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Section 1: 424B3 (424B3)

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Filed Pursuant to Rule 424(b)(3)

 

Registration No. 333-220498

 

 

PROSPECTUS

 

23,313,165 Shares

 

GRAPHIC

 

JBG SMITH Properties

 

Common Shares of Beneficial Interest

 


 

This prospectus relates to the offer and sale from time to time of up to 23,313,165 shares of our common shares of beneficial interest by the selling shareholders named in this prospectus or in supplements to this prospectus.  The registration of the common shares of beneficial interest to which this prospectus relates does not require the selling shareholders to offer or sell those shares. We cannot predict when or in what amounts the selling shareholders may sell any of the shares offered by this prospectus. We are filing the registration statement pursuant to contractual obligations that exist with the selling shareholders.

 

We are not offering for sale any common shares of beneficial interest in the registration statement of which this prospectus is part.  We will not receive any proceeds from the sale of our common shares of beneficial interest by the selling shareholders, but will incur expenses. The selling shareholders from time to time may offer and sell the shares held by them directly or through underwriters, agents or broker-dealers on terms to be determined at the time of sale, as described in more detail in this prospectus. For more information, see “Plan of Distribution.”

 

Our common shares of beneficial interest are listed on The New York Stock Exchange (the “NYSE”) under the symbol “JBGS.” On September 28, 2017, the last sale price of our common shares of beneficial interest as reported on the NYSE was $34.05 per share.

 

We intend to elect to be taxed as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes, commencing with our taxable year ending December 31, 2017. Our common shares of beneficial interest are subject to limitations on ownership and transfer that are primarily intended to assist us in maintaining our qualification as a REIT. Our charter contains certain restrictions relating to the ownership and transfer of our common shares of beneficial interest, including, subject to certain exceptions, a 7.5% limit, in value or in number of shares, whichever is more restrictive, on the ownership of outstanding shares of our common shares of beneficial

 



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interest.  See “Description of Shares of Beneficial Interest—Common Shares—Restrictions on Ownership of Common Shares.”

 

Investing in our common shares involves risks.  See “Risk Factors” beginning on page 7 to read about factors you should consider before buying common shares.

 


 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

Prospectus dated September 29, 2017

 



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TABLE OF CONTENTS

 

 

Page

 

 

PRESENTATION OF INFORMATION

ii

SUMMARY

1

RISK FACTORS

7

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

31

USE OF PROCEEDS

32

DIVIDEND POLICY

33

SELECTED HISTORICAL COMBINED FINANCIAL DATA

34

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

35

MARKET PRICE OF OUR COMMON SHARES AND DIVIDENDS

53

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

54

BUSINESS AND PROPERTIES

69

INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

102

MANAGEMENT

107

COMPENSATION DISCUSSION AND ANALYSIS

116

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

125

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

131

DESCRIPTION OF MATERIAL INDEBTEDNESS

133

DESCRIPTION OF SHARES OF BENEFICIAL INTEREST

136

SELLING SHAREHOLDERS

141

CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR DECLARATION OF TRUST AND BYLAWS

143

PARTNERSHIP AGREEMENT

149

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

156

TAXATION OF HOLDERS OF JBG SMITH COMMON SHARES

167

SHARES ELIGIBLE FOR FUTURE SALE

175

PLAN OF DISTRIBUTION

177

LEGAL MATTERS

180

EXPERTS

180

WHERE YOU CAN FIND MORE INFORMATION

181

INDEX TO FINANCIAL STATEMENTS

F-1

 

You should rely only on the information contained or incorporated by reference in this prospectus or in any prospectus supplement or free writing prospectus we may authorize to be delivered to you. None of us or the selling shareholders have authorized anyone to provide you with additional or different information. The selling shareholders are offering to sell, and seeking offers to buy, our shares only in jurisdictions where offers and sales thereof are permitted. You should assume that the information appearing in this prospectus or in any prospectus supplement or free writing prospectus prepared by us is accurate only as of its date or on the date or dates which are specified in such document, and that any information in documents that we have incorporated by reference is accurate only as of the date of such document incorporated by reference. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.

 

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PRESENTATION OF INFORMATION

 

JBG SMITH Properties (“JBG SMITH”) was organized by Vornado Realty Trust (“Vornado”) as a Maryland real estate investment trust on October 27, 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. On July 18, 2017, JBG SMITH acquired the management business and certain assets of The JBG Companies (“JBG”) (the “combination”). Unless the context otherwise requires, all references to “we,” “us,” and “our,” refer to JBG SMITH after giving effect to the completion of the separation and the combination, and references to our historical business and operations refer to the business and operations of the office, multifamily and other commercial assets that were contributed by Vornado and JBG.

 

Prior to the separation from Vornado, JBG SMITH was a wholly owned subsidiary of Vornado and had no material assets or operations. Pursuant to a separation agreement, 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 Properties LP (“JBG SMITH LP”), our operating partnership, on a pro rata basis to the holders of VRLP’s common limited partnership units (also referred to in this prospectus as “common limited partners”), 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 common limited partnership unit for every two common limited partnership units in VRLP held as of the close of business on the Record Date.

 

We present certain financial information and metrics in this prospectus “at JBG SMITH Share,” which refers to our ownership percentage of consolidated and unconsolidated assets in joint ventures (collectively, “partially owned entities”). 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. Given that, as of the combination, approximately 30% of our assets, as measured by total square feet, are held through joint ventures, we believe this form of presentation, which presents our economic interests in the partially owned entities, provides investors important information regarding a significant component of our portfolio, its composition, performance and capitalization.

 

We do not control the unconsolidated joint 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 joint 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, joint 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 joint 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 joint ventures or they take action inconsistent with the interests of the joint venture, we may be adversely affected. See “Risk Factors—Risks Related to our Business and Operations—Partnership or joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on our partners’ or co-venturers’ financial condition and disputes between us and our partners or co-venturers”. Because of these limitations, the non-GAAP “at JBG SMITH Share” financial information should not be considered in isolation or as

 

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a substitute for our financial statements as reported under GAAP. For more information on our joint venture arrangements, see “Our Joint Venture Arrangements”.

 

Unless the context otherwise requires, the terms listed below have the meanings set forth next to such terms.

 

“annualized rent” means (i) for office and other assets, or the retail component of a mixed-use asset, the in-place monthly base rent before free rent, plus tenant reimbursements as of June 30, 2017, multiplied by 12, with triple net leases converted to a gross basis by adding estimated tenant reimbursements to monthly base rent, and (ii) for multifamily assets, or the multifamily component of a mixed-use asset, the in-place monthly base rent before free rent as of June 30, 2017, multiplied by 12. Annualized rent excludes rent from signed but not yet commenced leases.

