attributable to
JBG SMITH are presented separately as amounts attributable to noncontrolling interests in the consolidated and combined financial
statements.
References to the financial statements refer to our consolidated and combined financial statements as of December 31, 2017 and
2016, and for each of the three years in the period ended December 31, 2017. References to the balance sheets refer to our
consolidated and combined balance sheets as of December 31, 2017 and 2016. References to the statement of operations refer to
our consolidated and combined statements of operations for each of the three years in the period ended December 31, 2017.
References to the statement of cash flows refer to our consolidated and combined statements of cash flows for each of the three
years in the period ended December 31, 2017.
Combination
JBG SMITH and the Vornado Included Assets were under common control of Vornado for all periods prior to the Separation. The
transfer of the Vornado Included Assets from Vornado to JBG SMITH was completed prior to the Separation, at net book values
(historical carrying amounts) carved out from Vornado’s books and records. For purposes of the formation of JBG SMITH, the
Vornado Included Assets were designated as the predecessor and the accounting acquirer of the JBG Assets. Consequently, the
financial statements of JBG SMITH, as set forth herein, represent a continuation of the financial information of the Vornado
Included Assets as the predecessor and accounting acquirer such that the historical financial information included herein as of any
date or for any periods on or prior to the completion of the Combination represents the pre-Combination financial information of
the Vornado Included Assets. The financial statements reflect the common shares as of the date of the Separation as outstanding
for all periods prior to July 17, 2017. The acquisition of the JBG Assets completed subsequently by JBG SMITH was accounted
for as a business combination using the acquisition method whereby identifiable assets acquired and liabilities assumed are recorded
at the acquisition-date fair values and income and cash flows from the operations were consolidated into the financial statements
of JBG SMITH commencing July 18, 2017. Consequently, the financial statements for the periods before and after the Formation
Transaction are not directly comparable.
The accompanying statements of operations for the year ended December 31, 2017 include our consolidated accounts and the
combined accounts of the Vornado Included Assets. Accordingly, the results of operations for the year ended December 31, 2017
reflect the aggregate operations and changes in cash flows and equity on a combined basis for the period prior to July 17, 2017
and on a consolidated basis for the period subsequent to July 17, 2017. The accompanying financial statements for the years ended
December 31, 2016 and 2015 include the Vornado Included Assets. Therefore, our results of operations, cash flows and financial
condition set forth in this report are not necessarily indicative of our future results of operations, cash flows or financial condition
as an independent, publicly traded company.
The historical financial results for the Vornado Included Assets reflect charges for certain corporate costs allocated by the former
parent which we believe are reasonable. These charges were based on either actual costs incurred or a proportion of costs estimated
to be applicable to the Vornado Included Assets based on an analysis of key metrics, including total revenues. Such costs do not
necessarily reflect what the actual costs would have been if JBG SMITH had been operating as a separate standalone public
company. See Note 18 for additional information.
70
Reclassifications
Certain prior period data have been reclassified to conform to the current period presentation as follows:
• Reclassification of $4.0 million of investments to "Other assets" on our balance sheet as of December 31, 2016 as a result
of the revision in the line item "Investments in and advances to unconsolidated real estate ventures" on our balance sheet
to include only real estate investments.
• Reclassification of $19.1 million and $18.2 million of expenses for the years ended December 31, 2016 and 2015 to
"General and administrative: third-party real estate services" from "Property operating expenses" as it relates to expenses
incurred to provide third-party real estate services. Additionally, we reclassified $16.4 million and $15.9 million of income
for the years ended December 31, 2016 and 2015 to "Third-party real estate services, including reimbursements" from
"Other income" as it relates to revenue earned from providing third-party real estate services.
2.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. The most significant of these estimates
include: (i) the underlying cash flows used to establish the fair values recorded in connection with the Combination and used in
assessing impairment, (ii) the determination of useful lives for tangible and intangible assets and (iii) the allowance for doubtful
accounts. Actual results could differ from those estimates.
Business Combinations
We account for business combinations, including the acquisition of real estate, using the acquisition method pursuant to which we
recognize and measure the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree at their
acquisition date fair values. Accordingly, we estimate the fair values of acquired tangible assets (consisting of real estate, cash and
cash equivalents, tenant and other receivables, investments in unconsolidated real estate ventures and other assets, as applicable),
identified intangible assets and liabilities (consisting of the value of in-place leases, above- and below-market leases, options to
enter into ground leases and management contracts, as applicable), assumed debt and other liabilities, and noncontrolling interests,
as applicable, based on our evaluation of information and estimates available at that date. Based on these estimates, we allocate
the purchase price to the identified assets acquired and liabilities assumed. Any excess of the purchase price over the estimated
fair value of the net assets acquired is recorded as goodwill. Any excess of the fair value of assets acquired over the purchase price
is recorded as a gain on bargain purchase. If, up to one year from the acquisition date, information regarding the fair value of the
net assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments are made on a prospective
basis to the purchase price allocation, which may include adjustments to identified assets, assumed liabilities, and goodwill or the
gain on bargain purchase, as applicable. The results of operations of acquisitions are prospectively included in our financial
statements beginning with the date of the acquisition. Transaction costs related to business combinations are expensed as incurred
and included in "Transaction and other costs" in our statements of operations.
The fair values of buildings are determined using the "as-if vacant" approach whereby we use discounted income or cash flow
models with inputs and assumptions that we believe are consistent with current market conditions for similar assets. The most
significant assumptions in determining the allocation of the purchase price to buildings are the exit capitalization rate, discount
rate, estimated market rents and hypothetical expected lease-up periods. We assess fair value of land based on market comparisons
and development projects using an income approach of cost plus a margin.
The fair values of identified intangible assets are determined based on the following:
• The value allocable to the above- or below-market component of an acquired in-place lease is determined based upon the
present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between
(i) the contractual amounts to be received pursuant to the lease over its remaining term and (ii) management’s estimate of
the amounts that would be received using market rates over the remaining term of the lease. Amounts allocated to above-
market leases are recorded as "Identified intangible assets" in "Other assets, net" in the balance sheets, and amounts allocated
to below-market leases are recorded as "Lease intangible liabilities" in "Other liabilities, net" in the balance sheets. These
intangibles are amortized to "Property rentals" in our statements of operations over the remaining terms of the respective
leases.
•
Factors considered in determining the value allocable to in-place leases during hypothetical lease-up periods related to space
71
that is leased at the time of acquisition include (i) lost rent and operating cost recoveries during the hypothetical lease-up
period and (ii) theoretical leasing commissions required to execute similar leases. These intangible assets are recorded as
"Identified intangible assets" in "Other assets, net" in the balance sheets and are amortized to "Depreciation and amortization
expenses" in our statements of operations over the remaining term of the existing lease.
• The fair value of the in-place property management, leasing, asset management, and development and construction
management contracts is based on revenue and expense projections over the estimated life of each contract discounted using
a market discount rate. These management contract intangibles are amortized to "Depreciation and amortization expenses"
in our statements of operations over the weighted average life of the management contracts.
The fair value of investments in unconsolidated real estate ventures and related noncontrolling interests is based on the estimated
fair values of the identified assets acquired and liabilities assumed of each venture, including future expected cash flows from
promote interests.
The fair value of the mortgages payable assumed was determined using current market interest rates for comparable debt financings.
The fair values of the interest rate swaps and caps are based on the estimated amounts we would receive or pay to terminate the
contract at the acquisition date and are determined using interest rate pricing models and observable inputs. The carrying value of
cash, restricted cash, working capital balances, leasehold improvements and equipment, and other assets acquired and liabilities
assumed approximates fair value.
Real Estate
Real estate is carried at cost, net of accumulated depreciation and amortization. Maintenance and repairs are expensed as incurred
and are included in "Property operating expenses" in our statements of operations. As real estate is undergoing redevelopment
activities, all property operating expenses directly associated with and attributable to the redevelopment, including interest expense,
are capitalized to the extent that we believe such costs are recoverable through the value of the property. The capitalization period
ends when redevelopment activities are substantially complete. General and administrative costs are expensed as incurred.
Depreciation requires an estimate of the useful life of each property and improvement as well as an allocation of the costs associated
with a property to its various components. Depreciation is recognized on a straight line basis over estimated useful lives, which
range from three to 40 years. Tenant improvements are amortized on a straight line basis over the lives of the related leases, which
approximate the useful lives of the tenant improvements.
Construction in progress, including land, is carried at cost, and no depreciation is recorded. Real estate undergoing significant
renovations and improvements is considered to be under development. All direct and indirect costs related to development activities
are capitalized into "Construction in progress, including land" on our balance sheets, except for certain demolition costs, which
are expensed as incurred. Direct development costs incurred include: pre-development expenditures directly related to a specific
project, development and construction costs, interest, insurance and real estate taxes. Indirect development costs include: employee
salaries and benefits, travel and other related costs that are directly associated with the development. Our method of calculating
capitalized interest expense is based upon applying our weighted average borrowing rate to the actual accumulated expenditures
if the property does not have property specific debt. If the property is encumbered by specific debt, we will capitalize both the
interest incurred applicable to that debt and additional interest expense using our weighted average borrowing rate for any
accumulated expenditures in excess of the principal balance of the debt encumbering the property. The capitalization of such
expenses ceases when the real estate is ready for its intended use, but no later than one-year from substantial completion of major
construction activity. If we determine that a project is no longer viable, all pre-development project costs are immediately expensed.
Our assets and related intangible assets are individually reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset
exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Estimates
of future cash flows are based on our current plans, intended holding periods and available market information at the time the
analyses are prepared. An impairment loss is recognized if the carrying amount of the asset is not recoverable and is measured
based on the excess of the property’s carrying amount over its estimated fair value. If our estimates of future cash flows, anticipated
holding periods, or fair values change, based on market conditions or otherwise, our evaluation of impairment charges may be
different and such differences could be material to our financial statements. Estimates of future cash flows are subjective and are
based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from
actual results.
Real estate is classified as held for sale when all the necessary criteria are met. The criteria include (i) management, having the
authority to approve action, commits to a plan to sell the property in its present condition, (ii) the sale of the property is at a price
reasonable in relation to its current fair value and (iii) the sale is probable and expected to be completed within one year. Real
estate held for sale is carried at the lower of carrying amounts or estimated fair value less disposal costs. Depreciation and
amortization is not recognized on real estate classified as held for sale.
72
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with a purchase date life to maturity of three months or less and
are carried at cost, which approximates fair value, due to their short term maturities.
Restricted Cash
Restricted cash consists primarily of security deposits held on behalf of our tenants and cash escrowed under loan agreements
for debt service, real estate taxes, property insurance and capital improvements.
Allowance for Doubtful Accounts
We periodically evaluate the collectability of amounts due from tenants, including the receivable arising from deferred rent
receivable, and maintain an allowance for doubtful accounts for the estimated losses resulting from the inability of tenants to make
required payments under lease agreements. We exercise judgment in establishing these allowances and consider payment history
and current credit status in developing these estimates.
Investments in and Advances to Real Estate Ventures
We analyze our real estate ventures to determine whether the entities should be consolidated. If it is determined that these investments
do not require consolidation because the entities are not VIEs in accordance with the Consolidation Topic of the Financial Accounting
Standards Board ("FASB"), Accounting Standards Codification ("ASC"), we are not considered the primary beneficiary of the
entities determined to be VIEs, we do not have voting control, and/or the limited partners (or non-managing members) have
substantive participatory rights, then the selection of the accounting method used to account for our investments in unconsolidated
real estate ventures is generally determined by our voting interests and the degree of influence we have over the entity. Management
uses its judgment when determining if we are the primary beneficiary of, or have a controlling financial interest in, an entity in
which we have a variable interest. Factors considered in determining whether we have the power to direct the activities that most
significantly impact the entity’s economic performance include risk and reward sharing, experience and financial condition of the
other partners, voting rights, involvement in day-to-day capital and operating decisions and the extent of our involvement in the
entity.
We use the equity method of accounting for investments in unconsolidated real estate ventures when we own 20% or more of the
voting interests and have significant influence but do not have a controlling financial interest, or if we own less than 20% of the
voting interests but have determined that we have significant influence. Under the equity method, we record our investments in
and advances to these entities in our balance sheets, and our proportionate share of earnings or losses earned by the real estate
venture is recognized in "Income (loss) from unconsolidated real estate ventures, net" in the accompanying statements of operations.
We earn revenues from the management services we provide to unconsolidated entities. These fees are determined in accordance
with the terms specific to each arrangement and may include property and asset management fees or transactional fees for leasing,
acquisition, development and construction, financing, and legal services provided. We account for this revenue gross of our
ownership interest in each respective real estate venture and recognize such revenue in "Third-party real estate services, including
reimbursements" in our statements of operations. Our proportionate share of related expenses is recognized in "Income (loss) from
unconsolidated real estate ventures, net" in our statements of operations. We may also earn incremental promote distributions if
certain financial return benchmarks are achieved upon ultimate disposition of the underlying properties. Management fees are
recognized when earned, and promote fees are recognized when certain earnings events have occurred, and the amount is
determinable and collectible. Any promote fees are reflected in "Income (loss) from unconsolidated real estate ventures, net" in
our statements of operations.
With regard to distributions from unconsolidated real estate ventures, we use the information that is available to us to determine
the nature of the underlying activity that generated the distributions. Using the nature of distribution approach, cash flows generated
from the operations of an unconsolidated real estate venture are classified as a return on investment (cash inflow from operating
activities) and cash flows that from property sales, debt refinancing or sales of our investments are classified as a return of investment
(cash inflow from investing activities).
On a periodic basis, we evaluate our investments in unconsolidated entities for impairment. We assess whether there are any
indicators, including underlying property operating performance and general market conditions, that the value of our investments
in unconsolidated real estate ventures may be impaired. An investment in a real estate venture is considered impaired if we determine
that its fair value is less than the net carrying value of the investment in that real estate venture on an other-than-temporary basis.
