JBG SMITH Announces Fourth Quarter 2017 Results

CHEVY CHASE, Md.--(BUSINESS WIRE)--JBG SMITH (NYSE: JBGS), a leading owner and developer of high-quality, mixed-use properties in the Washington, DC market, today filed its Form 10-K for the year ended December 31, 2017 and reported its financial results below.

Additional information regarding our results of operations, properties and tenants can be found in our Fourth Quarter 2017 Investor Report, which is posted in the Investor Relations section of our website at www.jbgsmith.com.

Fourth Quarter 2017 Financial Results

• Net loss attributable to common shareholders was $(16.4) million, or $(0.15) per diluted share.
• Funds From Operations (“FFO”) attributable to common shareholders was $32.5 million, or $0.28 per diluted share.
• Core Funds From Operations (“Core FFO”) attributable to common shareholders was $49.4 million, or $0.42 per diluted share.

Six Months Ended December 31, 2017 Financial Results

• Net loss attributable to common shareholders was $(86.2) million, or $(0.76) per diluted share.
• FFO attributable to common shareholders was $6.5 million, or $0.06 per diluted share.
• Core FFO attributable to common shareholders was $103.4 million, or $0.89 per diluted share.
• Note that our acquisition of the management business and certain assets and liabilities of The JBG Companies (the “JBG Assets”) has been accounted for as a business combination and the results from these operations have been included in our financial results commencing on July 18, 2017. Accordingly, these results exclude the net loss, FFO, and Core FFO from the JBG Assets for the period July 1, 2017 to July 17, 2017.

Operating Portfolio Highlights

• Annualized Net Operating Income (“NOI”) for the three months ended December 31, 2017 was $363.3 million compared with $357.5 million for the three months ended September 30, 2017. (Includes the JBG Assets as if the acquisition of the JBG Assets occurred on July 1, 2017.)
• The operating office portfolio was 88.0% leased and 87.2% occupied as of December 31, 2017 compared with 88.2% and 87.5% as of September 30, 2017.
• The operating multifamily portfolio was 95.6% leased and 93.8% occupied as of December 31, 2017 compared with 96.2% and 94.6% as of September 30, 2017.
• The operating other portfolio (excluding the Crystal City Marriott Hotel) was 96.5% leased and 96.2% occupied as of December 31, 2017 compared with 98.8% and 97.6% as of September 30, 2017.
• Executed approximately 558,000 square feet of office leases at our share in the fourth quarter, totaling approximately 212,000 square feet of new leases, and approximately 346,000 square feet of second generation leases, which generated a 9.1% rental rate increase on a GAAP basis and an 8.8% rental rate decrease on a cash basis.
• Same Store Net Operating Income (“SSNOI”) increased 10.3% to $71.6 million for the three months ended December 31, 2017 compared with $64.9 million for the three months ended December 31, 2016 and 6.5% to $272.0 million for the year ended December 31, 2017 compared with $255.3 million for the year ended December 31, 2016. The increase in SSNOI is largely attributable to higher rental revenue from new leases, the expiration of rent abatements and the expiration of certain payments associated with assumed lease liabilities. The same store pool for the three months and year ended December 31, 2017 includes only the assets that were in service for the entirety of both periods being compared and does not include any JBG Assets.

Development Portfolio Highlights

Under Construction

• As of December 31, 2017, there were ten assets under construction (four office assets, five multifamily assets and one other asset), consisting of 1.2 million square feet and 1,568 units, both at our share.
• During the fourth quarter, we commenced construction on one multifamily asset (965 Florida Avenue).

Near-Term Development

• As of December 31, 2017, there were no assets in near-term development.

Future Development Pipeline

• As of December 31, 2017, there were 43 future development assets consisting of 17.9 million square feet of estimated potential density at our share.

Third-Party Asset Management and Real Estate Services Business

• For the three months ended December 31, 2017, revenue from third-party real estate services, including reimbursements was $24.4 million. Excluding reimbursements and service revenue from our interests in consolidated and unconsolidated joint ventures, revenue from our third-party asset management and real estate services business was $14.2 million, of which $5.8 million came from property management fees, $4.0 million came from asset management fees, $1.7 million came from leasing fees, $1.7 million came from development fees, $0.7 million came from construction management fees and $0.3 million came from other service revenue.
• The general and administrative expenses allocated to the third-party asset management and real estate services business were $10.3 million for the three months ended December 31, 2017.