 

“buy-sell right” means a right pursuant to which one member (the “initiating member”) of a joint venture may, if certain conditions are met, force the other member (the “non-initiating member”) to either, with the choice to be made by the non-initiating member, (1) sell its interest in the joint venture to the initiating member or (2) purchase the initiating member’s interest in the joint venture, in either case for a price based on a value for the joint venture’s property proposed by the initiating member.

 

The “combination” means the combination of JBG SMITH with the management business and certain select assets of JBG in accordance with the MTA which occurred at 12:01 a.m. Eastern on July 18, 2017.

 

“common limited partners” means holders of common limited partnership units of VRLP or JBG SMITH LP, as applicable.

 

The “distribution” means, unless otherwise specified, the pro rata distribution by Vornado to its common shareholders of all JBG SMITH common shares held by Vornado which occurred at 11:59 p.m. Eastern Time on July 17, 2017.

 

The “distribution by VRLP” means the pro rata distribution by VRLP, immediately prior to the distribution by Vornado, of all outstanding OP Units to holders of VRLP’s common limited partnership units, consisting of Vornado and the other common limited partners of VRLP.

 

“estimated incremental investment” means management’s estimate of the remaining cost to be incurred in connection with the development of an asset as of June 30, 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 and ground rent expenses.

 

“estimated potential development density” reflects management’s estimate of developable gross square feet based on its current business plans with respect to real estate owned or controlled as of June 30, 2017.

 

“free rent” means the amount of base rent and operating expenses that are abated according to the applicable lease agreement(s).

 

“future development pipeline” refers to assets that are development opportunities on which we do not intend to commence construction within 18 months of June 30, 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.

 

“GAAP” means accounting principles generally accepted in the United States.

 

“Gateway Markets” means those metropolitan areas that receive the largest volumes of inbound investment capital and have the highest levels of institutional ownership. These markets are generally characterized by advanced infrastructure and connectivity to a wide range of domestic and international destinations as well as a deep pool of educated workers, an extensive network of public and private institutions and concentrations of Fortune 500 and/or high-profile headquarters. Although not necessarily the fastest-growing cities nationally, Gateway Markets

 

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generally provide long-term stability for both owners and occupiers. Gateway Markets generally command the highest rents and pricing for top-tier assets and achievable per-square-foot sales pricing is comparable to other global business hubs.

 

“GSA” means the General Services Administration, which is the independent federal government agency that manages real estate procurement for the federal government and federal agencies.

 

“Included Assets” means the Vornado Included Assets and the JBG Included Assets.

 

“JBG” refers to JBG/Operating Partners, L.P. and its affiliated entities that conducted business under The JBG Companies® trade name prior to the completion of the combination.

 

“JBG Contributing Funds” means JBG/Urban Direct Member, L.L.C., JBG/Urban Development Investment Partner L.L.C. and the four JBG Funds (i.e., JBG Investment Fund VI, L.L.C., JBG Investment Fund VII, L.L.C., JBG Investment Fund VIII, L.L.C. and JBG Investment Fund IX, L.L.C.) that contributed interests in real assets to us in the combination.

 

“JBG Funds” means the nine real estate investment funds JBG organized since 1999.

 

“JBG Included Assets” means the JBG Included Properties and certain other assets related thereto, including JBG/Operating Partners L.P.

 

“JBG Included Properties” means the portfolio of assets in the Washington, DC metropolitan area contributed to JBG SMITH by JBG in the separation and the combination, consisting of (as of June 30, 2017) (i) 30 operating assets comprising 19 office assets totaling approximately 3.6 million square feet (2.3 million square feet at JBG’s share), nine multifamily assets totaling 2,883 units (1,099 units at JBG’s share) and two other assets totaling approximately 490,000 square feet (73,000 square feet at JBG’s share); (ii) 11 assets under construction comprising five office assets totaling over 1.3 million square feet (1.2 million square feet at JBG’s share) and six multifamily assets totaling 1,334 units (1,146 units at JBG’s share); (iii) two near-term development assets comprising one multifamily asset totaling 433 units (303 units at JBG’s share) and one other asset with over 65,000 square feet (6,500 square feet at JBG’s share) and (iv) 26 future development assets totaling approximately 11.7 million square feet (8.5 million square feet at JBG’s share) of estimated potential development density.

 

“JBG Parties” means JBG Properties Inc., JBG/Operating Partners L.P., JBG Investment Fund VI, L.L.C., JBG Investment Fund VII, L.L.C., JBG Investment Fund VIII, L.L.C., JBG Investment Fund IX, L.L.C. and JBG/Urban Direct Member, L.L.C.

 

“JBG SMITH,” “our company,” “the company,” “us,” “our” and “we” refer to JBG SMITH Properties, a Maryland real estate investment trust, and its subsidiaries.

 

“JBG SMITH common shares” means common shares of beneficial interest, par value $0.01 per share, of JBG SMITH.

 

“JBG SMITH LP” means JBG SMITH Properties LP, our operating partnership.

 

The “JBG SMITH portfolio” means the portfolio of assets in the Washington, DC metropolitan area contributed to JBG SMITH by Vornado and JBG in the separation and the combination, consisting of (as of June 30, 2017) (i) 68 operating assets comprising 50 office assets totaling approximately 13.9 million square feet (11.9 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); (ii) 11 assets under construction comprising five office assets totaling over 1.3 million square feet (1.2 million square feet at our share) and six multifamily assets totaling 1,334 units (1,146 units at our share); (iii) two near-term development assets comprising one multifamily asset totaling 433 units (303 units at our share) and one other asset with over 65,000 square feet (6,500 square feet at our share) and (iv) 44 future development assets totaling over 22.0 million square feet (18.3 million square feet at our share) of estimated potential development density in the Washington, DC metropolitan area, transferred to JBG SMITH by Vornado and JBG in the separation and the combination.

 

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“JBG SMITH Share” refers to our ownership percentage of consolidated and unconsolidated assets applied to the specified metric.

 

“MTA” means the Master Transaction Agreement, dated as of October 31, 2016, by and among Vornado, VRLP, the JBG Parties, JBG SMITH and JBG SMITH LP, as amended.

 

“Metro” refers to the public transportation network serving the Washington, DC metropolitan area operated by the Washington Metropolitan Area Transit Authority.