Cash flow projections for the investments consider property level factors such as expected future operating income, trends and
prospects, as well as the effects of demand, competition and other factors. We consider various qualitative factors to determine if
a decrease in the value of our investment is other-than-temporary. These factors include age of the venture, our intent and ability
to retain our investment in the entity, financial condition and long-term prospects of the entity and relationships with our partners
and banks. If we believe that the decline in the fair value of the investment is temporary, no impairment charge is recorded. If our
73
analysis indicates that there is an other-than temporary impairment related to the investment in a particular real estate venture, the
carrying value of the venture will be adjusted to an amount that reflects the estimated fair value of the investment.
Intangibles
Intangible assets consist of in-place leases, below-market ground rent obligations, above-market real estate leases and options to
enter into ground lease that were recorded in connection with the acquisition of properties. Intangible assets also include management
and leasing contracts acquired in the Combination. Intangible liabilities consist of above-market ground rent obligations and below-
market real estate leases that are also recorded in connection with the acquisition of properties. Both intangible assets and liabilities
are amortized and accreted using the straight-line method over their applicable remaining useful life. When a lease or contract is
terminated early, any remaining unamortized or unaccreted balances are charged to earnings. The useful lives of intangible assets
are evaluated each reporting period with any changes in estimated useful lives being accounted for over the revised remaining
useful life.
Deferred Costs
Deferred financing costs consist of loan issuance costs directly related to financing transactions that are deferred and amortized
over the term of the related loan as a component of interest expense. Unamortized deferred financing costs related to our mortgages
payable and unsecured term loan are presented as a direct deduction from the carrying amounts of the related debt instruments,
while such costs related to our revolving credit facility are included in other assets.
Direct salaries, third-party fees and other costs incurred by us to originate a lease are capitalized in "Other assets, net" in the balance
sheets and are amortized against the respective leases using the straight-line method over the term of the related leases.
Noncontrolling Interests
We identify our noncontrolling interests separately within the equity section on the balance sheets. Amounts of consolidated net
income (loss) attributable to redeemable noncontrolling interests and to the noncontrolling interests in consolidated subsidiaries
are presented separately in the statements of operations.
Redeemable Noncontrolling Interests - Redeemable noncontrolling interests consists of OP Units issued in conjunction with the
Formation Transaction and our venture partner's interest in 965 Florida Avenue. The OP Units are redeemable for our common
shares or cash beginning August 1, 2018, subject to certain limitations. Redeemable noncontrolling interests are generally
redeemable at the option of the holder and are presented in the mezzanine section between total liabilities and shareholders' equity
on the balance sheets. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end
of each reporting period, but no less than its initial carrying value, with such adjustments recognized in "Additional paid-in capital".
See Note 11 for additional information.
Noncontrolling Interests - Noncontrolling interests represents the portion of equity that we do not own in entities we consolidate,
including interests in consolidated real estate ventures.
Derivative Financial Instruments and Hedge Accounting
Derivative financial instruments are used at times to manage exposure to variable interest rate risk. Derivative financial instruments
are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting designation.
Derivative Financial Instruments Designated as Cash Flow Hedges - Certain derivative financial instruments, consisting of interest
rate swap and cap agreements, are designated as cash flow hedges, and are carried at their estimated fair value on a recurring basis.
We assess the effectiveness of our cash flow 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 and is subsequently reclassified into "Interest
expense" in the period that the hedged forecasted transactions affect earnings. Our cash flow 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 credit worthiness of the counterparty.
Derivative instruments and hedging activities require management to make judgments on the nature of its derivatives and their
effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported in the
statements of operations or as a component of comprehensive income and as a component of shareholders’ equity on the balance
sheets.
74
Derivative Financial Instruments Not Designated as Hedges - Certain derivative financial instruments, consisting of interest rate
swap and cap agreements, are considered economic hedges, but not designated as accounting hedges, and are carried at their
estimated fair value on a recurring basis. Realized and unrealized gains are recorded in "Interest expense" in the statements of
operations in the period in which the change occurs.
Fair Value of Assets and Liabilities
ASC 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). ASC 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 value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair
value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to
the extent possible as well as consider counterparty credit risk in our assessment of fair value.
Revenue Recognition
Property rentals income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported
on a straight-line basis over the non-cancellable term of the lease, which includes the effects of periodic step-ups in rent and rent
abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space or
controls the physical use of the leased space and the leased space is substantially ready for its intended use. In circumstances where
we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a
reduction of property rentals revenue on a straight-line basis over the term of the lease. Differences between rental income recognized
and amounts due under the respective lease agreements are recorded as an increase or decrease to "Deferred rent receivable, net"
on our balance sheets. Property rentals also includes the amortization/accretion of acquired above-and below-market leases.
Tenant reimbursements provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective
assets. Tenant reimbursements are accrued in the same periods as the related expenses are incurred.
Third-party real estate services revenue, including reimbursements, is determined in accordance with the terms specific to each
arrangement and may include property and asset management fees or transactional fees for leasing, acquisition, development and
construction, financing, and legal services provided. These fees are determined in accordance with the terms specific to each
arrangement and are recognized as the related services are performed. Development and construction fees earned from providing
services to our unconsolidated real estate ventures are recorded on a percentage of completion basis.
Third-Party Real Estate Services Expenses
Third-party real estate services expenses include the costs associated with the management services provided to our unconsolidated
real estate ventures and other third parties. We allocate personnel and other overhead costs using the estimates of the time spent
performing services for our third-party real estate services and other allocation methodologies.
Income Taxes
We intend to elect 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.
Prior to the Separation, Vornado operated as a REIT and distributed 100% of taxable income to its shareholders, accordingly, no
provision for federal income taxes has been made in the accompanying financial statements for the periods prior to the Separation.
We intend to adhere to these requirements and maintain our REIT status in future periods.
As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions to shareholders. Future distributions
will be declared and paid at the discretion of the Board of Trustees and will depend upon cash generated by operating activities,
our financial condition, capital requirements, annual dividend requirements under the REIT provisions of the Code, as amended,
and such other factors as our Board of Trustees deems relevant.
75
We also participate in the activities conducted by subsidiary entities which have elected to be treated as taxable REIT subsidiaries
("TRS") under the Code. As such, we are subject to federal, state, and local taxes on the income from these activities. Income taxes
attributable to our TRSs are accounted for under the asset and liability method. Under the asset and liability method, deferred
income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the
financial statements, which will result in taxable or deductible amounts in the future.
ASC 740-10, Income Taxes, provides guidance for how uncertain tax positions should be recognized, measured, presented and
disclosed in the financial statements. ASC 740-10 requires the evaluation of tax positions taken in the course of preparing our tax
returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax
benefits of positions not deemed to meet the more-likely-than-not threshold are recorded as a tax expense in the current year.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by the
weighted average common shares outstanding during the period. Unvested and vested share-based payment awards that entitle
holders to receive non-forfeitable dividends, which include OP Units and long-term incentive partnership units ("LTIP Units"),
are considered participating securities. Consequently, we are required to apply the two-class method of computing basic and diluted
earnings 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. Diluted earnings per common share reflects the potential dilution of the assumed exchange of various units into
common shares unvested share-based payment awards to the extent they are dilutive.
Share-Based Compensation
We granted OP Units, formation awards ("Formation Awards"), LTIP Units, LTIP Units with time-based vesting requirements
(“Time-Based LTIP Units”) and Performance-Based LTIP Units to our trustees, management and employees in connection with
the Separation and Combination. Fair value is determined, depending on the type of award, using the Monte Carlo method or post-
vesting restriction periods, which is intended to estimate the fair value of the awards at the grant date using dividend yields and
expected volatilities that are primarily based on available implied data and peer group companies' historical data. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The shortcut method is used for determining
the expected life used in the valuation method.
Compensation expense is based on the fair value of our common shares at the date of the grant and is recognized ratably over the
vesting period using a graded vesting attribution model. We account for forfeitures as they occur. Distributions paid on unvested
OP Units, LTIP Units, Time-Based LTIP Units and Performance-Based LTIP Units are charged to "Net income attributable to
noncontrolling interests" in the statements of operations.
Recent Accounting Pronouncements
The following table provides a brief description of recent accounting pronouncements (ASU) by the FASB that could have a
material effect on our financial statements:
76
Standard
Standards adopted
ASU 2016-15,
Statement of Cash
Flows (Topic 230):
Classification of
Certain Cash
Receipts and Cash
Payments and ASU
2016-18, Statement
of Cash Flows
(Topic 230):
Restricted Cash
ASU 2017 05,
Other Income—
Gains and Losses
from the
Derecognition
of Nonfinancial
Assets (Subtopic
610-20): Clarifying
the Scope of Asset
Derecognition
Guidance and
Accounting for
Partial Sales of
Nonfinancial
Assets
Compensation—
Stock
Compensation
(Topic 718): Scope
of Modification
Accounting
Date of
Adoption
December
2017
Description
These standards amend the existing guidance and
address specific cash flow issues with the objective
of reducing existing diversity in practice. ASU
2016-15 addresses eight specific cash flow issues and
ASU 2016-18 specifically addresses presentation of
restricted cash and restricted cash equivalents in the
statements of cash flows. These standards are
effective for interim and annual reporting periods in
fiscal years beginning after December 15, 2017, with
early adoption permitted. These standards require a
retrospective transition method to each period
presented. If it is impracticable to apply the
amendments retrospectively for some of the issues,
entities may apply the amendments prospectively as
of the earliest date practicable.
Effect on the Financial
Statements or Other
Significant Matters
the
adoption
Other than the revised statement of
cash flows presentation of restricted
cash,
and
implementation of these standards
did not have a material impact on our
financial statements. The standards
were retrospectively applied to prior
years.
guidance
nonfinancial
the scope of recently
This standard clarifies
established
asset
on
derecognition as well as the accounting for partial
sales of nonfinancial assets. This update conforms the
derecognition guidance on nonfinancial assets with
the model for transactions in ASC 606. This standard
is effective for interim and annual reporting periods
in fiscal years beginning after December 15, 2017,
with early adoption permitted. This standard may be
adopted either retrospectively or on a modified
retrospective basis.
December
2017
The adoption and implementation of
this standard did not have an impact
on our financial statements. In future
periods, the adoption of this standard
could have a material impact to our
results of operations if we sell a
significant partial interest in a real
estate asset.
December
2017
This standard clarifies which changes to the terms or
conditions of a share-based payment award are subject
to the guidance on modification accounting under
ASC Topic 718. Entities would apply the modification
accounting guidance unless the value, vesting
requirements and classification of a share-based
payment award are the same immediately before and
after a change to the terms or conditions of the award.
This standard is effective for annual periods beginning
after December 15, 2017, with early adoption
permitted. This
should be applied
prospectively.
standard
The adoption and implementation of
this standard did not have an impact
on our financial statements. In future
periods, if we encounter a change to
the terms or conditions of any of our
share-based payment awards, we
will evaluate the need to apply
modification accounting based on
the new guidance. The general
treatment for modifications of share-
based payment awards is to record
the incremental value arising from
the
additional
change
compensation expense.
as
ASU 2017-12,
Derivatives and
Hedging (Topic
815): Targeted
Improvements to
Accounting for
Hedging Activities
The standard provides new guidance for
the
determination of eligibility for hedge accounting and
effectiveness. It also amends the presentation and
disclosure requirements. This standard is effective for
interim and annual reporting periods in fiscal years
beginning after December 15, 2018, with early
adoption permitted. This standard requires a modified
retrospective transition method which requires the
recognition of the cumulative effect of the change on
the opening balance of each affected component of
equity in the statement of financial position as of the
date of adoption.
October
2017
The adoption and implementation of
this standard did not have a material
impact on our financial statements.
77
Standard
ASU 2017 01
Business
Combinations
(Topic 805):
Clarifying the
Definition of a
Business
Description
This standard provides guidance for determination of
when an asset acquired or group of assets acquired is
not a business. The standard requires that when
substantially all of the fair value of the gross assets
acquired (or disposed of) is concentrated in a single
identifiable asset or a group of similar identifiable
assets, the set is not a business. This standard reduces
the number of transactions that need to be further
evaluated. This standard is effective for annual
periods beginning after December 15, 2017, with
early adoption permitted. This standard should be
applied prospectively.
Date of
Adoption
September
2017
Effect on the Financial
Statements or Other
Significant Matters
The adoption and implementation of
this standard did not have an impact
on our financial statements. In future
periods, the adoption of this standard
may result in the capitalization of
asset
associated with
costs
acquisitions.
January
2019
Standards not yet adopted
ASU 2016-02,
Leases (Topic 842),
as clarified and
amended by ASU
2018-01
presentation
This standard sets out the principles for the
and
recognition, measurement,
disclosure of leases for both lessees and lessors. ASU
2016-02 requires lessees to apply a dual approach,
classifying leases as either finance or operating leases
based on the principle of whether or not the lease is
effectively a financed purchase. Lessees are required
to record a right-of-use asset and a lease liability for
all leases with a term of greater than 12 months. Leases
with a term of 12 months or less will be accounted for
similar to existing guidance for operating leases.
Lessees will recognize expense based on the effective
interest method for finance leases or on a straight-line
basis for operating leases. The FASB has also clarified
that an assessment of whether a land easement meets
the definition of a lease under the new lease standard
will be required. An entity with land easements that
are not accounted for as leases under the current lease
accounting standards, however, may elect a practical
expedient to exclude those land easements from
assessment under the new lease accounting standards.
The provisions of this standard are effective for fiscal
years beginning after December 15, 2018 and should
be applied through a modified retrospective transition
approach for leases existing at, or entered into after,
the beginning of the earliest comparative period
presented in the financial statements. Early adoption
is permitted.
this
We are currently evaluating the
overall impact of the adoption of
ASU 2016-02 on our financial
statements, including the timing of
adopting
standard. ASU
2016-02 will more significantly
impact the accounting for leases in
which we are the lessee. We have
ground leases for which we will be
required to record a right-of-use
asset and lease liability equal to the
present value of the remaining
minimum
lease payments upon
adoption of this standard. Under
ASU 2016-02, initial direct costs for
both lessees and lessors would
include only those costs that are
incremental to the arrangement and
would not have been incurred if the
lease had not been obtained. As a
result, we may no longer be able to
capitalize internal leasing costs and
instead may be required to expense
these
incurred.