Balance Sheet

• We had $2.2 billion of debt ($2.6 billion including our share of debt of unconsolidated ventures) as of December 31, 2017. Of the $2.6 billion of debt at our share, approximately 70% was fixed-rate, and we have caps in place for approximately 19%.
• At December 31, 2017, our enterprise value was approximately $7.0 billion, comprised of 137.7 million common shares and units valued at $4.8 billion and debt at our share of $2.6 billion, less cash and cash equivalents.
• The weighted average interest rate of our debt at share was 4.05% at December 31, 2017.
• As of December 31, 2017, we had $329 million of cash and cash equivalents, including our share of cash and cash equivalents from unconsolidated joint ventures, and $1.2 billion of capacity under our credit facility.
• Net Debt / Adjusted EBITDA at our share for the three months ended December 31, 2017 was 7.1x and our Net Debt / Total Enterprise Value was 32%.

Financing Activities

During the fourth quarter we:

• Closed two loans with an aggregate credit limit of $148.4 million at our share:
  • A $78.0 million loan on 1235 South Clark, an office asset in the Crystal City submarket of Arlington, VA. The loan has a 10-year term and a fixed interest rate of 3.94%; and
  • A $110.0 million refinancing on Atlantic Plumbing ($70.4 million at our share), a multifamily asset in the U Street/Shaw submarket of Washington, DC. The loan has a 5-year term and a floating interest rate of LIBOR + 1.50%. A swap agreement has been placed to fix the interest rate of 5.08% through September 2020. At closing, $100.0 million was funded, which was used in part to repay the existing $88.4 million loan. We have the ability to draw an additional $10.0 million subject to the asset’s performance.
• Repaid approximately $78.2 million of secured debt:
  • A $67.3 million loan on 220 20th Street, a multifamily asset in Crystal City, VA; and
  • A $10.9 million loan on Capitol Point – North, a development parcel in the NoMa submarket of Washington, DC.
• Entered into agreements in the aggregate notional amounts of $792.9 million to swap variable interest rates to fixed rates on the following debt instruments:
  • $50.0 million related to our Tranche A-1 Term Loan;
  • $107.7 million related to our mortgage loan on RTC - West;
  • $107.5 million related to our mortgage loan on 800 North Glebe Road;
  • $307.7 million related to our mortgage loan on River House; and
  • $220.0 million related to our mortgage loan on The Bartlett.
• Executed short-term extensions of three loans we expect to refinance in 2018.

Subsequent to December 31, 2017, we:

• Drew an additional $50 million under the Term Loan A-1, in accordance with the delayed draw provisions of the credit facility. Concurrent with the draw, we entered into an agreement to swap the variable interest rate to a fixed rate.
• Closed a $48.0 million loan on The Alaire ($8.6 million at our share), a residential asset in the Twinbrook submarket of Rockville, MD. The loan has a term of 7 years and a variable interest rate of LIBOR + 1.82%. At closing, $47.0 million was funded, with the ability to draw an additional $1.0 million subject to the asset’s performance. Concurrent with the loan closing, we entered into an agreement to cap the maximum LIBOR rate under the loan for three years.
• Closed 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 DC CBD. 1900 N Street is 29.6% preleased to Goodwin Procter, a global 50 law firm, from the top down. CPPIB will invest approximately $101 million for a 45% interest in the venture, and we will continue to develop, manage and lease the asset.

Dividends

On December 18, 2017, we declared a dividend of $0.225 per common share, an indicated annual dividend of $0.90 per common share. The dividend was paid on January 8, 2018 to common shareholders of record as of December 29, 2017.

About JBG SMITH

JBG SMITH is an S&P 400 company that owns, operates, invests in and develops assets concentrated in leading urban infill submarkets in and around Washington, DC. Our mixed-use operating portfolio comprises approximately 20 million square feet of high-quality office, multifamily and retail assets, 98% of which are Metro-served. With a focus on placemaking, we drive synergies across the portfolio and create amenity-rich, walkable neighborhoods. JBG SMITH’s future development pipeline includes 17.9 million square feet of potential development density at our share. For additional information on JBG SMITH please visit www.jbgsmith.com.