 

“Metro-served” means 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.

 

“NAREIT” means the National Association of Real Estate Investment Trusts.

 

“near-term development” refers to assets that have substantially completed the entitlement process and on which we intend to commence construction within the 18 months following June 30, 2017, subject to market conditions.

 

“net absorption” means the net change in physically occupied space over the applicable review period. Net absorption takes into account move-ins and move-outs within the existing office stock as well as the change in occupied space resulting from the delivery of newly constructed buildings and conversion/demolition of buildings over the review period. The resulting increase or decrease in physically occupied space relative to the starting inventory is characterized as net absorption. Net absorption may be expressed in square footage, or square footage as a percent of inventory based on the square footage at the start of the measurement period.

 

“Placemaking” refers to our approach to value creation that 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.

 

“recently delivered” means assets that have been delivered within the 12 months ended June 30, 2017.

 

“SEC” means the U.S. Securities and Exchange Commission.

 

“Securities Act” means the U.S. Securities Act of 1933, as amended.

 

The “separation” means the separation from Vornado of the Vornado Included Assets from Vornado’s other businesses.

 

“signed but not yet commenced leases” means leases for assets in the JBG SMITH portfolio that, as of June 30, 2017, have been executed but for which the contractual lease term had not yet begun and no rental payments had yet been received.

 

“square feet” or “SF” means 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 actual rentable square feet based on current design plans as of June 30, 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 June 30, 2017.

 

The “transaction” means the separation, distribution and combination, collectively.

 

“under construction” refers to assets that were under construction as of June 30, 2017.

 

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“urban-infill” refers to new development or an existing asset that is sited on vacant or undeveloped land within an existing community, and that is surrounded by other types of development.

 

“Vornado” means Vornado Realty Trust, a Maryland real estate investment trust, and its consolidated subsidiaries, including Vornado Realty L.P.

 

“Vornado common shares” means common shares of beneficial interest, par value $0.04 per share, of Vornado.

 

“Vornado Included Assets” means the Vornado Included Properties, the entities that held the Vornado Included Properties and certain debt and equity investments owned by a few transferred entities and other assets related thereto, which included all of the assets and liabilities of Vornado’s Washington, DC segment (other than the 46.2% interest in Rosslyn Plaza) and excludes Vornado’s 7.5% interest in Fashion Centre Mall and 3040 M Street.

 

“Vornado Included Properties” means the portfolio of Vornado/Charles E. Smith assets in the Washington, DC metropolitan contributed to JBG SMITH by Vornado in the separation and the combination, consisting of (as of June 30, 2017) (i) 38 operating assets comprising 31 office assets totaling over 10.3 million square feet (9.6 million square feet at Vornado’s share), five wholly owned multifamily assets totaling 3,133 units and two wholly owned other assets totaling approximately 275,000 square feet and (ii) 18 future development assets totaling over 10.3 million square feet (9.8 million square feet at Vornado’s share) of estimated potential development density.

 

“VRLP” means Vornado Realty L.P., a Delaware limited partnership through which Vornado conducts its business and holds substantially all of its interests in assets.

 

“Washington, DC metropolitan area” means the contiguous metropolitan area, centered on the District of Columbia, which also includes certain adjacent, nearby counties in Northern Virginia and Southern Maryland.

 

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SUMMARY

 

The following is a summary of material information discussed in this prospectus. This summary may not contain all information that may be important to you before making a decision to invest in our shares. To better understand our business and financial position, you should carefully review this entire prospectus. Except as otherwise indicated or unless the context otherwise requires, the information included in this prospectus assumes the completion of the separation and the combination even if the date of the information is prior to the actual completion of the separation and the combination, and references to our historical business and operations refer to the business and operations of those office, multifamily and other commercial assets contributed by Vornado and JBG.  For a glossary of certain terms used in this prospectus, please refer to “Presentation of Information.”

 

Our Company

 

JBG SMITH represents the combination of Vornado’s Washington, DC segment (which operated as Vornado / Charles E. Smith) and the management business and certain Washington, DC metropolitan area assets of JBG. Historically, Vornado / Charles E. Smith and JBG represented two large, noteworthy, Washington, DC focused real estate franchises, each with an over 50-year history of operations in the Washington, DC metropolitan area.

 

We believe that the combination of Vornado / Charles E. Smith and JBG results in the following key strengths and competitive advantages that will contribute to our future success:

 

·                  We are the largest publicly traded real estate company focused on the Washington, DC metropolitan area;

 

·                  Our assets consist of high-quality office, multifamily and retail properties concentrated in what we believe are the most attractive Metro-served, urban-infill submarkets;

 

·                  We have a demonstrated track record of combining these assets in vibrant, amenity-rich mixed-use projects that create and sustain value and competitive advantage over time;

 

·                  We believe that we are positioned for substantial revenue growth driven by near-term opportunities embedded in our existing operating portfolio and our near-term and future development pipelines;

 

·                  Our Washington, DC area management platform has proven investment, operating and development skills and leverages our experience in the use of our Placemaking strategy to unlock value in large scale projects and neighborhood repositionings;

 

·                  We expect to access acquisition opportunities with strong prospects for growth through our proven acquisition platform that combines the longstanding market relationships, reputation and expertise of both the Vornado and JBG Washington, DC platforms;

 

·                  Our disciplined, research-based approach ensures our investment decisions are based on current and forecasted market fundamentals and trends, which allows us to identify value creating development, redevelopment and acquisition opportunities in existing and new high-growth submarkets;

 

·                  We have a proven track record of capital allocation across investment opportunities and market cycles;

 

·                  We have a well-capitalized balance sheet and access to a broad range of funding sources which allows us to fund our growth opportunities while maintaining prudent leverage levels; and

 

·                  We believe the Washington, DC metropolitan area real estate market is positioned to experience a stronger recovery over the next 24 to 36 months compared to other Gateway Markets.

 

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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 in the Washington, DC metropolitan area across multiple product types and consider office, multifamily and retail to be our core asset classes. We are known for our creative deal-making and capital allocation skills and for our deep pool of development and value creation expertise across product types.

 

One of our approaches to value creation involves utilizing 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 drive synergies, and thus value, across those varied uses and create unique, amenity-rich, walkable neighborhoods that are desirable and create significant tenant and investor demand.