Capitalization of internal leasing
costs were $2.9 million, $2.5 million
and $4.0 million for each of the three
years
ended
December 31, 2017. We do not have
any significant land easements.
period
costs
the
as
in
ASU 2014-09,
Revenue from
Contracts with
Customers (Topic
606), as clarified
and amended by
ASU 2016-08,
ASU 2016-10 and
ASU 2016-12
January
2018
This standard establishes a single comprehensive
model for entities to use in accounting for revenue
arising from contracts with customers and supersedes
most of the existing revenue recognition guidance. It
requires an entity to recognize revenue when it
transfers promised goods or services to customers in
an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those
goods or services and also requires certain additional
disclosures. This standard is effective beginning after
December 15, 2017, including interim reporting
periods within that reporting period and may be
adopted either retrospectively or on a modified
retrospective basis.
the modified
We will utilize
retrospective method of adoption.
We completed our evaluation of the
implementation of this standard,
which
included gathering and
evaluating the inventory of our
revenue streams. The standard
excludes from its scope the areas of
accounting that most significantly
affect our revenue recognition,
including accounting for leases and
financial instruments. Therefore, the
adoption of this standard is not
expected to have a material impact
on our financial statements. We
expect this standard will have an
impact on the timing of gains on
future partial sales of real estate.
78
3.
The Combination
In the Combination on July 18, 2017, we acquired the JBG Assets in exchange for approximately 37.2 million common shares
and OP Units. The Combination has been accounted for at fair value under the acquisition method of accounting. The following
allocation of the purchase price is based on the preliminary fair value of the assets acquired and liabilities assumed (in thousands):
Fair value of purchase consideration:
Common shares and OP Units
Cash
Total consideration paid
Fair value of assets acquired and liabilities assumed:
Land and improvements
Building and improvements
Construction in progress, including land
Leasehold improvements and equipment
Real estate
Cash
Restricted cash
Investments in and advances to unconsolidated real estate ventures
Identified intangible assets
Notes receivable (1)
Identified intangible liabilities
Mortgages payable assumed (2)
Capital lease obligations assumed (3)
Lease assumption liabilities (4)
Deferred tax liability (5)
Other liabilities acquired, net
Noncontrolling interests in consolidated subsidiaries
Net assets acquired
Gain on bargain purchase (6)
Total consideration paid
$
$
$
$
1,224,885
20,573
1,245,458
338,072
609,156
699,800
7,890
1,654,918
104,529
13,460
241,611
138,371
50,934
(8,687)
(768,523)
(33,543)
(43,388)
(18,610)
(57,650)
(3,588)
1,269,834
24,376
1,245,458
____________________
(1) During the year ended December 31, 2017, we received proceeds of $50.9 million from the repayment of the notes receivable acquired in
the Combination.
(2) Subject to various interest rate swap and cap agreements assumed in the Combination that are considered economic hedges, but not designated
as accounting hedges.
(3)
(4)
In the Combination, two ground leases were assumed that were determined to be capital leases. On July 25, 2017, we purchased a land
parcel located in Reston, Virginia associated with one of the ground leases for $19.5 million.
Includes a $14.0 million payment to a tenant, which will be paid in 2018, and a $29.4 million lease liability we assumed in relocating a
tenant to one of our office buildings. The $29.4 million assumed lease liability is based on the contractual payments we assumed under the
tenant’s previous lease, which are partially offset by estimated sub-tenant income we anticipate receiving as we actively pursue a sub-tenant.
(5) Related to the management and leasing contracts acquired in the Combination.
(6) The Combination resulted in a gain on bargain purchase because the estimated fair value of the identifiable net assets acquired exceeded
the purchase consideration by $24.4 million. The purchase consideration was based on the fair value of the common shares and OP Units
issued in the Combination. We continue to reassess the recognition and measurement of identifiable assets and liabilities acquired and have
preliminarily concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates of
fair values were appropriate.
During the fourth quarter of 2017, as a result of our continuing reassessment of our fair value estimates, we made adjustments to
the fair value of certain assets acquired and liabilities assumed primarily related to an increase of $47.5 million to real estate, a
decrease of $8.2 million to identified intangible assets related to management and leasing contracts, an increase of $3.2 million
to investments in and advances to unconsolidated real estate ventures, an increase of $43.4 million to lease assumption liability,
an increase of $5.6 million to other liabilities acquired and a decrease of $2.9 million to deferred tax liability, resulting in a reduction
to the gain on bargain purchase of $3.4 million.
79
The fair value of the common shares and OP Units purchase consideration was determined as follows (in thousands, except
exchange ratio and price per share/unit):
Outstanding common shares and common limited partnership units prior to the Combination
Exchange ratio (1)
Common shares and OP Units issued in consideration
Price per share/unit (2)
Fair value of common shares and OP Units issued in consideration
Fair value adjustment to OP Units due to transfer restrictions
Portion of consideration attributable to performance of future services (3)
Fair value of common shares and OP Units purchase consideration
100,571
2.71
37,164
37.10
1,378,780
(43,303)
(110,591)
1,224,886
$
$
$
____________________
(1) Represents the implied exchange ratio of one common share and OP Unit of JBG SMITH for 2.71 common shares and common limited
partnership units prior to the Combination.
(2) Represents the volume weighted average share price on July 18, 2017.
(3) OP Unit consideration paid to certain of the owners of the JBG Assets which have an estimated fair value of $110.6 million is subject to
post-combination employment with vesting over periods of either 12 or 60 months and amortization is recognized as compensation expense
over the period of employment in "General and administrative expense: Share-based compensation related to Formation Transaction" in
the statements of operations.
The JBG Assets acquired on July 18, 2017 comprise: (i) 30 operating assets comprising 19 office assets totaling approximately
3.6 million square feet (2.3 million square feet at our share), nine multifamily assets with 2,883 units (1,099 units at our share)
and two other assets totaling approximately 490,000 square feet (73,000 square feet at our share); (ii) 11 office and multifamily
assets under construction totaling over 2.5 million square feet (2.2 million square feet at our share); (iii) two near-term development
office and multifamily assets totaling approximately 401,000 square feet (242,000 square feet at our share); (iv) 26 future
development assets totaling approximately 11.7 million square feet (8.5 million square feet at our share) of estimated potential
development density; and (v) JBG/Operating Partners, L.P., a real estate services company providing investment, development,
asset management, property management, leasing, construction management and other services. JBG/Operating Partners, L.P. was
owned by 20 unrelated individuals of which 19 became our employees, and three serve on our Board of Trustees.
The preliminary estimated fair values of tangible and identified intangible assets and liabilities, which have definite lives, are as
follows:
Total Fair
Value
(In thousands)
Weighted Average
Amortization
Period
(In years)
Useful Life (1)
Tangible assets:
Building and improvements
Tenant improvements
Total building and improvements
$
$
Leasehold improvements
Equipment
Total leasehold improvements and equipment $
$
Identified intangible assets:
In-place leases
Above-market real estate leases
Below-market ground leases
Option to enter into ground lease
Management and leasing contracts (2)
Total identified intangible assets
Identified intangible liabilities:
Below-market real estate leases
$
$
$
543,584
65,572
609,156
4,422
3,468
7,890
60,317
11,732
332
17,090
48,900
138,371
3 - 40 years
Shorter of useful life or remaining
life of the respective lease
Shorter of useful life or remaining
life of the respective lease
5 years
6.4
6.3
88.5
N/A
7.5
Remaining life of the respective lease
Remaining life of the respective lease
Remaining life of the respective lease
Remaining life of contract
Estimated remaining life of contracts,
ranging between 3 - 9 years
8,687
10.3
Remaining life of the respective lease
80
____________________
(1)
In determining these useful lives, we considered the length of time the asset had been in existence, the maintenance history, as well as
anticipated future maintenance, and any contractual stipulations that might limit the useful life.
Includes in-place property management, leasing, asset management and development management contracts.
(2)
Transaction costs and other costs (such as advisory, legal, accounting, valuation and other professional fees) incurred to affect the
Formation Transaction are included in "Transaction and other costs" in our statements of operations. Transaction and other costs
of $127.7 million and $6.5 million were incurred during the years ended December 31, 2017 and 2016. For the year ended
December 31, 2017, transaction and other costs include severance and transaction bonus expense of $40.8 million, investment
banking fees of $33.6 million, legal fees of $13.9 million and accounting fees of $10.8 million.
The total revenue and net loss of the JBG Assets for the year ended December 31, 2017 included in our statements of operations
from the acquisition date was $71.3 million and $23.1 million.
The accompanying unaudited pro forma information for the two years in the period ended December 31, 2017 is presented as if
the Formation Transaction had occurred on January 1, 2016. This pro forma information is based upon the historical financial
statements. This unaudited pro forma information does not purport to represent what the actual results of our operations would
have been, nor does it purport to predict the results of operations of future periods. The unaudited pro forma information for the
year ended December 31, 2017 was adjusted to exclude $24.4 million of gain on bargain purchase. The unaudited pro forma
information was adjusted to exclude transaction and other costs of $127.7 million and $6.5 million and their respective income
tax benefits for the years ended December 31, 2017 and 2016.
Unaudited pro forma information:
Total revenue
Net loss attributable to common shareholders
Loss per common share:
Basic
Diluted
4.
Tenant and Other Receivables, Net
Year Ended December 31,
2016
2017
(In thousands, except per share data)
$
$
$
$
637,672
$
(19,343) $
655,668
(26,961)
(0.16) $
(0.16) $
(0.23)
(0.23)
The following is a summary of tenant and other receivables, net as of December 31, 2017 and 2016:
Tenants
Third-party real estate services
Other
Allowance for doubtful accounts
Total tenant and other receivables, net
December 31,
2017
2016
(In thousands)
30,672
$
8,954
12,992
(5,884)
46,734
$
26,278
2,488
8,826
(4,212)
33,380
$
$
We incurred bad debt expense of approximately $3.8 million, $750,600 and $1.4 million during each of the three years in the
period ended December 31, 2017, which is included in "Property operating expenses" in the statements of operations.
81
5.
Investments in and Advances to Unconsolidated Real Estate Ventures
The following is a summary of the composition of our investments in and advances to unconsolidated real estate ventures as of
December 31, 2017 and 2016:
Real Estate Venture Partners (1)
Landmark
CBREI Venture
Canadian Pension Plan Investment Board ("CPPIB")
Brandywine
Berkshire Group
JP Morgan
Other
Total investments in unconsolidated real estate ventures
Advances to unconsolidated real estate ventures
Total investments in and advances to unconsolidated real
estate ventures
Ownership
Interest (1)
December 31,
2017
December 31,
2017
2016
(In thousands)
1.8% - 49.0% $
95,368
$
5.0% - 64.0%
55.0%
30.0%
50.0%
5.0%
79,062
36,317
13,741
27,761
9,296
246
261,791
20
—
—
36,312
—
—
9,335
129
45,776
—
$
261,811
$
45,776
_______________
(1) We aggregate our investments in and advances to unconsolidated real estate ventures by real estate venture partner. We have multiple investments
with certain venture partners with varying ownership interests.
In November 2017, we acquired the remaining 41.0% interest in the Capitol Point - North unconsolidated real estate venture,
which was part of our real estate venture with Landmark for $13.1 million. Subsequent to the acquisition, we consolidated Capitol
Point - North.
In November 2017, our real estate venture with CBREI closed a $110.0 million refinancing on Atlantic Plumbing, a multifamily
and retail asset in the U Street/Shaw submarket of Washington, DC. The loan has a five-year term and bears interest at a variable
rate of one-month LIBOR plus 1.50%. A prior swap agreement was novated to synthetically fix the interest rate through September
2020, and we are responsible for the related premiums. At closing, $100.0 million was funded, which was used in part to repay
the existing $88.4 million loan. The real estate venture has the ability to draw an additional $10.0 million based on the asset’s
performance.
The following is a summary of the debt of our unconsolidated real estate ventures as of December 31, 2017 and 2016:
Variable rate (1)
Fixed rate (2)
Weighted Average
Effective
Interest Rate at
December 31,
2017
4.40%
3.79%
Unconsolidated real estate ventures - mortgages payable
Unamortized deferred financing costs
Unconsolidated real estate ventures - mortgages payable, net (3)
______________
(1)
Includes variable rate mortgages payable with interest rate cap agreements.
December 31,
2017
2016
(In thousands)
534,500
$
657,701
1,192,201
(2,000)
1,190,201
$
31,000
273,000
304,000
(1,034)
302,966
$
$
(2)
Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements.
(3) See Note 17 for additional information regarding related commitments and contingencies.
82
The following is a summary of the financial information for our unconsolidated real estate ventures as of December 31, 2017 and
2016 and for each of the three years in the period ended December 31, 2017:
Combined balance sheet information:
Real estate, net
Other assets
Total assets
Mortgages payable, net
Other liabilities
Total liabilities
Noncontrolling interests
Total equity
Total liabilities and equity
Combined income statement information:
Total revenue
Operating income
Net income (loss)
6.
Variable Interest Entities
Unconsolidated VIEs
$
December 31,
2017
2016
(In thousands)
$
$
$
$
2,106,670
264,731
2,371,401
1,190,202
76,415
1,266,617
—
1,104,784
2,371,401
$
$
$
$
2017
Year Ended December 31,
2016
(In thousands)
68,118
$
19,283
5,234
$
135,256
14,741
(7,593)
463,643
134,596
598,239
302,966
24,896
327,862
343
270,034
598,239
2015
67,275
21,173
340
As of December 31, 2017 and 2016, we have interests in entities that are deemed VIEs that are in development stage and do not
hold sufficient equity at risk or conduct substantially all their operations on behalf of the investor with disproportionately few
voting rights. Although we are engaged to act as the managing partner in charge of 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 performance. We account for our investment in these entities under the equity method.
As of December 31, 2017 and 2016, the net carrying amounts of our investment in these entities were $163.5 million and $42.4
million. Our maximum exposure to loss in these entities is limited to our investments, construction commitments and debt
guarantees. See Note 17 for additional information.