Forward Looking Statements

Certain statements contained herein may constitute “forward-looking statements” as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Consequently, the future results of JBG SMITH Properties (“JBG SMITH” or the “Company”) may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximate”, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “would”, “may” or similar expressions in this document. We also note the following forward-looking statements: our expected annualized dividend per share and dividend yield, estimated net operating income; in the case of our construction and near-term development assets, estimated square feet, estimated number of units, the estimated completion date, estimated stabilization date, estimated incremental investment, estimated total investment, projected net operating income yield and estimated stabilized net operating income; and in the case of our future development assets, estimated potential development density, estimated commercial SF/multifamily units to be replaced, estimated remaining acquisition cost, estimated capitalized cost and estimated total investment. 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. These factors include, among others: adverse economic conditions in the Washington, DC metropolitan area, the timing of and costs associated with development and property improvements, financing commitments, and general competitive factors. For further discussion of factors that could materially affect the outcome of our forward-looking statements and other risks and uncertainties, see “Risk Factors” and the Cautionary Statement Concerning Forward-Looking Statements in JBG SMITH’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2018. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements. 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 after the date hereof.

Pro Rata Information

We present certain financial information and metrics in this release “at JBG SMITH Share,” which refers to our ownership percentage of consolidated and unconsolidated assets in real estate ventures (collectively, “real estate ventures”) as applied to these financial measures and metrics. Financial information “at JBG SMITH Share” is calculated on an asset-by-asset basis by applying our percentage economic interest to each applicable line item of that asset’s financial information. “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. Given that a substantial portion of our assets are held through real estate ventures, we believe this form of presentation, which presents our economic interests in the partially owned entities, provides investors valuable information regarding a significant component of our portfolio, its composition, performance and capitalization.

We do not control the unconsolidated real estate ventures and do not have a legal claim to our co-venturers’ share of assets, liabilities, revenue and expenses. The operating agreements of the unconsolidated real estate ventures generally allow each co-venturer to receive cash distributions to the extent there is available cash from operations. The amount of cash each investor receives is based upon specific provisions of each operating agreement and varies depending on certain factors including the amount of capital contributed by each investor and whether any investors are entitled to preferential distributions.

With respect to any such third-party arrangement, we would not be in a position to exercise sole decision-making authority regarding the property, real estate venture or other entity, and may, under certain circumstances, be exposed to economic risks not present were a third-party not involved. We and our respective co-venturers may each have the right to trigger a buy-sell or forced sale arrangement, which could cause us to sell our interest, or acquire our co-venturers’ interests, or to sell the underlying asset, either on unfavorable terms or at a time when we otherwise would not have initiated such a transaction. Our real estate ventures may be subject to debt, and the refinancing of such debt may require equity capital calls. To the extent our co-venturers do not meet their obligations to us or our real estate ventures or they act inconsistent with the interests of the real estate venture, we may be adversely affected. Because of these limitations, the non-GAAP “at JBG SMITH Share” financial information should not be considered in isolation or as a substitute for our financial statements as reported under GAAP.

Non-GAAP Financial Measures

This release includes non-GAAP financial measures. For these measures, we have provided an explanation of how these non-GAAP measures are calculated and why JBG SMITH’s management believes that the presentation of these measures provides useful information to investors regarding JBG SMITH’s financial condition and results of operations. Reconciliations of certain non-GAAP measures to the most directly comparable GAAP financial measure are included in this earnings release. Our presentation of non-GAAP financial measures may not be comparable to similar non-GAAP measures used by other companies. In addition to "at share" financial information, the following non-GAAP measures are included in this release:

Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") and Adjusted EBITDA

Management uses EBITDA as a supplemental operating performance measure and believes it helps investors and lenders meaningfully evaluate and compare our operating performance from period-to-period by removing from our operating results the impact of our capital structure (primarily interest charges from our consolidated outstanding debt and the impact of our interest rate swaps) and certain non-cash expenses (primarily depreciation and amortization on our assets). This supplemental measure may help investors and lenders understand our ability to incur and service debt and to make capital expenditures. EBITDA is not a substitute for net income (loss) (computed in accordance with GAAP) and may not be comparable to similarly titled measures used by other companies.