 

Our Portfolio

 

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 concentrating in downtown Washington, DC and other leading urban-infill submarkets with proximity to downtown Washington, DC that have high barriers to entry and key urban amenities, including being within walking distance of the Metro. Over 98% of our operating assets are Metro-served, based on our share of rentable square feet as of June 30, 2017. As of June 30, 2017, our operating portfolio consisted of 68 operating assets comprising 50 office assets totaling approximately 13.9 million square feet (11.9 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).

 

Our Assets Under Construction and Near-Term and Future Development Pipelines

 

In addition to our operating portfolio, as of June 30, 2017, we owned:

 

·                  11 assets under construction comprising over 1.3 million square feet (1.2 million square feet at our share) of office and 1,334 units (1,146 units at our share) of multifamily with an estimated incremental investment as of June 30, 2017 of approximately $952.4 million ($825.7 million at our share);

 

·                  a near-term development pipeline consisting of two assets (one multifamily and one other asset) with 433 multifamily units (303 units at our share) and over 65,000 square feet (6,500 square feet at our share) of retail; and

 

·                  a future development pipeline consisting of 44 future development assets with an estimated potential development density of over 22.0 million square feet (18.3 million square feet at our share).

 

With respect to the two assets in our near-term development pipeline, the entitlement process has been substantially completed and these projects are in position for construction to commence.  In general, given current market expectations, we estimate that we will commence construction on near-term development multifamily assets within the 18 months following June 30, 2017, while commencement of construction on near-term development office assets will more likely depend on either pre-leasing or attractive submarket supply and demand dynamics. We plan to be an active developer, particularly of multifamily assets, and intend to manage the delivery of our development growth pipeline to meet market demand while prudently managing our long-term leverage levels and balance sheet.

 

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Our Third-Party Real Estate Services Business

 

In addition to our portfolio, we have a third-party real estate services business that represents the combination of Vornado / Charles E. Smith’s and JBG’s management platforms and provides fee-based real estate services to eight JBG Funds, other JBG-affiliated entities, joint ventures and third parties with whom we have long-standing relationships.

 

Our Management Team and Platform

 

We are self-managed and led by JBG’s former executive management team, and have combined talent from each of Vornado / Charles E. Smith and JBG, providing us with a seasoned management team. Our executive management team includes W. Matthew Kelly (Chief Executive Officer), Robert Stewart (Executive Vice Chairman), David Paul (President and Chief Operating Officer), James Iker (Chief Investment Officer), Brian Coulter (Co-Chief Development Officer) and Kevin (“Kai”) Reynolds (Co-Chief Development Officer), who are all former managing partners or partners of JBG with an average tenure of 18 years at JBG. These executives managed the JBG business up until the combination and have a longstanding track record in the Washington, DC market. Our senior management team also benefits from the experience and expertise of Stephen W. Theriot (Chief Financial Officer), who served as Vornado’s Chief Financial Officer from June 2013 to February 2017, and Patrick J. Tyrrell (Chief Administrative Officer), who served as Vornado’s Chief Operating Officer of its Washington, DC division from April 2003 until the combination. Our commercial leasing team is led by David Ritchey (Executive Vice President) and is supported by Jim Creedon, a 25-year veteran with Vornado / Charles E. Smith, and a team of 14 professionals. Our board of trustees consists of a majority of independent trustees. In addition to the appointment of seven independent trustees, Steven Roth, Vornado’s Chairman and CEO, is Chairman of the board of trustees and Mitchell Schear, the former President of Vornado’s Washington, DC division, serves as a trustee. Michael Glosserman, W. Matthew Kelly and Robert Stewart, all former managing partners of JBG, also serve as our trustees.

 

Our broad transactional skill sets, multi-asset class experience, deep organizational and financial expertise, and a long and successful track record built over 50 years, allow us to uniquely source and execute on a broad array of opportunities. Our management platform is vertically integrated across functions, including investment, development, construction management, finance, asset management, property management and leasing, which allows us to efficiently execute on our business strategy. Our platform is also horizontally integrated across real estate asset classes, focusing primarily on office, multifamily and retail, which affords us the flexibility to respond to changing market conditions by adjusting our business plans to deliver the type of asset that will meet current market demand. As a result, we are able to execute large-scale mixed-use projects without the need to partner with other operators or developers. In addition, we have developed an intimate knowledge of the Washington, DC metropolitan area and a detailed understanding of the key submarkets on a block-by-block basis. We believe that our in-depth market knowledge and extensive network of longstanding relationships with real estate owners, developers, tenants, brokers, lenders, general contractors, municipalities, local community organizations and other market participants provide us with a sustainable competitive advantage.

 

REIT Status

 

We plan to elect to be treated as a REIT in connection with the filing of our federal income tax return for the taxable year ending December 31, 2017, and we intend to maintain this status in future periods.

 

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Summary Table—Total Portfolio as of June 30, 2017

 

 

 

 

 

100% Share

 

At JBG SMITH Share

 

 

 

Number
of
Assets

 

Square
Feet/Units

 

Square
Feet/Units

 

%
Leased

 

Annualized
Rent

(in
thousands)

 

Annualized
Rent Per
Square Foot/
Monthly
Rent Per
Unit
(1)

 

OPERATING

 

 

 

 

 

 

 

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

In service

 

49

 

13,873,849

 

11,871,298

 

87.4

%

$

447,941

 

$

44.41

 

Recently delivered

 

1

 

13,633

 

13,633

 

100.0

%

 

 

Total/weighted average

 

50

 

13,887,482

 

11,884,931

 

87.5

%

$

447,941

 

$

44.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

 

 

 

 

 

 

 

 

 

 

 

 

In service

 

13

 

5,317

 

3,533

 

97.0

%

$

81,485

 

$

2,009

 

Recently delivered

 

1

 

699

 

699

 

95.9

%

21,313

 

2,692

 

Total/weighted average

 

14

 

6,016

 

4,232

 

96.8

%

$

102,798

 

$

2,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

In service

 

4

 

764,546

 

348,188

 

96.3

%

$

2,888

 

$

36.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating - Total/Weighted Average

 

68

 

14,652,028 SF/

6,016 Units

 

12,233,119 SF/

4,232 Units

 

89.8

%

553,627

 

$44.34 per SF/

$2,122 per unit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DEVELOPMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

Under Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

Office(3)

 

5

 

1,343,823

 

1,234,068

 

41.8

%

 

 

 

 

Multifamily

 

6

 

1,334

 

1,146

 

N/A

 

 

 

 

 

Total/weighted average

 

11

 

1,343,823 SF/

1,334 Units

 

1,234,068 SF/

1,146 Units

 

41.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Near-Term Development

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

1

 

433

 

303

 

 

 

 

 

 

 

Other

 

1

 

65,342

 

6,534

 

 

 

 

 

 

 

Total

 

2

 

65,342 SF/

433 Units

 

6,534 SF/

303 Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Development - Total

 

13

 

1,409,165 SF/

1,767 Units

 

1,240,603 SF/

1,449 Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future Development

 

44

 

22,024,100

 

18,254,300

 

 

 

 

 

 

 

 


(1) For office assets, represents annualized office rent divided by occupied office square feet; annualized retail rent and retail square feet are excluded from this metric. For multifamily assets, represents monthly multifamily rent divided by occupied units; retail rent is excluded from this metric. For other assets, represents annualized rent divided by occupied square feet. Occupied square footage may differ from leased square footage because leased square footage includes leases that have been signed but have not yet commenced.