Consolidated VIEs
JBG SMITH LP is our most significant consolidated VIE. We hold the majority membership interest in the operating partnership,
act as the general partner and exercise full responsibility, discretion and control over its day-to-day management.
The noncontrolling interests of the operating partnership do not have either substantive liquidation rights, or substantive kick-out
rights without cause, or substantive participating rights that could be exercised by a simple majority of noncontrolling interest
members (including by such a member unilaterally). Because the noncontrolling interest holders do not have these rights, the
operating partnership is a VIE. As general partner, we have the power to direct the core activities of the operating partnership that
most significantly affect its performance, and through our majority interest in the operating partnership have both the right to
receive benefits from and the obligation to absorb losses of the operating partnership. Accordingly, we are the primary beneficiary
of the operating partnership and consolidate the operating partnership in our financial statements. As we conduct our business and
hold our assets and liabilities through the operating partnership, the total assets and liabilities of the operating partnership comprise
substantially all of our consolidated assets and liabilities.
We also consolidate certain VIEs that have minimal noncontrolling interests (less than 5%). These entities are VIEs because the
noncontrolling interest holders do not have substantive kick-out or participating rights. We consolidate these entities because we
control all of their significant business activities. As of December 31, 2017, the total assets and liabilities of such consolidated
VIEs, excluding the operating partnership, were approximately $111.0 million and $8.8 million.
83
7.
Other Assets, Net
The following is a summary of other assets, net as of December 31, 2017 and 2016:
Deferred leasing costs
Accumulated amortization
Deferred leasing costs, net
Prepaid expenses
Identified intangible assets, net
Deferred financing costs on revolving credit facility, net
Deposits
Other
Total other assets, net
December 31,
2017
2016
(In thousands)
$
$
171,153
(67,180)
103,973
9,038
126,467
6,654
6,317
11,474
$
263,923
$
157,258
(57,910)
99,348
2,199
3,063
—
100
8,245
112,955
The following is a summary of the composition of identified intangible assets, net as of December 31, 2017 and 2016:
Identified intangible assets:
In-place leases
Above-market real estate leases
Below-market ground leases
Option to enter into ground lease
Management and leasing contracts
Other
Total identified intangibles assets
Accumulated amortization:
In-place leases
Above-market real estate leases
Below-market ground leases
Option to enter into ground lease
Management and leasing contracts
Other
Total accumulated amortization
Identified intangible assets, net
December 31,
2017
2016
(in thousands)
$
72,086
$
12,066
2,547
17,090
48,900
206
152,895
20,015
1,600
1,365
78
3,209
161
26,428
$
126,467
$
12,777
773
2,215
—
—
206
15,971
10,871
612
1,278
—
—
147
12,908
3,063
84
The following is a summary of amortization expense included in the statements of operations related to identified intangible assets
for each of the three years in the period ended December 31, 2017:
In-place lease amortization (1)
Above-market real estate lease amortization (2)
Below-market ground lease amortization (3)
Management and leasing contract amortization (1)
Other amortization (1)
Year Ended December 31,
2017
2016
2015
(in thousands)
$
$
10,216
1,428
87
3,209
14
$
485
78
85
—
92
Total identified intangible asset amortization
$
14,954
$
740
$
___________________________________________
(1) Amounts are included in "Depreciation and amortization expenses" in our statements of operations.
(2) Amounts are included in "Property rentals revenue" in our statements of operations.
(3) Amounts are included in "Property operating expenses" in our statements of operations.
1,343
89
85
—
248
1,765
As of December 31, 2017, the estimated amortization of identified intangible assets is as follows for the next five years and
thereafter:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
8.
Debt
Mortgages Payable
$
Amount
(in thousands)
22,338
19,167
16,136
12,607
11,248
44,971
$
126,467
The following is a summary of mortgages payable as of December 31, 2017 and 2016:
Variable rate (2)
Fixed rate (3)
Mortgages payable
Unamortized deferred financing costs and premium/discount, net
Mortgages payable, net
Payable to former parent (4)
__________________________
Weighted Average
Effective
Interest Rate at
December 31,
2017
3.62%
4.25%
—
December 31,
2017 (1)
2016
(In thousands)
498,253
$
1,537,706
2,035,959
(10,267)
2,025,692
$
547,291
620,327
1,167,618
(2,604)
1,165,014
— $
283,232
$
$
$
(1)
(2)
Includes mortgages payable assumed in the Combination. See Note 3 for additional information.
Includes variable rate mortgages payable with interest rate cap agreements.
85
(3)
(4)
Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements.
Includes amounts payable to former parent as of December 31, 2016 in connection with the Bowen Building and The Bartlett. See Note 18
for additional information.
As of December 31, 2017, the net carrying value of real estate collateralizing our mortgages payable totaled $2.9 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 of our
mortgage loans are recourse to us. As of December 31, 2017, we were not in default under any mortgage loan.
In the Combination, we assumed mortgages payable with an aggregate principal balance of $768.5 million. In addition, we entered
into mortgages payable with an aggregate principal balance of $79.3 million during the year ended December 31, 2017 with an
ability to draw an additional $143.7 million for construction. During the year ended December 31, 2017, we repaid mortgages
payable with an aggregate principal balance of $250.0 million, which includes mortgages payable totaling $64.8 million assumed
in the Combination. We recognized losses on the extinguishment of debt in conjunction with these repayments of $701,000 for
the year ended December 31, 2017.
As of December 31, 2017, we had various interest rate swap and cap agreements with an aggregate notional value of $1.4 billion
to swap variable interest rates to fixed rates on certain of our mortgages payable. See Note 15 for additional information.
Credit Facility
On July 18, 2017, we entered into a $1.4 billion credit facility, consisting of a $1.0 billion revolving credit facility maturing in
July 2021, with two six-month extension options, a delayed draw $200.0 million unsecured term loan ("Tranche A-1 Term Loan")
maturing in January 2023 and a delayed draw $200.0 million unsecured term loan ("Tranche A-2 Term Loan") maturing in July
2024. The interest rate for the credit facility varies based on a ratio of our total outstanding indebtedness to a valuation of certain
real property and assets and ranges (a) in the case of the revolving credit facility, from LIBOR plus 1.10% to LIBOR plus 1.50%,
(b) in the case of the Tranche A-1 Term Loan, from LIBOR plus 1.20% to LIBOR plus 1.70% and (c) in the case of the Tranche
A-2 Term Loan, from LIBOR plus 1.55% to LIBOR plus 2.35%. There are various LIBOR options in the credit facility, and we
elected the one-month LIBOR option as of December 31, 2017. In October 2017, we entered into an interest rate swap with a
notional value of $50.0 million to convert the variable interest rate applicable to our Tranche A-1 Term Loan to a fixed interest
rate, providing a base interest rate under the facility agreement of 1.97% per annum. The interest rate swap matures in January
2023, concurrent with the maturity of our Tranche A-1 Term Loan. As of December 31, 2017, we were not in default under our
credit facility.
On July 18, 2017, in connection with the Combination, we drew $115.8 million on the revolving credit facility and $50.0 million
under the Tranche A-1 Term Loan. In connection with the execution of the credit facility, we incurred $11.2 million in debt issuance
costs.
The following is a summary of amounts outstanding under the credit facility as of December 31, 2017:
Revolving credit facility (1)
Tranche A-1 Term Loan
Unamortized deferred financing costs, net
Unsecured term loan, net
__________________________
December 31, 2017
Interest Rate
Balance
(In thousands)
2.66%
3.17%
$
$
$
115,751
50,000
(3,463)
46,537
(1) As of December 31, 2017, letters of credit with an aggregate face amount of $5.7 million were provided under our revolving credit facility.
86
Principal Maturities
Principal maturities of debt outstanding as of December 31, 2017, including mortgages payable, the Tranche A-1 Term Loan and
borrowings on the revolving credit facility, are as follows:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
Amount
(In thousands)
337,513
227,041
225,914
216,545
327,500
867,197
$
2,201,710
Interest costs incurred, excluding amortization and accretion of discounts and premiums and deferred financing costs, were $65.4
million, $54.3 million and $55.5 million for each of the three years in the period ended December 31, 2017, of which $12.7 million,
$4.1 million and $6.4 million were capitalized.
9.
Other Liabilities, Net
The following is a summary of other liabilities, net as of December 31, 2017 and 2016:
Lease intangible liabilities
Accumulated amortization
Lease intangible liabilities, net
Prepaid rent
Lease assumption liabilities and accrued tenant incentives (1)
Capital lease obligation
Security deposits
Ground lease deferred rent payable
Net deferred tax liability
Dividends payable (2)
Other
Total other liabilities, net
December 31,
2017
2016
(In thousands)
$
$
44,917
(26,950)
17,967
15,751
50,866
15,819
13,618
3,730
8,202
31,097
4,227
161,277
$
$
36,515
(24,945)
11,570
9,163
14,907
—
10,324
3,331
—
—
192
49,487
___________________________________________
(1) As of December 31, 2017, includes $43.4 million of lease assumption liabilities assumed in the Combination. See Note 3 for additional information.
(2) Dividends declared in December 2017 that were paid in January 2018.
Amortization expense included in "Property rentals" the statements of operations related to lease intangible liabilities for each of the
three years in the period ended December 31, 2017 was $2.3 million, $1.4 million and $2.9 million.
87
As of December 31, 2017, the estimated amortization of lease intangible liabilities is as follows for the next five years and thereafter:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
10.
Income Taxes
$
Amount
(in thousands)
2,695
2,633
2,382
1,905
1,788
6,564
$
17,967
For the year ended December 31, 2017, we intend to elect to be taxed as a REIT, and our former parent also elected to be taxed
as a REIT for the years ended December 31, 2016 and 2015. Accordingly, we incurred no federal income tax expense for each of
the three years ended December 31, 2017 related to our REIT subsidiaries. The only federal income taxes included in the
accompanying financial statements relate to activities of our TRSs. Due to the passage of federal tax reform legislation, which
was signed into law on December 22, 2017 and which we refer as the 2017 Tax Act, our TRSs were required to decrease the net
deferred tax liability, which resulted in a net tax benefit of $3.9 million during the year ended December 31, 2017. The remainder
of the tax benefit is due to the net loss of the TRSs.
Our financial statements include the operations of our TRSs, which are subject to federal, state and local income taxes on their
taxable income. As a REIT, we may also be subject to federal excise taxes if we engage in certain types of transactions. Continued
qualification as a REIT depends on our ability to satisfy the REIT distribution tests, stock ownership requirements and various
other qualification tests. As of December 31, 2017, our TRSs have an estimated federal and state net operating loss of $6.2 million,
which will expire in 2037. As of December 31, 2017, the cost of real estate, net of accumulated depreciation, for federal income
tax purposes was approximately $3.5 billion.
The following is a summary of our income tax benefit (expense) for each of the three years in the period ended December 31,
2017:
Current tax benefit (expense)
Deferred tax benefit (expense)
Income tax benefit (expense)
Year Ended December 31,
2017
2016
(in thousands)
2015
$
$
(496) $
10,408
9,912
$
(1,083) $
—
(1,083) $
(420)
—
(420)
As of December 31, 2017, we have a net deferred tax liability of $8.2 million primarily related to the management and leasing
contracts assumed in the Combination, partially offset by deferred tax assets associated with tax versus book differences, related
general and administrative expenses and the net operating loss for 2017. We are subject to federal, state and local income tax
examinations by taxing authorities for 2014 through 2017.
88
Deferred tax assets:
Accrued bonus
Net operating loss
Other
Total deferred tax assets
Deferred tax liabilities:
Management and leasing contracts
Other
Total deferred tax liabilities
Net deferred tax liability
December 31,
2017
2016
(in thousands)
$
$
1,675
1,710
805
4,190
(11,840)
(552)
(12,392)
$
(8,202) $
—
—
—
—
—
—
—
—
During the year ended December 31, 2017, our Board of Trustees declared cash dividends of $0.45 per common share of which
$0.31 was taxable as ordinary income for federal income tax purposes in 2017 and the remaining $0.14 will be determined in
2018. No dividends were declared or paid in 2016 and 2015.
11.
Redeemable Noncontrolling Interests
JBG SMITH LP
In the Formation Transaction, JBG SMITH LP issued 19.8 million OP Units to persons other than JBG SMITH that are redeemable
for cash or our common shares beginning August 1, 2018, subject to certain limitations. These OP Units represent a 14.4% interest
in JBG SMITH LP as of December 31, 2017. The carrying amount of the redeemable noncontrolling interests is adjusted to its
redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized
in "Additional paid-in capital". Redemption value is equivalent to the market value of one of our common shares at the end of the
period multiplied by the number of vested OP Units outstanding.
Consolidated Real Estate Venture
In November 2017, a real estate venture acquired 965 Florida Avenue for $1.5 million and concurrently restructured the terms of
the venture. Prior to the restructure, our partner held a 37.9% ownership interest. Pursuant to the terms of the venture agreement,
we will fund all capital contributions until we achieve a 97.0% interest. Our partner can redeem its interest for cash two years after
delivery, but no later than seven years subsequent to delivery. As of December 31, 2017, we held a 67.6% ownership interest and
consolidated 965 Florida Avenue.
Below is a summary of the activity of redeemable noncontrolling interests for the year ended December 31, 2017:
JBG SMITH LP
Consolidated Real
Estate Venture
(In thousands)
Total
Balance at January 1, 2017 (1)
OP Units issued at the Separation
OP Units issued in connection with the Combination (2)
Net loss attributable to redeemable noncontrolling interests
Other comprehensive income
Distributions and acquisition of consolidated real estate
venture
Share-based compensation expense
Adjustment to redemption value
Balance as of December 31, 2017
$
$
— $
96,632
359,967
(7,320)
225
(9,113)
32,634
130,692
603,717
$
— $
—
—
(8)
—
5,420
—
—
5,412
$
—
96,632
359,967
(7,328)
225
(3,693)
32,634
130,692
609,129
__________________
(1) We did not have any redeemable noncontrolling interests prior to the Separation on July 17, 2017.
89
(2) Excludes certain OP Units issued in the Combination which have an estimated fair value of $110.6 million, that are subject to post-
combination employment with vesting over periods of either 12 or 60 months. See Note 12 for additional information.