“Adjusted EBITDA,” a non-GAAP financial measure, represents EBITDA adjusted for items we believe are not representative of ongoing operating results, such as non-recurring transaction and other costs, gain (loss) on the extinguishment of debt, gain on the bargain purchase of a business, impairment of real estate and investments in unconsolidated joint ventures and share-based compensation expense related to the Formation Transaction. We believe that adjusting such items not considered part of our comparable operations, provides a meaningful measure to evaluate and compare our performance from period-to-period.

Because EBITDA and Adjusted EBITDA have limitations as analytical tools, we use EBITDA and Adjusted EBITDA to supplement GAAP financial measures. Additionally, we believe that users of these measures should consider EBITDA and Adjusted EBITDA in conjunction with net income (loss) and other GAAP measures in understanding our operating results.

Funds from Operations ("FFO"), Core FFO and Funds Available for Distribution (“FAD")

FFO is a non-GAAP financial measure computed in accordance with the definition established by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of, or impairment charges related to, depreciable operating properties, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.”

"Core FFO" represents FFO adjusted to exclude items (net of tax) which we believe are not representative of ongoing operating results, such as transaction and other costs, gains (or losses) on extinguishment of debt, gain on the bargain purchase of a business, gains (or losses) on the disposal of non-depreciable assets, share-based compensation expense related to the Formation Transaction, amortization of the management contracts intangible and the mark-to-market of interest rate swaps.

"FAD" is a non-GAAP financial performance measure and represents FFO less cash basis recurring tenant improvements, leasing commissions and other capital expenditures, net deferred rent activity, recurring share-based compensation expense, accretion of acquired below-market leases, net of amortization of acquired above-market leases, amortization of debt issuance costs and other non-cash income and charges. FAD is presented solely as a supplemental disclosure that management believes provides useful information as it relates to our ability to fund dividends.

We believe FFO, Core FFO and FAD are meaningful non-GAAP financial measures useful in comparing our levered operating performance from period-to-period and as compared to similar real estate companies because these non-GAAP measures exclude real estate depreciation and amortization expense and other non-comparable income and expenses, which implicitly assumes that the value of real estate diminishes predictably over time rather than fluctuating based on market conditions. FFO, Core FFO and FAD do not represent cash generated from operating activities and are not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flow as a liquidity measure. FFO, Core FFO and FAD may not be comparable to similarly titled measures used by other companies.

Net Operating Income ("NOI") and Annualized NOI

“NOI” is a non-GAAP financial measure management uses to measure the operating performance of our assets and consists of property-related revenue (which includes base rent, tenant reimbursements and other operating revenue, net of free rent and payments associated with assumed lease liabilities) less operating expenses and ground rent, if applicable. NOI also excludes deferred rent, related party management fees, interest expense, and certain other non-cash adjustments, including the accretion of acquired below-market leases and amortization of acquired above-market leases and below-market ground lease intangibles. Annualized NOI represents NOI for the three months ended December 31, 2017 multiplied by four. Management believes Annualized NOI provides useful information in understanding JBG SMITH’s financial performance over a 12-month period, however, investors and other users are cautioned against attributing undue certainty to our calculation of Annualized NOI. Actual NOI for any 12-month period will depend on a number of factors beyond our ability to control or predict, including general capital markets and economic conditions, any bankruptcy, insolvency, default or other failure to pay rent by one or more of our tenants and the destruction of one or more of our assets due to terrorist attack, natural disaster or other casualty, among others. We do not undertake any obligation to update our calculation to reflect events or circumstances occurring after the date of this earnings release. There can be no assurance that the annualized NOI shown will reflect JBG SMITH’s actual results of operations over any 12-month period. We also report adjusted annualized NOI which includes signed but not yet commenced leases and incremental revenue from recently delivered assets assuming stabilization. While we believe adjusted annualized NOI provides useful information regarding potential future NOI from our assets, it does not account for any decrease in NOI for lease terminations, defaults or other negative events that could affect NOI and therefore, should not be relied upon as indicative of future NOI.

Management uses each of these measures as supplemental performance measures for its assets and believes they provide useful information to investors because they reflect 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 this measure of the operating performance of our assets is limited. Moreover, our method of calculating NOI may differ from other real estate companies and, accordingly, may not be comparable. NOI should be considered only as a supplement to net operating income (loss) (computed in accordance with GAAP) as a measure of the operating performance of our assets.

Same Store and Non-Same Store

“Same store” refers to the pool of 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 included in the same store pool.

“Non-same store” refers to all assets excluded from the same store pool.