 

(2) Includes three standalone retail assets and the Crystal City Marriott Hotel, a standalone hotel totaling 266,000 square feet and 345 rooms. The Crystal City Marriott Hotel is excluded from percent leased, annualized rent, and annualized rent per square foot metrics.

 

(3) In July 2017, we executed a lease for approximately 80,200 square feet at 4747 Bethesda Avenue to relocate our headquarters, which brings the asset to 27.9% pre-leased. With this lease, the under construction office assets are 48.3% pre-leased at JBG SMITH’s share.

 

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Corporate Information

 

We were formed as a Maryland real estate investment trust on October 27, 2016 for the purpose of receiving, via contribution from Vornado, all of the assets and liabilities of Vornado’s Washington, DC segment. The address of our principal executive office is 4445 Willard Avenue, Suite 400, Chevy Chase, Maryland 20815. The telephone number for our principal executive office is (240) 333-3600.

 

We also maintain a website at JBGSMITH.com. Our website and the information contained therein or connected thereto is not deemed to be incorporated herein, and you should not rely on any such information in making any investment decision.

 

Risks Associated with Our Business

 

An investment in our common shares is subject to a number of risks, including risks relating to the separation. The following list of risk factors is not exhaustive. Please read the information in the section captioned “Risk Factors” for a more thorough description of these and other risks.

 

·                  Our portfolio of assets is geographically concentrated in the Washington, DC metropolitan area, which makes us more susceptible to regional and local adverse economic and other conditions than if we owned a more geographically diverse portfolio.

 

·                  A significant portion of our revenues is derived from federal government tenants, and our assets and our property development market are dependent on a metropolitan economy that is heavily reliant on actual and anticipated federal government spending, and any actual or anticipated curtailment of such spending could have a material adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

·                  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.

 

·                  Our real estate development activities are subject to risks particular to development, such as unanticipated expenses, delays, actual density being materially lower than estimated potential development density and other contingencies, any of which could adversely affect our financial condition, results of operations, cash flow and the per share trading price of our common shares.

 

·                  We may be unable to renew leases, lease vacant space or re-let space as leases expire, which could adversely affect our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

·                  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 U.S. federal government and defense contractors.

 

·                  Certain of the agreements entered into in connection with the separation and the combination require us to indemnify Vornado, which could materially adversely affect our operations.

 

·                  We may not achieve some or all of the expected benefits of the separation and the combination, and the separation and the combination may adversely affect our business.

 

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·                  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.

 

·                  We may fail to qualify or remain qualified as a REIT and may be required to pay income taxes at corporate rates.

 

·                  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 share price may be volatile and could decline substantially due to the trading market for our common shares being initiated only recently in connection with the separation and combination, in response to substantial sales of our common shares or for other reasons.

 

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RISK FACTORS

 

You should carefully consider the following risks and other information in this prospectus in evaluating our company and our common shares. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please 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, which makes us more susceptible to regional and local adverse economic and other conditions than if we owned a more geographically diverse portfolio.

 

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, 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 materially and adversely affect our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

We cannot assure you that this market will grow or that underlying real estate fundamentals will be favorable to owners, operators and developers of office, multifamily or retail assets or future development assets. Our operations may also be affected if competing assets are built in this market. Moreover, submarkets within our core market may be dependent upon a limited number of industries. Any adverse economic or other conditions in the Washington, DC metropolitan area, or any decrease in demand for office, multifamily or retail assets could adversely impact our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

Our assets and our property development market are dependent on a metropolitan economy that is heavily reliant on actual and anticipated federal government spending, and any actual or anticipated curtailment of such spending could have a material adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

The real estate and property development market in the Washington, DC metropolitan area is heavily dependent upon actual and anticipated government spending, and the professional services and other industries that support the federal government. Any actual or anticipated curtailment of 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, 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 our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

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We derive a significant portion of our revenues from U.S. federal government tenants.

 

As of June 30, 2017, approximately 22.3% of our share of annualized rent from our office and retail leases in our operating portfolio was generated by rentals to U.S. federal government tenants. 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 the revenues generated by U.S. federal government tenants were to decline substantially, our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders could be negatively impacted in a material fashion.

 

We may face additional risks and costs associated with directly managing assets occupied by government tenants.

 

As of June 30, 2017, we owned 25 assets in which some or all of the tenants are federal government agencies. As such, lease agreements with these federal government agencies contain certain provisions required by federal law, which require, among other things, that the contractor (which is the lessor or the owner of the property), agree to comply with certain rules and regulations, including, but not limited to, 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 such federal rules and regulations. In addition, there are certain additional requirements relating to the potential application of certain 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 such 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.

 

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 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 may acquire, develop or redevelop real estate and acquire related companies and this may create risks.

 

We may acquire, develop or redevelop assets or acquire real estate related companies when we believe doing so is consistent with our business strategy. We may not succeed in (i) developing, redeveloping or acquiring real estate and real estate related companies; (ii) completing these activities on time or within budget; and (iii) leasing or selling developed, redeveloped or acquired assets at amounts sufficient to cover our costs. Competition in these activities could also significantly increase our costs. Difficulties in integrating acquisitions may prove costly or time-consuming and could divert management’s attention. Acquisitions or developments in new markets or types of assets where we do not have the same level of market knowledge may result in weaker than anticipated performance. We may also abandon acquisition, development or redevelopment opportunities that we have begun pursuing and consequently fail to recover expenses already incurred. Furthermore, we may be exposed to the liabilities of assets or companies acquired, some of which we may not be aware of at the time of acquisition.

 

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Partnership or joint 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.