12.
Share-Based Payments and Employee Benefits
OP UNITS
In the Combination, 3.3 million OP Units were issued with an estimated grant-date fair value of $110.6 million, subject to post-
combination employment with vesting over periods of either 12 or 60 months. The fair value of these OP Units was estimated
based on the post-vesting restriction periods of the OP Units. The significant assumptions used to value the OP Units included
expected volatilities (18.0% to 27.0%), risk-free interest rates (1.3% to 1.5%) and post-vesting restriction periods (1 year to 3
years). Compensation expense for these OP Units is recognized over the graded vesting period. See Note 3 for additional information.
The following table presents information regarding the OP Units activity during the year ended December 31, 2017:
Unvested at January 1, 2017
Granted
Vested
Unvested at December 31, 2017
JBG SMITH 2017 Omnibus Share Plan
Unvested
Shares
Weighted
Average Grant-
Date Fair Value
—
$
3,280,900
(193,938)
3,086,962
—
33.71
37.10
33.49
On June 23, 2017, our Board of Trustees adopted the JBG SMITH 2017 Omnibus Share Plan (the "Plan"), effective as of July 17,
2017, and authorized the reservation of approximately 10.3 million of our common shares pursuant to the Plan. On July 10, 2017,
our then sole-shareholder approved the Plan. As of December 31, 2017, there were 6.6 million common shares available for
issuance under the Plan.
Formation Awards
Pursuant to the Plan, on July 18, 2017, we granted approximately 2.7 million Formation Awards based on an aggregate notional
value of approximately $100.0 million divided by the volume-weighted average price on July 18, 2017 of $37.10 per common
share. The Formation Awards are structured in the form of profits interests in JBG SMITH LP that provide for a share of appreciation
determined by the increase in the value of a common share at the time of conversion over the $37.10 volume-weighted average
price of a common share at the time the formation unit was granted. The Formation Awards, subject to certain conditions, generally
vest 25% on each of the third and fourth anniversaries and 50% on the fifth anniversary, of the closing of the Combination, subject
to continued employment with JBG SMITH through each vesting date.
The value of vested Formation Awards is realized through conversion of the award into a number of LTIP Units, and subsequent
conversion into a number of OP Units determined based on the difference between $37.10 and the value of a common share on
the conversion date. The conversion ratio between Formation Awards and OP Units, which starts at zero, is the quotient of (i) the
excess of the value of a common share on the conversion date above the per share value at the time the Formation Award was
granted over (ii) the value of a common share as of the date of conversion. This is similar to a "cashless exercise" of stock options,
whereby the holder receives a number of shares equal in value to the difference between the full value of the total number of shares
for which the option is being exercised and the total exercise price. Like options, Formation Awards have a finite 10-year term
over which their value is allowed to increase and during which they may be converted into LTIP Units (and in turn, OP Units).
Holders of Formation Awards will not receive distributions or allocations of net income or net loss prior to vesting and conversion
to LTIP Units.
The grant-date fair value of the Formation Awards was $23.7 million or $8.84 per unit estimated using Monte Carlo simulations.
The significant assumptions used to value the awards included expected volatility (26.0%), dividend yield (2.3%), risk-free interest
rate (2.3%) and expected life (7 years). Compensation expense for these awards is being recognized over a five-year period.
90
The following table presents information regarding the Formation Awards activity during the year ended December 31, 2017:
Unvested at January 1, 2017
Granted
Forfeited
Unvested at December 31, 2017
Unvested
Shares
Weighted
Average Grant-
Date Fair Value
—
$
2,680,552
(6,738)
2,673,814
—
8.84
8.84
8.84
LTIP and Time-Based LTIP Units
On July 18, 2017, we granted a total of 47,166 fully vested LTIP Units to the seven non-employee trustees in the notional amount
of $250,000 each. The LTIP Units may not be sold while such non-employee trustee is serving on the Board. On the same date,
we also granted 59,927 LTIP units to a key employee of which 50% vested immediately and the remaining 50% vests ratably from
the 31st to the 60th month following the grant date. These LTIP Units had an aggregate grant-date fair value of $3.5 million.
On August 1, 2017, we granted 302,518 Time-Based LTIP Units to management and other employees under our Plan. The Time-
Based LTIP units vest in four equal installments on August 1 of each year, subject to continued employment. These Time-Based
LTIP Units were valued at a weighted average grant-date fair value of $33.71 per unit. Compensation expense for these units is
being recognized over a four-year period.
The fair value of LTIP and Time-Based LTIP Units was estimated based on the post-vesting restriction periods. The significant
assumptions used to value the units included expected volatilities (17.0% to 19.0%), risk-free interest rates (1.3% to 1.5%) and
post-vesting restriction periods (2 years to 3 years). Net income and net loss is allocated to each LTIP and Time-Based LTIP Unit.
LTIP and Time-Based LTIP Unit holders have the right to convert all or a portion of vested units into OP Units, which are then
subsequently exchangeable for our common shares. LTIP and Time-Based LTIP Units do not have redemption rights, but any OP
Units into which units are converted are entitled to redemption rights. LTIP and Time-Based LTIP Units, generally, vote with the
OP Units and do not have any separate voting rights except in connection with actions that would materially and adversely affect
the rights of the LTIP and Time-Based LTIP Units.
The following table presents information regarding the LTIP and Time-Based LTIP Units activity during the year ended
December 31, 2017:
Unvested at January 1, 2017
Granted
Vested
Forfeited
Unvested at December 31, 2017
Unvested
Shares
Weighted
Average Grant-
Date Fair Value
—
$
409,611
(77,129)
(275)
332,207
—
33.41
32.26
33.71
33.68
Performance-Based LTIP Units
On August 1, 2017, we granted 605,072 Performance-Based LTIP Units to management and other employees under the Plan.
Performance-Based LTIP Units are performance-based equity compensation pursuant to which participants have the opportunity
to earn Performance-Based LTIP Units based on the relative performance of the total shareholder return ("TSR") of our common
shares compared to the companies in the FTSE NAREIT Equity Office Index, over the three-year performance period beginning
on the August 1, 2017 grant date, inclusive of dividends and stock price appreciation. Fifty percent of any Performance-Based
LTIP Units that are earned vest at the end of the three-year performance period and the remaining 50% on the fourth anniversary
of the date of grant, subject to continued employment. Net income and net loss are allocated to each Performance-Based LTIP
Unit. The grant-date fair value of the Performance-Based LTIP Units was $9.7 million or $15.95 per unit estimated using Monte
Carlo simulations. The significant assumptions used to value the Performance-Based LTIP Units include expected volatility
(18.0%), dividend yield (2.3%) and risk-free interest rates (1.5%). Compensation expense for these units is being recognized over
a four-year period.
91
The following table presents information regarding the Performance-Based LTIP Units activity during the year ended December 31,
2017:
Unvested at January 1, 2017
Granted
Forfeited
Unvested at December 31, 2017
Share-Based Compensation Expense
Unvested
Shares
Weighted
Average Grant-
Date Fair Value
—
$
605,072
(550)
604,522
—
15.95
15.95
15.95
Share-based compensation expense for each of the three years in the period ended December 31, 2017 is summarized as follows:
Formation Awards
LTIP Units
OP Units (1)
Share-based compensation related to Formation Transaction (2)
Time-Based LTIP Units that vest over four years
Performance-Based LTIP Units
Other equity awards (3)
Share-based compensation expense - other (4)
Total share-based compensation expense
Less amount capitalized
Net share-based compensation expense
Year Ended December 31,
2017
2016
2015
$
$
5,169
2,615
21,467
29,251
2,211
1,172
1,526
4,909
34,160
(467)
33,693
(In thousands)
$
— $
—
—
—
—
—
4,502
4,502
4,502
—
$
4,502
$
—
—
—
—
—
—
4,506
4,506
4,506
—
4,506
______________________________________________
(1) Represents share-based compensation expense for OP Units subject to post-combination employment. See Note 3 for additional information.
(2) Included in "General and administrative expense: Share-based compensation related to Formation Transaction" in the accompanying statements
of operations.
(3) Represents share-based compensation expense related to equity awards prior to the Formation Transaction.
(4) Included in "General and administrative expense" in the accompanying statements of operations.
As of December 31, 2017, we had $124.9 million of total unrecognized compensation expense related to unvested share-based
payment arrangements (unvested OP Units, Formation Awards, Time-Based LTIP Units and Performance-Based LTIP Units). This
expense is expected to be recognized over a weighted average period of 3.3 years.
Employee Benefits
We have a 401(k) defined contribution plan (the "401(k) Plan") covering substantially all of our officers and employees which
permits participants to defer compensation up to the maximum amount permitted by law. We provide a discretionary matching
contribution. Employees’ contributions vest immediately and our matching contributions vest over five years. Our contributions
for each of the three years in the period ended December 31, 2017 were $3.6 million, $2.4 million, $2.3 million.
92
13.
Earnings (Loss) Per Common Share
The following summarizes the calculation of basic and diluted earnings (loss) per common share and provides a reconciliation of
the amounts of net income (loss) available to common shareholders used in calculating basic and diluted earnings (loss) per
common share for each of the three years in the period ended December 31, 2017:
Net income (loss)
Net loss attributable to redeemable noncontrolling interests
Net loss attributable to noncontrolling interest
Net income (loss) attributable to common shareholders
Distributions to participating securities
Net income (loss) available to common shareholders
Weighted average number of common shares outstanding — basic and diluted (1)
Earnings (loss) per common share:
Basic
Diluted
______________
Year Ended December 31,
2017
2016
2015
(In thousands, except per share amounts)
(79,084) $
7,328
3
(71,753)
(1,655)
(73,408) $
61,974
$
49,628
—
—
61,974
—
—
—
49,628
—
61,974
$
49,628
105,359
100,571
100,571
(0.70) $
(0.70)
$
0.62
0.62
0.49
0.49
$
$
$
(1) Reflects the weighted average common shares outstanding as of the date of the Separation in all periods prior to July 17, 2017.
The effect of the conversion of 16.7 million OP Units that were outstanding at December 31, 2017 is excluded in the computation
of basic and diluted loss per common share, as the assumed exchange of such units for common shares on a one-for-one basis was
antidilutive (the assumed conversion of these units would have no net impact on the determination of diluted earnings per share).
Since vested and outstanding OP Units, which are held by noncontrolling interests, are attributed gains and losses at an identical
proportion to the common shareholders, the gains and losses attributable and their equivalent weighted average OP Unit impact
are excluded from net income (loss) available to common shareholders and the weighted average number of common shares
outstanding in calculating basic and diluted loss per common share. The number of additional securities excluded from the
calculation of diluted earnings (loss) per common share as they were antidilutive, but potentially could be dilutive in the future
are included in the following table for each of the three years in the period ended December 31, 2017:
OP Units
Formation Awards
Time-Based LTIP Units
Performance-Based LTIP Units
14.
Future Minimum Rental Income
Year Ended December 31,
2017
2016
2015
(In thousands)
3,087
2,674
409
605
—
—
—
—
—
—
—
—
We lease space to tenants under operating leases that expire at various dates through the year 2036. The leases provide for the
payment of fixed base rents payable monthly in advance as well as reimbursements of real estate taxes, insurance and maintenance
costs. Retail leases may also provide for the payment by the lessee of additional rents based on a percentage of their sales. As of
December 31, 2017, future base rental revenue under these non-cancelable operating leases excluding extension options is as
follows:
93
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
$
Amount
(In thousands)
428,413
341,872
307,181
264,351
226,490
1,167,008
15.
Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 2017, we had various derivative financial instruments consisting of interest rate swap and cap agreements
that are measured at fair value on a recurring basis. There were no derivative financial instruments prior to the Combination. The
net unrealized gain on our derivative financial instruments designated as cash flow hedges was $1.8 million for the year ended
December 31, 2017 and is recorded in "Accumulated other comprehensive income" in the balance sheet. Within the next 12 months,
we expect to reclassify $3.6 million as an increase to interest expense. The net unrealized gain on our derivative financial instruments
not designated as cash flow hedges was $1.3 million for the year ended December 31, 2017 and is recorded in "Interest expense"
in the statement of operations. 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 are assets and liabilities measured at fair value on a recurring basis as of December 31, 2017:
December 31, 2017
Derivative financial instruments designated as cash flow hedges:
Classified as assets in "Other assets, net"
Classified as liabilities in "Other liabilities, net"
Derivative financial instruments not designated as cash flow hedges:
Classified as assets in "Other assets, net"
Classified as liabilities in "Other liabilities, net"
Fair Value Measurements
Total
Level 1
Level 2
Level 3
(In thousands)
$
$
$
1,506
$
— $
1,506
$
2,640
—
2,640
635
22
$
$
— $
— $
635
22
$
$
—
—
—
—
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 under authoritative accounting guidance, 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 December 31, 2017, 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 gain included in "Other
comprehensive gain'' was primarily attributable to the net change in unrealized gains or losses related to the interest rate swaps
that were outstanding as of December 31, 2017, none of which were reported in the statements of operations because they were
documented and qualified as hedging instruments and there was no ineffectiveness in relation to the hedges.
94
Financial Assets and Liabilities Not Measured at Fair Value
As of December 31, 2017 and 2016, all financial instruments and liabilities were reflected in our balance sheets at amounts which,
in our estimation, reasonably approximated their fair values, except for the following:
December 31, 2017
December 31, 2016
Carrying
Amount (1)
Fair Value
Carrying
Amount (1)
Fair Value
(In thousands)
$
2,035,959
$
2,060,899
$
1,167,618
$
1,192,267
115,751
50,000
115,768
50,029
—
—
—
—
Financial liabilities:
Mortgages payable
Revolving credit facility
Unsecured term loan
______________________________________
(1) The carrying amount consists of principal only.
The fair value of our mortgages payable is estimated by discounting the future contractual cash flows of these instruments using
current risk-adjusted rates available to borrowers with similar credit ratings, which are provided by a third-party specialist. The
fair value of the mortgages payable and unsecured term loan was determined using Level 2 inputs of the fair value hierarchy.