 

As of June 30, 2017, approximately 30% of our assets measured by total square feet were held through joint ventures, and we expect to co-invest in the future with other third parties through partnerships, joint ventures or other entities, acquiring noncontrolling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. 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, joint venture or other entity, 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. Such 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 joint 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 joint 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 joint venture. Where we are a limited partner or non-managing member in any partnership or limited liability company, if such 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 such entity. 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 joint 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 joint 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. To the extent our partners and co-venturers do not meet their obligations to us or our partnerships or joint ventures or they take action inconsistent with the interests of the partnership or joint venture, we may be adversely affected.

 

We may be unable to renew leases, lease vacant space or re-let space as leases expire, which could adversely affect our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

As of June 30, 2017, leases representing 3.1% of our share of the office and retail square footage in our operating portfolio will expire by the end of 2017 and 14.0% 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, which have a number of scheduled lease expirations in the near-term, 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, is dependent upon the overall level of spending in the economy, which 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 for 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 will expire, our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders could be adversely affected.

 

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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 an adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

As of June 30, 2017, the 20 largest office and retail tenants in our operating portfolio represented approximately 49.5% 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 be able to recover.

 

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 office 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 such 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 an adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

We derive a significant portion of our revenues from five of our assets.

 

As of June 30, 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 the assets, would have a much larger adverse effect on our revenues than a corresponding occurrence affecting a less significant property. If the revenues generated by one or more of these assets were to decline substantially, our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders could be adversely affected.

 

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 U.S. federal government and defense contractors.

 

As of June 30, 2017, our 50 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 U.S. 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 may materially and adversely affect our results of operations, financial condition and ability to service current debt and to make distributions to our shareholders.

 

Certain of our retail assets depend on anchor or major tenants to attract shoppers and could be adversely affected by the loss of, or a store closure by, one or more of these tenants.

 

Certain of our retail assets are anchored by large, nationally recognized tenants. At any time, such tenants may experience a downturn in their business that may significantly weaken their financial condition. As a result, such 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 such tenants’ leases. In addition, certain of our

 

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tenants may cease operations 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 retail assets.

 

Loss of, or a store closure by, an anchor or major 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. Such 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, in the event of default by a major tenant or anchor store, 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 seriously harm our performance and could adversely affect the value of the applicable retail property.

 

We are subject to risks that affect the retail environment generally, such as weakness in the economy, consumer spending, adverse financial condition of large retail companies and competition from discount and online retailers, 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.

 

A portion of our assets are in the retail real estate market. This means that we 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 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, excess amount of retail space in a number of markets and increasing competition from online retailers and other online businesses, discount retailers and outlet malls. Increases in online consumer spending may significantly affect our retail tenants’ ability to generate sales in their stores. If we fail to reinvest in and redevelop our assets so as to maintain their attractiveness to retailers and shoppers, our revenue and profitability may suffer. If retailers or shoppers perceive that shopping at other venues, online or by phone is more convenient, cost-effective or otherwise more attractive, our revenues and profitability may also suffer.

 

Any of the foregoing factors could adversely affect the financial condition of our retail tenants and the willingness of retailers to lease space in our retail assets, which in turn, could negatively impact market rents for retail space and, therefore, materially and adversely affect our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

We face risks associated with our tenants being designated “Prohibited Persons” by the Office of Foreign Assets Control.

 

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 or otherwise negatively affect our financial results and cash flows.

 

Real estate is a competitive business.

 

We compete with a large number of property owners and developers, some of which may be willing to accept lower returns on their investments than we are. Principal factors of competition include rents charged,

 

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attractiveness of location, the quality of the property and breadth and quality of services provided. 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 certain of 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.

 

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 adversely affect our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

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 adversely affect our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

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 June 30, 2017, approximately 4% of the units in our operating multifamily 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.

 

Increased competition and increased affordability of residential homes could limit our ability to retain residents, lease apartment homes and increase or maintain rents at our multifamily assets.

 

Our multifamily assets compete with numerous housing alternatives in attracting residents, including other multifamily assets and single-family rental homes, as well as owner-occupied single and multifamily homes. Competitive housing in a particular area and an increase in the affordability of owner-occupied single and multifamily homes due to, among other things, affordable housing prices, oversupply, low mortgage interest rates, and tax incentives and government programs that promote home ownership, could adversely affect our ability to retain residents, lease apartment homes and increase or maintain rents at our multifamily assets.

 

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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 adversely affect our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

The actual density of our future development pipeline and/or any particular future development parcel may not be consistent with the estimated potential development density set forth in this prospectus.

 

As of June 30, 2017, we estimate that our 44-asset future development pipeline is comprised over 22.0 million square feet (18.3 million 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 currently available to us, and our business plans as of June 30, 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, 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 the estimated potential development density set forth in this prospectus.

 

We may not be able to realize potential incremental annualized rent from our office, multifamily or other lease-up opportunities set forth in this prospectus.

 

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.

 

We own assets in the same geographic regions as Vornado and the JBG Funds and may compete for tenants with Vornado and such JBG Funds.

 

Although Vornado and the JBG Funds have collectively contributed the majority of their assets located in the Washington, DC metropolitan area to our company as part of the transaction, we have not and will not acquire all of the assets of Vornado or the JBG Funds in the Washington, DC metropolitan area. We will therefore own assets in the same geographic regions as Vornado and the JBG Funds, and, as a result, we may compete for tenants

 

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with Vornado and such JBG Funds. Competition may affect our ability to attract and retain tenants and may reduce the rental rates we are able to charge, which could adversely affect our results of operations and cash flow.

 

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 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 adversely affect our financial condition and results of operations, as well as the amount of cash available for distribution to shareholders.

 

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 June 30, 2017, 25 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.

 

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

 

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result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions.

 

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, and/or damage to our business relationships, all of which could negatively impact our financial results.

 

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, damage to our relationship with our tenants, and private data exposure. We have implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as our increased awareness of a risk of a cyber incident, do not guarantee that our financial results will not be negatively impacted by such an incident.

 

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 are required to develop and implement 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 an adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.

 

Risks Related to the separation and the combination

 

We have a limited history operating as an independent company, and our historical and pro forma 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 about us in this prospectus refers to our business as operated by Vornado and JBG separately from each other. Our historical and pro forma financial information included in this prospectus is derived from the consolidated financial statements and accounting records of Vornado or Vornado and JBG, respectively. Accordingly, the historical and pro forma financial information included in this prospectus 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 which could cause our results to differ from those reflected in such historical and pro forma 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 separation, our business was operated by Vornado or JBG, as applicable, as part of its or their broader organizations, rather than as an independent company. Vornado and JBG performed various management functions for us, such as accounting, information technology and finance. Vornado continues to provide some of these functions to us, as described in “Certain Relationships and Related Person Transactions,” and we provide some of these functions on our own behalf through the management business we acquired from JBG. Our historical and pro forma financial results reflect allocations of expenses from Vornado or JBG, as applicable, 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. Developing our ability to operate as a separate, publicly traded company will be costly and may prove difficult. We may not be able to operate our business efficiently or at comparable costs, and our profitability may decline;

 

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·                  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 or JBG 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, 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 separation and the combination, 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, research and development, and capital expenditures, have historically been satisfied as part of the company-wide cash management policies of Vornado or the cash management policies 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 separation; and

 

·                  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 and the unaudited pro forma combined financial statements of our business, please refer to “Unaudited Pro Forma Combined Financial Statements,” “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 elsewhere in this prospectus.

 

We are dependent on Vornado to provide certain services to us pursuant to the Transition Services Agreement, and it may be difficult to replace the services provided under such agreement.

 

Historically, we have 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 “Certain Relationships and Related Party Transactions—Transition Services Agreement.” 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, could materially harm our business and financial performance.

 

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 by Vornado, together with certain related transactions, is not tax-free. Under the Tax

 

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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 the 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. For a more detailed discussion, please refer to “Certain Relationships and Related Person Transactions—Tax Matters Agreement.”

 

Unless Vornado and JBG SMITH are both REITs immediately after the distribution 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 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. 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 that were acquired in conversion transactions. The Treasury Department recently issued a notice identifying the temporary Treasury regulations as a significant tax regulation that imposes an 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) and, consistent with the order, intends to propose reforms to mitigate the burdens of the regulation, in a final report to be submitted to the President.  It is unclear what 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 separation. 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 separation, for the two-year period following the separation, 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 its businesses, or (v) taking or failing to take any other action that prevents the distribution 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. For more information, please refer to “Certain Relationships and Related Person Transactions—Tax Matters Agreement.”

 

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Potential indemnification liabilities to Vornado pursuant to the Separation Agreement could materially adversely affect our operations.

 

The Separation Agreement with Vornado provides for, among other things, the principal transactions required to effect the separation, certain conditions to the separation and the combination and provisions governing 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 separation and the combination, 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. For a description of this agreement, please refer to “Certain Relationships and Related Person Transactions—The Separation Agreement.”

 

There may be undisclosed liabilities of the Vornado Included Assets or the JBG Included Assets that might expose us to potentially large, unanticipated costs.

 

Prior to entering into the MTA, each of Vornado and JBG performed diligence with respect to the business and assets of the other. However, these diligence reviews have necessarily been 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 separation and the combination, many of which may not be covered by insurance. Now that the combination has closed, the MTA does not provide for indemnification for these types of liabilities by either party, 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 materially adversely affect our business, results of operations and financial condition.

 

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 Funds and own carried interests in certain JBG funds and in certain of our joint ventures that entitles them to receive additional compensation if the fund or joint venture achieves certain return thresholds.

 

Some of our trustees and executive officers are persons who are or have been employees of Vornado or 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 Funds and related entities. In addition, one of our trustees continues to serve on the board of trustees of Vornado. Ownership of Vornado common shares or interests in the JBG Funds, or service as a trustee or managing partner, as applicable, at both companies, could create, or appear to create, potential conflicts of interest.

 

Certain of the JBG Funds own assets that were not contributed to us in the combination (the “JBG Excluded Assets”), which JBG 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 transaction, in connection with obtaining the necessary approvals from the constituent members of the JBG Funds, it was determined that the general partner and managing member interests in the JBG Funds that are held by former JBG executives (and who became members of our management team) would not be 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 Funds, which could adversely affect the execution of our business plan and our results of operations and cash flow.

 

In addition, members of our senior management have an ownership interest in the JBG Funds and own carried interests in each fund and in certain of our joint ventures that entitles them to receive additional compensation if the fund or joint 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 Funds and certain joint 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.

 

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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 has advised us that it does not intend to continue to operate within the Washington, DC metropolitan area after the separation, 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 of the separation and the combination, and the separation and the combination may adversely affect our business.

 

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. The integration process will require our management to devote a significant amount of time and attention to the process of integrating the operations of the Vornado Included Assets and the JBG Included Assets. There is a significant degree of difficulty and management involvement inherent in that process, and the actions required to separate our business from that of Vornado and to implement the combination could disrupt our operations. In addition, we incurred certain transaction costs in connection with the separation and the combination, including our obligation pursuant to the MTA to pay all bona fide third-party expenses (with certain limited exceptions) incurred by Vornado and JBG in connection therewith. Furthermore, now that the separation and the combination have been completed, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of Vornado, and our business is less diversified than Vornado’s business was prior to the separation. As a result, we may not be able to achieve the full strategic and financial benefits expected to result from the separation and the combination, or such benefits may be delayed due to a variety of circumstances (not all of which may be under our control), which could have a materially adverse effect on our business, financial condition and results of operations.

 

In connection with our separation from Vornado, Vornado will 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.

 

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

 

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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. This could materially adversely affect our company by, for example, leading to a decline in our share price and impairing our ability to raise additional capital.

 

Substantial sales of our common shares may occur, which could cause our share price to decline.

 

In the distribution, Vornado distributed approximately 94.7 million shares to its shareholders that generally were able to be sold immediately in the public market. These shares are freely tradable without restriction or further registration under the Securities Act, unless the shares are owned by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act. In addition, we issued approximately 23.3 million additional common shares to JBG investors in the combination, as well as 13.9 million OP Units, which may be redeemed for cash or, at our option, exchanged for common shares.  These common shares, including any issued upon exchange of OP Units, will be freely tradable without further restriction upon inclusion in an effective registration statement or, generally, once certain other conditions are met under the securities laws, except with respect to common shares held by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act.  The registration statement of which this prospectus forms a part includes the 23.3 million common shares referred to above.

 

Although we have no actual knowledge of any plan or intention on the part of any 5% or greater shareholder to sell our common shares, it is possible that some shareholders, including possibly some of our large shareholders, will sell our common shares that they receive in the distribution or the combination. For example, Vornado shareholders may sell our common shares because our business profile or market capitalization as an independent company does not fit their investment objectives or because our common shares are not included in certain indices after the distribution. Additionally, JBG investors who received common shares in the combination and include them in the registration statement of which this prospectus forms a part will have liquidity for their investments and may decide to sell their shares to realize such liquidity. The sales of significant amounts of our common shares, or the perception in the market that this will occur, may result in the lowering of the market price of our common shares.