The fair value of our revolving credit facility and unsecured term loan 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. The fair value of the revolving
credit facility and unsecured term loan was determined using Level 2 inputs of the fair value hierarchy.
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. As a result of the Formation Transaction, we redefined 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 (office, multifamily, and third-party real estate services) based on the
economic characteristics and nature of our assets and services. In connection therewith, we have reclassified the prior period
segment financial data to conform to the current period presentation.
The CODM measures and evaluates the performance of our operating segments, with the exception of the third-party real estate
services business, based on the net operating income ("NOI") of properties within each segment. NOI includes property rental
revenues and tenant reimbursements and deducts property operating expenses and real estate taxes.
With respect to the third-party real estate services business, the CODM reviews revenues 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 disclosed separately in the statements of operations. Management
company assets primarily consist of management and leasing contracts with a net book value of $45.7 million classified in "Other
assets, net" in the balance sheet as of December 31, 2017. Consistent with internal reporting presented to our CODM and our
definition of NOI, the third-party real estate services operating results are excluded from the NOI data below.
The following table reflects the reconciliation of net income (loss) attributable common shareholders to consolidated NOI for each
of the three years in the period ended December 31, 2017:
95
Net income (loss) attributable to common shareholders
Add:
Depreciation and amortization expense
General and administrative expense:
Corporate and other
Third-party real estate services
Share-based compensation related to Formation Transaction
Transaction and other costs
Interest expense
Loss on extinguishment of debt
Income tax expense (benefit)
Less:
Third-party real estate services, including reimbursements
Other income
Loss from unconsolidated real estate ventures, net
Interest and other income (loss), net
Gain on bargain purchase
Net loss attributable to redeemable noncontrolling interests
Net loss attributable to noncontrolling interest
Consolidated NOI
Year Ended December 31,
2017
2016
(In thousands)
61,974
2015
$
49,628
$
(71,753) $
161,659
133,343
144,984
47,131
51,919
29,251
127,739
58,141
701
(9,912)
63,236
5,167
(4,143)
1,788
24,376
7,328
48,753
19,066
—
6,476
51,781
—
1,083
33,882
5,381
(947)
2,992
—
—
44,424
18,217
—
—
50,823
—
420
29,467
10,854
(4,283)
2,557
—
—
3
297,121
$
—
281,168
$
—
269,901
$
Below is a summary of NOI by segment for each of the three years in the period ended December 31, 2017:
Year Ended December 31, 2017
Office
Multifamily
Other
(In thousands)
Elimination of
Intersegment
Activity
Total
$
$
343,213
32,315
375,528
93,834
50,483
144,317
$
85,809
5,012
90,821
24,297
10,940
35,237
$
10,508
658
11,166
8,528
5,011
13,539
(2,905) $
—
(2,905)
(15,604)
—
(15,604)
436,625
37,985
474,610
111,055
66,434
177,489
Rental revenue:
Property rentals
Tenant reimbursements
Total rental revenue
Rental expense:
Property operating
Real estate taxes
Total rental expense
Consolidated NOI
$
231,211
$
55,584
$
(2,373) $
12,699
$
297,121
96
Year Ended December 31, 2016
Office
Multifamily
Other
(In thousands)
Elimination of
Intersegment
Activity
Total
$
$
317,956
33,361
351,317
91,128
46,115
137,243
$
63,401
3,454
66,855
17,238
6,993
24,231
$
23,234
846
24,080
7,216
4,676
11,892
(2,996) $
—
(2,996)
(15,278)
—
(15,278)
401,595
37,661
439,256
100,304
57,784
158,088
Rental revenue:
Property rentals
Tenant reimbursements
Total rental revenue
Rental expense:
Property operating
Real estate taxes
Total rental expense
Consolidated NOI
$
214,074
$
42,624
$
12,188
$
12,282
$
281,168
Year Ended December 31, 2015
Office
Multifamily
Other
(In thousands)
Elimination of
Intersegment
Activity
Total
$
311,671
$
53,071
$
27,504
$
35,508
347,179
92,355
45,479
137,834
2,790
55,861
14,606
6,022
20,628
2,178
29,682
9,268
7,373
16,641
$
209,345
$
35,233
$
13,041
$
(2,436) $
—
(2,436)
(14,718)
—
(14,718)
12,282
$
389,810
40,476
430,286
101,511
58,874
160,385
269,901
Rental revenue:
Property rentals
Tenant reimbursements
Total rental revenue
Rental expense:
Property operating
Real estate taxes
Total rental expense
Consolidated NOI
The following is a summary of certain balance sheet data by segment as of December 31, 2017 and 2016:
December 31, 2017
Real estate, at cost
Investments in and advances to
unconsolidated real estate ventures
Total assets
December 31, 2016
Real estate, at cost
Investments in and advances to
unconsolidated real estate ventures
Total assets
Office
Multifamily
Other
(In thousands)
Elimination of
Intersegment
Activity
Total
$
3,955,013
$
1,476,423
$
594,361
$
— $
6,025,797
124,659
3,542,977
98,835
38,317
1,434,999
1,299,085
—
(205,254)
261,811
6,071,807
$
2,798,946
$
959,404
$
397,041
$
— $
4,155,391
45,647
2,388,396
—
873,157
129
399,087
—
—
45,776
3,660,640
97
17.
Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $200.0 million per occurrence and in the aggregate, and property and rental
value insurance coverage with limits of $2.0 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 both terrorist
acts and for nuclear, biological, chemical or radiological terrorism events with limits of $2.0 billion per occurrence. These policies
are partially reinsured by third-party insurance providers.
We will continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. We cannot
anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for deductibles and
losses in excess of the insurance coverage, which could be material.
Our debt, consisting of mortgage loans secured by our properties, revolving credit facility and unsecured term loans contain
customary covenants requiring adequate insurance coverage. Although we believe that we currently have adequate insurance
coverage, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. If lenders insist on
greater coverage than we are able to obtain, it could adversely affect the ability to finance or refinance our properties.
Construction Commitments
As of December 31, 2017, we have construction in progress that will require an additional $766.0 million to complete ($676.0
million related to our consolidated entities and $90.0 million related to our unconsolidated real estate ventures at our share), based
on our current plans and estimates, which we anticipate will be primarily expended over the next two to three years. These capital
expenditures are generally due as the work is performed, and we expect to finance them with debt proceeds, proceeds from asset
recapitalizations and sales, and available cash.
Environmental Matters
Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental
assessments did not reveal any material environmental contamination that we believe would have a material adverse effect on our
overall business, financial condition or results of operations, or that have not been anticipated and remediated during site
redevelopment as required by law. Nevertheless, there can be no assurance that the identification of new areas of contamination,
changes in the extent or known scope of contamination, the discovery of additional sites or changes in cleanup requirements would
not result in significant cost to us.
Other
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, to (1)
guarantee portions of the principal, interest and other amounts in connection with their borrowings, (2) provide customary
environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy)
in connection with their borrowings and (3) provide guarantees to lenders and other third parties for the completion of development
projects. We customarily have agreements with our outside partners whereby the partners agree to reimburse the real estate venture
or us for their share of any payments made under the guarantee. Amounts that may be required to be paid in future periods in
relation to budget overruns or operating losses that also included in some of our guarantees are not estimable. Guarantees (excluding
environmental) terminate either upon the satisfaction of specified circumstances or repayment of the underlying debt. As of
December 31, 2017, the aggregate amount of our principal payment guarantees was approximately $91.5 million for our
consolidated entities and $31.0 million for our unconsolidated real estate ventures.
As of December 31, 2017, we expect to fund additional capital to certain of our unconsolidated investments totaling approximately
$49.3 million, which we anticipate will be primarily expended over the next two to three years.
In connection with the Formation Transaction, we entered into 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 not 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, or from the taking
of certain restricted actions by us.
98
We are obligated under non-cancelable operating leases including ground leases on certain of our properties through 2106. As of
December 31, 2017, future minimum rental payments under non-cancelable operating leases, capital leases and lease assumption
liabilities are as follows:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
Amount
(In thousands)
$
$
13,686
14,073
13,866
13,594
12,845
697,903
765,967
During each of the three years in the period ended December 31, 2017, we recognized approximately $4.7 million, $2.1 million
and $1.9 million of rental expense related to our non-cancelable operating and capital leases.
18.
Transactions with Vornado and Related Parties
Transactions with Vornado
As described in Note 1 and Note 3, the accompanying financial statements present the operations of the Vornado Included Assets
as carved-out from the financial statements of Vornado for all periods prior to July 17, 2017.
Certain centralized corporate costs borne by Vornado for management and other services including, but not limited to, accounting,
reporting, legal, tax, information technology and human resources have been allocated to the assets in the financial statements
based on either actual costs incurred or a proportion of costs estimated to be applicable to the Vornado Included Assets based on
key metrics including total revenue. The total amounts allocated during each of the three years in the period ended December 31,
2017 were $13.0 million, $20.7 million and $20.0 million. These allocated amounts are included as a component of "General and
administrative expense: Corporate and other" expenses on the statements of operations and do not necessarily reflect what actual
costs would have been if the Vornado Included Assets were a separate standalone public company. Actual costs may be materially
different.
In connection with the Formation Transaction, we entered into an agreement with Vornado under which Vornado provides
operational support for an initial period of up to two years. These services include information technology, financial reporting and
payroll services. The charges for these services are based on an hourly or per transaction fee arrangement including reimbursement
for overhead and out-of-pocket expenses. The total charges for the year ended December 31, 2017 were approximately $2.2 million.
Pursuant to an agreement, we are providing Vornado with leasing and property management services for certain of its assets that
were not part of the Separation. The total revenue related to these services for the year ended December 31, 2017 was $779,000.
We believe that the terms of both of these agreements are comparable to those that would have been negotiated based on market
rates.
In connection with the Formation Transaction, we entered into a Tax Matters Agreement with Vornado. See Note 17 for additional
information.
In August 2014, we completed a $185.0 million financing of the Universal buildings, a 687,000 square foot office complex located
in Washington, DC. In connection with this financing, pursuant to a note agreement dated August 12, 2014, we used a portion of
the financing proceeds and made an $86.0 million loan to Vornado at LIBOR plus 2.9% due August 2019. During 2016 and 2015,
Vornado repaid $4.0 million and $7.0 million of the loan receivable. At the Separation, Vornado repaid the outstanding balance of
the loan and related accrued interest. As of December 31, 2016, the balance of the receivable from Vornado, including accrued
interest, was $75.1 million. We recognized interest income of $1.8 million, $3.3 million and $3.0 million during each of the three
years in the period ended December 31, 2017.
In connection with the development of The Bartlett, prior to the Combination, we entered into various note agreements with
Vornado whereby we could borrow up to a maximum of $170.0 million. Vornado contributed these note agreements along with
accrued and unpaid interest to JBG SMITH at the Separation. As of December 31, 2016, the amounts outstanding under these note
99
agreements totaled $166.5 million, and are included in "Payable to former parent" on our balance sheets. We incurred interest
expense of $4.1 million, $4.1 million and $846,000 during each of the three years in the period ended December 31, 2017.
In June 2016, the $115.0 million mortgage loan (including $608,000 of accrued interest) secured by the Bowen Building, a 231,000
square foot office building located in Washington, DC, was repaid with the proceeds of a $115.6 million draw on our former
parent's revolving credit facility. Given that the $115.6 million draw on our former parent's credit facility was secured by an interest
in the property, such amount was included in "Payable to former parent" in our balance sheet as of December 31, 2016. The loan
was repaid with amounts drawn under our revolving credit facility. See Note 8 for additional information. We incurred interest
expense of $1.3 million and $1.1 million during the two years in the period ended December 31, 2017.
We have agreements that are terminable on the second anniversary of the Combination with Building Maintenance Services
("BMS"), a wholly owned subsidiary of Vornado, to supervise cleaning, engineering and security services at our properties. We
paid BMS $13.6 million, $12.1 million and $12.4 million during each of the three years in the period ended December 31, 2017,
which are included in "Property operating expenses" in our statements of operations.
We entered into a consulting agreement with Mr. Schear, a member of our Board of Trustees and formerly the president of Vornado’s
Washington, DC segment. The consulting agreement expired on December 31, 2017 and provides for the payment of consulting
fees and expenses at the rate of approximately $169,400 per month for the 24 months following the Separation, including after
the termination of the consulting agreement. The amount due under this consulting agreement of $4.1 million was expensed in
connection with the Combination during the year ended December 31, 2017. As of December 31, 2017, the remaining liability is
$3.0 million. Additionally, in March 2017, Vornado amended Mr. Schear’s employment agreement to provide for the payment of
severance, bonus and post-employment services. A total of $16.4 million was expensed in connection with the Separation during
the year ended December 31, 2017.
Transactions with Real Estate Ventures
In addition, we have a third-party real estate services business that provides fee-based real estate services to the JBG Legacy Funds
and other third parties. We provide services for the benefit of the JBG Legacy Funds that own interests in the assets retained by
the JBG Legacy Funds. In connection with the contribution of the JBG Assets to us, it was determined that the general partner and
managing member interests in the JBG Legacy Funds that were held by former JBG executives (and who became members of our
management team and/or Board of Trustees) would not be transferred to us and remain under the control of these individuals. In
addition, certain members of our senior management and Board of Trustees have an ownership interest in the JBG Legacy Funds
and own carried interests in each fund and in certain of our real estate ventures that entitles them to receive additional compensation
if the fund or real estate venture achieves certain return thresholds. This third-party real estate services revenue, including
reimbursements, from these JBG Legacy Funds for the year ended December 31, 2017 was $19.9 million.
We rent our corporate offices from an unconsolidated real estate venture and incurred $2.3 million during the year ended
December 31, 2017, which is recorded in "General and administrative expense: Corporate and other" in our statement of operations.
Registration Rights Agreements
In connection with the Formation Transaction, we entered into a registration rights agreement with certain former investors in the
legacy JBG funds that received our common shares in the Formation Transaction (the "Shares Registration Rights Agreement")
and a separate registration rights agreement with the certain former investors in the legacy JBG funds and certain employees of
JBG entities that received OP Units in the Formation Transaction (the "OP Units Registration Rights Agreement" and together
with the Shares Registration Rights Agreement, the "Registration Rights Agreements"). Certain holders of common shares and
OP Units who may benefit from the Registration Rights Agreements are members of our management team and/or Board of
Trustees. Our obligations under the Shares Registration Rights Agreement were fully satisfied in January 2018.
19.
Quarterly Financial Data (unaudited)
2017
Total revenue
Net income (loss)
Net income (loss) attributable to common shareholders
Earnings (loss) per share:
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter (1)
Fourth
Quarter (2)
(In thousands, except per share data)
$
$
116,272
6,318
6,318
$
118,020
11,341
11,341
$
152,350
(77,991)
(69,831)
156,371
(18,752)
(16,418)
0.06
0.06
0.11
0.11
(0.61)
(0.61)
(0.15)
(0.15)
100
_______________
(1) During the third quarter of 2017, we recognized transaction and other costs of $104.1 million, a gain on bargain purchase of $27.8 million
and share-based compensation expense of $14.4 million in connection with the completion of the Formation Transaction.
(2) During the fourth quarter of 2017, we recognized share-based compensation expense of $14.8 million and transaction and other costs of $12.6
million in connection with the completion of the Formation Transaction in the third quarter of 2017. Additionally, we recognized a reduction
to the gain on bargain purchase of $3.4 million related to adjustments to the fair value of certain assets acquired and liabilities assumed in the
Formation Transaction. See Note 3 for additional information.
2016
Total revenue
Net income
Net income attributable to common shareholders
Earnings per share:
Basic
Diluted
____________
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter (1)
(In thousands, except per share data)
$
$
116,784
11,547
11,547
$
116,339
16,783
16,783
$
123,357
21,014
21,014
122,039
12,630
12,630
0.11
0.11
0.17
0.17
0.21
0.21
0.13
0.13
(1) During the fourth quarter of 2016, we recognized transaction and other costs of $4.9 million in connection with the Formation Transaction
completed during the third quarter of 2017.
20.
Subsequent Events
In January 2018, we entered into an agreement for the sale of Summit I and II, two office assets located in Reston, Virginia, which
had an aggregate net carrying value of $87.9 million as of December 31, 2017 for an aggregate gross sales price of $95.0 million.
The assets met the held for sale criteria subsequent to December 31, 2017.
In January 2018, we drew an additional $50.0 million under the Tranche A-1 Term Loan, in accordance with the delayed draw
provisions of the credit facility. Concurrent with the draw, we entered into an interest rate swap agreement to convert the variable
interest rate to a fixed interest rate.
In January 2018, we entered into a real estate venture with CIM Group ("CIM") and Pacific Life Insurance Company ("PacLife"),
which purchased the 1,152-key Marriott Wardman Park Hotel ("Wardman Park Marriott"), located adjacent to the Woodley Park
Metro Station in northwest Washington, DC. We and CIM each contributed $10.1 million for 16.67% interests in the real estate
venture and PacLife contributed $40.3 million for the remaining 66.67% interest. Prior to the acquisition, the JBG Legacy Funds
owned a 47.64% interest in the Wardman Park Marriott. While the new real estate venture will attempt to improve hotel operations,
in the event operations continue to decline, the real estate venture provides a low-cost option to pursue a plan to develop a large
and potentially valuable land site in a high value residential market. We do not intend to devote meaningful resources to managing
the asset, and intend to only do so if the land development opportunity becomes the primary business plan for the asset.
In February 2018, we closed on a joint venture with one of our real estate venture partners, CPPIB, to develop and own 1900 N
Street, an under-construction office asset in Washington, DC. CPPIB has committed approximately $101.0 million for a 45%
interest, which will reduce our ownership percentage from 100.0% to 55.0% as contributions are funded.
In February 2018, we issued an additional 61,309 Formation Units, 357,922 Time-Based LTIP Units and 553,589 Performance-
Based LTIP Units to management and employees with an estimated aggregate fair value of $21.1 million.
101
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
ITEM 9A. 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 December 31, 2017, our disclosure controls and procedures were effective.
No Management Report or Attestation Report Regarding Internal Control
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an
attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the Securities
and Exchange Commission for newly public companies.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2017 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information regarding trustees is incorporated herein by reference from the section entitled “Proposal One: Election of Trustees
—Nominees for Election as Trustees” in our definitive Proxy Statement (the “2018 Proxy Statement”) to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, for our 2018 Annual Meeting of Shareholders to be held on
May 3, 2018. The 2018 Proxy Statement will be filed within 120 days after the end of our fiscal year ended December 31, 2017.
ITEM 11. EXECUTIVE COMPENSATION
The information included under the following captions in our 2018 Proxy Statement is incorporated herein by reference:
“Compensation Discussion and Analysis,” “Compensation Committee Report,” “Compensation of Executive Officers,” “Corporate
Governance and Board Matters—Compensation of Trustees” and “Corporate Governance and Board Matters—Compensation
Committee Interlocks and Insider Participation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from
the section entitled “Security Ownership of Certain Beneficial Owners and Management” and “Compensation of Executive Officers
—Equity Compensation Plan Information” in our 2018 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information regarding transactions with related persons and trustee independence is incorporated herein by reference from
the sections entitled “Certain Relationships and Related Party Transactions” and “Corporate Governance and Board Matters—
Corporate Governance Profile” in the Company’s 2018 Proxy Statement.
102
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information regarding principal auditor fees and services and the audit committee’s pre-approval policies are incorporated
herein by reference from the sections entitled “Proposal Four: Ratification of the Appointment of Independent Registered Public
Accounting Firm—Principal Accountant Fees and Services” and “Proposal Four: Ratification of the Appointment of Independent
Registered Public Accounting Firm—Pre-Approval Policies and Procedures” in our 2018 Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following consolidated and combined information is included in this Form 10-K:
(1) Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated and Combined Balance Sheets as of December 31, 2017 and 2016
Consolidated and Combined Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated and Combined Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016
and 2015
Consolidated and Combined Statements of Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated and Combined Financial Statements
These financial statements are set forth in Item 8 of this report and are hereby incorporated by reference.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedule III - Real Estate Investments and Accumulated Depreciation
Page
104
105
Schedules other than those listed above are omitted because they are not applicable or the information required is included
in the financial statements or the notes thereto.
103
SCHEDULE II
JBG SMITH PROPERTIES
VALUATION AND QUALIFYING ACCOUNTS
Balance at
Beginning of
Year
Additions
Charged
Against
Operations
Adjustments
to Valuation
Accounts
(In thousands)
Uncollectible
Accounts
Written off
Balance at
End of Year
Year ended December 31, 2017:
Allowance for doubtful accounts (1)
Year ended December 31, 2016:
Allowance for doubtful accounts (1)
Year ended December 31, 2015:
Allowance for doubtful accounts (1)
$
$
$
4,526
$
3,807
$
— $
(2,048) $
6,285
4,431
$
751
$
— $
(656) $
4,526
2,514
$
1,407
$
— $
510
$
4,431
_______________
(1) Includes allowance for doubtful accounts related to tenant and other receivables and deferred rent receivable.
104
SCHEDULE III
JBG SMITH PROPERTIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2017
Initial Cost to Company
Gross Amounts at Which Carried
at Close of Period
Description
Office Operating Assets
Encumbrances(1)
Land and
Improvements
Buildings and
Improvements
Costs
Capitalized
Subsequent
to
Acquisition(2)
Land and
Improvements
Buildings and
Improvements
Total
Accumulated
Depreciation
and
Amortization
Date of
Construction(3)
Date
Acquired
Universal Buildings
$
184,357 $
69,393 $
143,320 $
22,547 $
68,612 $
166,648 $ 235,260 $
2101 L Street
Bowen Building
1730 M Street
1233 20th Street
Executive Tower
1600 K Street
Courthouse Plaza 1 and 2
2345 Crystal Drive
2121 Crystal Drive
1550 Crystal Drive
RTC - West
2231 Crystal Drive
2011 Crystal Drive
2451 Crystal Drive
Commerce Executive
1235 S. Clark Street
241 18th Street S.
251 18th Street S.
1215 S. Clark Street
201 12th Street S.
140,493
—
—
42,684
—
—
2,000
—
139,134
—
107,720
—
—
—
—
78,000
—
35,792
34,299
—
800 North Glebe Road
107,500
1225 S. Clark Street
2200 Crystal Drive
1901 South Bell Street
2100 Crystal Drive
200 12th Street S.
2001 Jefferson Davis
Highway
Summit I
Summit II
1800 South Bell Street
Crystal City Shops at
2100
Wiehle Avenue Office
Building
1831 Wiehle Avenue
Crystal Drive Retail
—
—
—
—
17,227
—
29,500
29,500
—
—
—
—
—
7200 Wisconsin Avenue
83,130
34,683
One Democracy Plaza
4749 Bethesda Avenue
Retail
RTC - West Retail
Office Construction Assets
1900 N Street
CEB Tower at Central
Place
4747 Bethesda Avenue
Multifamily Operating Assets
Fort Totten Square
WestEnd25
RiverHouse Apartments
The Bartlett
220 20th Street
2221 South Clark Street
—
—
—
—
178,783
—
73,600
99,456
307,710
220,000
—
—
—
—
2,894
—
—
—
24,390
67,049
118,421
41,687
8,434
7,405
32,815
30,077
10,095
30,505
33,481
19,870
51,642
98,962
17,541
23,130
67,363
10,308
—
105,475
23,126
21,503
22,182
30,326
20,611
18,940
16,755
13,401
15,826
13,867
12,305
13,636
14,766
28,168
11,176
13,104
11,669
10,287
8,016
7,300
7,317
5,535
—
4,059
—
—
—
93,918
87,329
70,525
134,108
83,705
76,921
68,047
58,705
56,090
54,169
49,360
48,380
52,750
140,983
43,495
30,050
36,918
23,590
30,552
16,746
30,626
28,463
28,702
9,309
96
—
20,465
92,059
33,628
11,830
—
83,766
6,238
16,111
338
9,306
193
56,173
35,612
47,790
19,796
(110)
18,856
33,139
27,307
26,122
27,075
25,164
50,928
54,196
22,680
2,182
19,649
32,798
22,584
31,712
19,423
11,297
379
332
7,220
5,229
—
24
6,034
885
6,572
2,664
7,011
8,865
86,336
230,280
117,898
10,040
46,782
90,404
5,039
125,078
—
19,340
16,981
566
109,922
82,825
224,805
99,259
41,598
105
39,768
30,176
10,687
30,505
34,178
19,870
—
23,546
21,934
21,585
30,397
21,001
18,871
17,090
13,140
16,189
14,894
12,809
13,926
15,036
28,168
11,413
13,378
11,669
10,520
8,186
7,281
7,317
5,535
—
4,049
—
—
55
34,683
—
—
2,894
—
—
—
24,390
68,201
138,763
41,687
8,693
7,386
128,455
105,101
33,060
23,468
75,972
10,501
161,648
129,110
134,688
90,918
133,927
102,171
110,129
95,019
85,088
82,802
78,306
99,784
102,286
75,160
168,223
135,277
43,747
53,973
110,150
30,371
161,648
152,656
156,622
112,503
164,324
123,172
129,000
112,109
98,228
98,991
93,200
112,593
116,212
90,196
143,165
171,333
62,907
62,574
59,502
55,069
49,805
28,062
31,005
28,795
35,922
74,320
75,952
71,171
65,589
57,991
35,343
38,322
34,330
35,922
48,187
40,822
32,854
12,537
735
13,180
402
67,974
54,253
65,256
37,886
3,330
38,807
45,263
35,934
33,829
30,358
30,915
34,678
27,373
27,838
2,737
23,247
18,075
24,931
22,490
18,490
10,135
662
741
14,835
1956
1975
1922
1964
1984
2001
1950
1989
1988
1985
1980
1988
1987
1984
1990
1987
1981
1977
1975
1983
1987
2012
1982
1968
1968
1968
1985
1967
1987
1986
1969
14,548
18,597
5,611
1968
96
24
26,444
92,944
40,200
14,494
7,011
96
24
26,499
127,627
40,200
14,494
9,905
95,201
95,201
348,178
348,178
56,822
56,822
90,970
113,809
187,561
224,805
118,340
58,598
115,360
182,010
326,324
266,492
127,033
65,984
48
2
12,133
1,763
21,915
—
103
—
—
—
1,785
23,983
56,476
10,074
27,749
4,109
1984
1983
2003
1986
1987
2016
2017
2015
2009
1960
2016
2009
1964
2007
2003
2005
2002
2017
2011
2017
2002
2002
2002
2002
2017
2002
2002
2002
2002
2002
2002
2002
2002
2002
2017
2002
2002
2002
2002
2002
2002
2017
2017
2002
2002
2017
2017
2004
2017
2002
2017
2017
2017
2017
2017
2017
2007
2007
2007
2017
2002
Initial Cost to Company
Gross Amounts at Which Carried
at Close of Period
Encumbrances(1)
Land and
Improvements
Buildings and
Improvements
Costs
Capitalized
Subsequent
to
Acquisition(2)
Land and
Improvements
Buildings and
Improvements
Total
Accumulated
Depreciation
and
Amortization
Date of
Construction(3)
Date
Acquired
41,976
22,566
1,338
—
59,194
—
—
—
—
—
—
—
—
—
—
—
—
18,530
9,810
—
—
—
—
5,847
1,763
8,000
65,259
104,473
34,178
32,730
20,318
15,550
44,232
22,706
17,902
—
63,775
13,952
9,333
641
107
6
69,424
22,665
46,834
63,269
(107)
41
47,191
12,595
1,326
55
46,938
—
—
26,574
(32,322)
(26,487)
147
132
6,451
(2,328)
18,530
9,810
—
—
—
—
5,847
1,763
8,224
82,898
61,970
34,183
32,846
20,318
12,803
44,339
22,712
87,326
22,665
62,869
32,522
87,326
22,665
110,609
110,609
77,221
77,221
9,226
682
15,073
2,445
910
477
—
—
1
—
179
213
1938
1938
2015
1981
59,562
67,786
20,529
1968
10,261
10,236
20,446
31
132
6,870
93,159
72,206
54,629
32,877
20,450
19,673
27
—
—
—
—
367
140,919
112,653
—
—
(9,091)
21,939
170,620
—
73,861
21,939
244,481
21,939
62
4,060
2,035,959
1,332,451
2,922,442
1,762,611
1,368,294
4,649,210
6,017,504
1,011,330
—
—
—
1,699
6,594
8,293
—
—
—
—
—
—
1,699
6,594
8,293
—
—
—
1,699
6,594
8,293
—
—
—
$
2,035,959 $
1,340,744 $
2,922,442 $
1,762,611 $
1,376,587 $
4,649,210 $ 6,025,797 $
1,011,330
2017
2017
2017
2017
2017
2017
2017
2005
2004
2007
2007
2002, 2006
2017
2017
2005
2017
2017
2017
2017
Description
Falkland Chase - South &
West
Falkland Chase - North
Multifamily Construction Assets
West Half
965 Florida Avenue
1221 Van Street
Atlantic Plumbing C
Other Operating Assets
North End Retail
Vienna Retail
Crystal City Marriott
Hotel
Future Development Assets
Metropolitan Park 6-8
Pen Place - Land Parcel
1700 M Street Dev
Capitol Point - North
Potomac Yard Land Bay G
- Parcels A - F
Square 649
Other Future
Development Assets
Corporate
Held for sale:
Summit II
Potomac Yard Land Bay G
- Parcel G
_______________
Note: Depreciation of the buildings and improvements is calculated over lives ranging from the life of the lease to 40 years. As of December 31, 2017, the cost of real estate, net of
accumulated depreciation, for federal income tax purposes was approximately $3.5 billion.
(1) Represents the contractual debt obligations.
(2) Includes asset impairments recognized and amounts written off in connection with redevelopment activities.
(3) Date of original construction, many assets have had substantial renovation or additional construction. See "Costs Capitalized Subsequent to Acquisition" column.
106
The following is a reconciliation of real estate and accumulated depreciation:
Real Estate:
Balance at beginning of the year
Additions during the year:
Land and improvements
Buildings and improvements
Held for sale
Balance at end of the year
Accumulated Depreciation:
Balance at beginning of period
Additions charged to operating expenses
Balance at end of period
Year Ended December 31,
2017
2016
2015
(In thousands)
$
4,155,391
$
4,038,206
$
3,809,213
428,702
1,489,409
8,293
(55,998)
—
217,261
—
(100,076)
—
252,113
—
(23,120)
6,025,797
$
4,155,391
$
4,038,206
930,769
$
908,233
$
136,559
(55,998)
122,612
(100,076)
797,806
133,582
(23,155)
1,011,330
$
930,769
$
908,233
$
$
$
107
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(3) Exhibit Index
Exhibits
Description
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
3.1
3.2
3.3**
10.1**
10.2
10.3
10.4
Master Transaction Agreement, dated as of October 31, 2016, by and among Vornado Realty Trust, Vornado
Realty L.P., JBG Properties, Inc., JBG/Operating Partners, L.P., certain affiliates of JBG Properties Inc. and JBG/
Operating Partners set forth on Schedule A thereto, JBG SMITH Properties and JBG SMITH Properties LP
(incorporated by reference to Exhibit 2.1 to our Registration Statement on Form 10, filed on June 12, 2017).
Amendment to Master Transaction Agreement, dated as of July 17, 2017, by and among Vornado Realty Trust,
Vornado Realty L.P., JBG Properties, Inc., JBG/Operating Partners, L.P., certain affiliates of JBG Properties Inc.
and JBG/Operating Partners set forth on Schedule A thereto, JBG SMITH Properties and JBG SMITH Properties
LP (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K, filed on July 21, 2017).
Agreement and Plan of Merger, dated as of July 17, 2017, by and between JBG/Fund VI Transferred, L.L.C. and
JBGS/Fund VI OP Mergerco, L.L.C. (incorporated by reference to Exhibit 2.3 to our Current Report on Form 8-
K, filed on July 21, 2017).
Agreement and Plan of Merger, dated as of July 17, 2017, by and between JBG/Fund VII Transferred, L.L.C. and
JBGS/Fund VII OP Mergerco, L.L.C. (incorporated by reference to Exhibit 2.4 to our Current Report on Form 8-
K, filed on July 21, 2017).
Agreement and Plan of Merger, dated as of July 17, 2017, by and between JBG/Fund IX Transferred, L.L.C. and
JBGS/Fund IX OP Mergerco, L.L.C. (incorporated by reference to Exhibit 2.5 to our Current Report on Form 8-
K, filed on July 21, 2017).
Contribution and Assignment Agreement, dated as of July 18, 2017, by and between JBG SMITH Properties LP
and JBG/Fund VIII Legacy, L.L.C. (incorporated by reference to Exhibit 2.6 to our Current Report on Form 8-
K, filed on July 21, 2017).
Contribution and Assignment Agreement, dated as of July 18, 2017, by and between JBG SMITH Properties LP
and JBG/UDM Legacy, L.L.C. (incorporated by reference to Exhibit 2.7 to our Current Report on Form 8-K,
filed on July 21, 2017).
Agreement and Plan of Merger, dated as of July 17, 2017, by and between JBG/Operating Partners, L.P. and
JBGS/OP Mergerco, L.L.C. (incorporated by reference to Exhibit 2.8 to our Current Report on Form 8-K, filed
on July 21, 2017).
Contribution and Assignment Agreement, dated as of July 18, 2017, by and between JBG Properties, Inc. and
JBG SMITH Properties LP (incorporated by reference to Exhibit 2.9 to our Current Report on Form 8-K, filed
on July 21, 2017).
Separation and Distribution Agreement, dated as of July 17, 2017, by and among Vornado Realty Trust, Vornado
Realty L.P., JBG SMITH Properties and JBG SMITH Properties LP (incorporated by reference to Exhibit 2.2 to
our Current Report on Form 8-K, filed on July 21, 2017).
Declaration of Trust of JBG SMITH Properties, as amended and restated (incorporated by reference to Exhibit 3.1
to our Current Report on Form 8-K, filed on July 21, 2017).
Articles Supplementary to Declaration of Trust of JBG SMITH Properties (incorporated by reference to Exhibit
3.1 to our Current Report on Form 8-K, filed on March 6, 2018).
Amended and Restated Bylaws of JBG SMITH Properties.
First Amended and Restated Limited Partnership Agreement of JBG SMITH Properties LP, dated as of July 17,
2017.
Tax Matters Agreement, dated as of July 17, 2017, by and between Vornado Realty Trust and JBG SMITH
Properties (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on July 21, 2017).
Employee Matters Agreement, dated as of July 17, 2017, by and between Vornado Realty Trust, Vornado Realty
L.P., JBG SMITH Properties and JBG SMITH Properties LP (incorporated by reference to Exhibit 10.2 to our
Current Report on Form 8-K, filed on July 21, 2017).
Transition Services Agreement, dated as of July 17, 2017, by and between Vornado Realty Trust and JBG SMITH
Properties (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on July 21, 2017).
108
Exhibits
10.5
10.6
10.7
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20**
10.21†
10.22†
10.23†
10.24†
Description
Credit Agreement, dated as of July 18, 2017, by and among JBG SMITH Properties LP, as Borrower, the financial
institutions party thereto as lenders, and Wells Fargo Bank, National Association, as Administrative Agent
(incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K, filed on July 21, 2017).
Registration Rights Agreement, dated as of July 18, 2017, by and among JBG SMITH Properties and the holders
listed on Schedule I thereto (for holders of common shares of JBG SMITH Properties received in the combination)
(incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K, filed on July 21, 2017).
Registration Rights Agreement, dated as of July 18, 2017, by and among JBG SMITH Properties and the holders
listed on Schedule I thereto (for holders of OP Units of JBG SMITH LP received in the combination) (incorporated
by reference to Exhibit 10.6 to our Current Report on Form 8-K, filed on July 21, 2017).
Form of JBG SMITH Properties Unit Issuance Agreement (incorporated by reference to Exhibit 10.7 to our
Current Report on Form 8-K, filed on July 21, 2017).
JBG SMITH Properties Non-Employee Trustee Unit Issuance Agreement, dated July 18, 2017, by and among,
JBG SMITH Properties, JBG SMITH Properties LP, Michael J. Glosserman and Glosserman Family JBG
Operating, L.L.C. (incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K, filed on July 21,
2017).
Amended and Restated Employment Agreement, dated as of June 16, 2017, by and between JBG SMITH
Properties and W. Matthew Kelly (incorporated by reference to Exhibit 10.5 to our Registration Statement on
Form 10, filed on June 21, 2017).
Amended and Restated Employment Agreement, dated as of June 16, 2017, by and between JBG SMITH
Properties and James L. Iker (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form 10,
filed on June 21, 2017).
Amended and Restated Employment Agreement, dated as of June 16, 2017, by and between JBG SMITH
Properties and David P. Paul (incorporated by reference to Exhibit 10.7 to our Registration Statement on Form 10,
filed on June 21, 2017).
Amended and Restated Employment Agreement, dated as of June 16, 2017, by and between JBG SMITH
Properties and Robert A. Stewart (incorporated by reference to Exhibit 10.10 to our Registration Statement on
Form 10, filed on June 21, 2017).
Employment Agreement, dated as of July 17, 2017, by and between JBG SMITH Properties and Stephen W.
Theriot (incorporated by reference to Exhibit 10.11 to our Current Report on Form 8-K, filed on July 21, 2017).
Form of Indemnification Agreement between JBG SMITH Properties and each of its trustees and executive
officers (incorporated by reference to Exhibit 10.12 to our Current Report on Form 8-K, filed on July 21, 2017).
Formation Unit Grant Letter, dated as of October 31, 2016, by and between JBG SMITH Properties and Steven
Roth (incorporated by reference to Exhibit 10.15 to our Registration Statement on Form 10, filed on January 24,
2017).
Consulting Agreement, dated as of March 10, 2017, by and between JBG SMITH Properties and Mitchell Schear
(incorporated by reference to Exhibit 10.16 to our Registration Statement on Form 10, filed on June 12, 2017).
Second Amended and Restated Continuation Agreement, dated as of June 13, 2017, by and between Michael J.
Glosserman and JBG/Operating Partners, L.P. (incorporated by reference to Exhibit 10.17 to our Registration
Statement on Form 10, filed on June 21, 2017).
JBG SMITH Properties 2017 Employee Share Purchase Plan (incorporated by reference to Exhibit 10.9 to our
Current Report on Form 8-K, filed on July 21, 2017).
Amendment No. 1 to the JBG SMITH Properties 2017 Employee Share Purchase Plan, effective January 1, 2018.
JBG SMITH Properties 2017 Omnibus Share Plan (incorporated by reference to Exhibit 10.10 to our Current
Report on Form 8-K, filed on July 21, 2017).
Form of JBG SMITH Properties Formation Unit Agreement (incorporated by reference to Exhibit 10.18 to our
Registration Statement on Form 10, filed on June 12, 2017).
Form of JBG SMITH Properties Formation Unit Agreement for Non-Employee Trustees (incorporated by
reference to Exhibit 10.19 to our Registration Statement on Form 10, filed on June 12, 2017).
Form of JBG SMITH Properties Restricted LTIP Unit Agreement (incorporated by reference to Exhibit 10.20 to
our Registration Statement on Form 10, filed on June 12, 2017).
109
Exhibits
10.25†
Form of JBG SMITH Properties Performance LTIP Unit Agreement (incorporated by reference to Exhibit 10.21
to our Registration Statement on Form 10, filed on June 12, 2017).
Description
10.26**
Form of 2018 Performance LTIP Unit Agreement.
10.27†
10.28†
10.29†
Form of JBG SMITH Properties Non-Employee Trustee Restricted LTIP Unit Agreement (incorporated by
reference to Exhibit 10.22 to our Registration Statement on Form 10, filed on June 21, 2017).
Form of JBG SMITH Properties Non-Employee Trustee Restricted Stock Agreement (incorporated by reference
to Exhibit 10.23 to our Registration Statement on Form 10, filed on June 21, 2017).
Form of JBG SMITH Properties Non-Employee Trustee Unit Issuance Agreement (incorporated by reference to
Exhibit 10.24 to our Registration Statement on Form 10, filed on June 21, 2017).
21.1**
List of Subsidiaries of the Registrant
23.1**
Consent of Independent Registered Public Accounting Firm
31.1**
31.2**
32.1**
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
as amended and Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
as amended and Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934, as amended and 18 U.S.C 1350, as created by Section 906 of the Sarbanes-
Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Extension Calculation Linkbase
101.LAB
XBRL Extension Labels Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
_______________
**
†
Filed herewith.
Denotes a management contract or compensatory plan, contract or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
110
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: March 12, 2018
JBG SMITH Properties
/s/ Stephen W. Theriot
Stephen W. Theriot
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE
TITLE
DATE
/s/ Steven Roth
Steven Roth
Chairman of the Board
March 12, 2018
/s/ Robert Stewart
Executive Vice Chairman
March 12, 2018
Robert Stewart
/s/ W. Matthew Kelly
Chief Executive Officer
March 12, 2018
W. Matthew Kelly
/s/ Stephen W. Theriot
Chief Financial Officer
March 12, 2018
Stephen W. Theriot
(Principal Financial and Accounting Officer)
/s/ Scott Estes
Scott Estes
/s/ Alan Forman
Alan Forman
/s/ Michael J. Glosserman
Michael J. Glosserman
/s/ Charles E. Haldeman, Jr.
Charles E. Haldeman, Jr.
/s/ Carol Melton
Carol Melton
/s/ William Mulrow
William Mulrow
/s/ Mitchell N. Schear
Mitchell N. Schear
/s/ Ellen Shuman
Ellen Shuman
/s/ John F. Wood
John F. Wood
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
111
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
Atlantic Plumbing
The Bartlett
West Half
1900 N Street
4445 WILLARD AVENUE, SUITE 400, CHEVY CHASE, MD 20815
JBGSMITH.COM | 240.333.3600 | NYSE: JBGS