 

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.

 

On a pro forma basis, as of June 30, 2017, we had approximately $2.3 billion aggregate principal amount of consolidated debt outstanding ($2.3 billion at our share) and our unconsolidated joint ventures had approximately $1.2 billion aggregate principal amount of debt outstanding ($384 million at our share), resulting in a total of over $2.6 billion aggregate principal amount of debt outstanding at our share. A subset 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 or necessary to maintain our REIT qualification. 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;

 

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·                  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, our financial condition, results of operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders could be adversely affected. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.

 

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. On a pro forma basis, as of June 30, 2017, we had approximately $2.3 billion aggregate principal amount of consolidated debt outstanding ($2.3 billion at our share) and our unconsolidated joint ventures had approximately $1.2 billion aggregate principal amount of debt outstanding ($384 million at our share), resulting in a total of over $2.6 billion aggregate principal amount of debt outstanding at our share. 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, in certain instances, 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 certain cash flow sweep requirements and mandatory escrows, and our property mortgages generally require certain 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 secured 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. Although we believe that we will be able to finance any investments we may wish to make in the foreseeable future, there can be no assurance that new financing will be available or available on acceptable terms. 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 financial statements in this prospectus.

 

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We may not be permitted to dispose of certain assets or pay down the debt associated with those assets when we might otherwise desire to do so without incurring additional costs. In addition, when we dispose of or sell assets, we may not be able to reinvest the sales proceeds and earn similar returns.

 

As part of an acquisition of a property, or a portfolio of assets, we may agree not to dispose of the acquired assets or reduce the mortgage indebtedness for a long-term period, unless we pay certain of the resulting tax costs of the seller. Such an agreement could result in us holding assets that we would otherwise sell and not pay down or refinance the mortgage indebtedness encumbering such assets. In addition, when we dispose of assets, we may not be able to reinvest the sales proceeds and earn returns similar to those generated by the assets that were sold.

 

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 accounting principles generally accepted in the United States, 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.

 

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:

 

·                  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;

 

·                  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;

 

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·                  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.

 

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

 

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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 June 30, 2017, the remaining weighted average term of our ground leases, including unilateral as-of-right extension rights available to us, was approximately 72.2 years. Our share of annualized rent from assets subject to ground leases as of June 30, 2017 was approximately $43.3 million, or 7.8%.

 

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 certain 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.

 

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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.

 

Certain 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.

 

Certain 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 certain 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 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.

 

Certain provisions of Subtitle 8 of Title 3 of the MGCL permit our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to implement certain corporate governance provisions, some of which (for example, approval by at least two-thirds of all shareholders to remove a trustee) are not currently applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could provide the holders of common shares with the opportunity to realize a premium over the then current market price.

 

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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, our operating partnership, as amended and restated in connection with the combination, 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 certain 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). This requirement is described in more detail under “Partnership Agreement.”

 

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 initially 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 separation and the combination. Initially, shareholders will elect only one class of trustees each year. Shareholders will elect successors to trustees of the first class for a two-year term and successors to trustees of the second class for a one-year term, in each case upon the expiration of the terms of the initial trustees of each class. 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 certain 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;

 

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·                  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.

 

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, our operating partnership, 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. Thus, JBG SMITH LP’s ability to make distributions to holders of its units 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.

 

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. The federal income tax payable would include any applicable alternative minimum tax. 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 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

 

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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. 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. Please refer to “Dividend Policy.”

 

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. Legislative and regulatory changes, including comprehensive tax reform, may be more likely in the 115th Congress, which convened in January 2017, because the Presidency and both Houses of Congress will be controlled by the same political party. 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 our business, financial condition and results of operations. Even changes that do not impose greater taxes on us could potentially result in adverse consequences to our shareholders. For example, a decrease in corporate tax rates could decrease the attractiveness of the REIT structure relative to companies that are not organized as REITs.

 

In any event, the rules of Section 355 of the Code and the Treasury regulations promulgated thereunder, which apply to determine the taxability of the separation and the combination, 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 adversely affect our financial condition and results of operations and the amount of cash available for payment of dividends.

 

Risks Related to Our Common Shares

 

A trading market for our common shares was initiated only recently in connection with the separation and the combination, and the per share trading price and trading volume of our common shares may be volatile and could decline substantially.

 

Prior to the combination, there had not been a public market for our common shares. An active trading market for our common shares was initiated only recently and may not be sustainable, which may affect your ability

 

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to sell your common shares and could depress their market price.  In addition, the per share trading price of our common shares may be volatile, and the trading volume in our common shares may fluctuate and cause significant price variations to occur. If the per share trading price of our common shares declines significantly, you may be unable to resell your shares at or above the purchase price. We cannot assure you that the per share trading price of our common shares will not fluctuate or decline significantly in the future. The market price of our common shares may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:

 

·                  our financial condition and performance;

 

·                  the financial condition of our tenants, including the extent of tenant bankruptcies or defaults;

 

·                  actual or anticipated quarterly fluctuations in our operating results and financial condition;

 

·                  our dividend policy;

 

·                  the reputation of REITs and real estate investments generally and the attractiveness of REIT equity securities in comparison to other equity securities, including securities issued by other real estate companies, and fixed income securities;

 

·                  perceptions of the Washington, DC metropolitan area real estate market;

 

·                  uncertainty and volatility in the equity and credit markets;

 

·                  fluctuations in interest rates;

 

·                  changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other REITs;

 

·                  failure to meet analysts’ revenue or earnings estimates;

 

·                  speculation in the press or investment community;

 

·                  strategic actions by us or our competitors, such as acquisitions or restructurings;

 

·                  the extent of institutional investor interest in us;

 

·                  the extent of short-selling of our common shares and the shares of our competitors;

 

·                  fluctuations in the stock price and operating results of our competitors;

 

·                  general financial and economic market conditions and, in particular, developments related to market conditions for REITs and other real estate related companies;

 

·                  domestic and international economic factors unrelated to our performance; and

 

·                  all other risk factors addressed elsewhere in this prospectus.

 

In addition, when the market price of a company’s common shares drops significantly, shareholders often institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

 

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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 or continue to pay any dividend if we commence paying dividends. For more information, please refer to “Dividend Policy.”

 

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 respecting 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. Please refer to “Description of Shares of Beneficial Interest.”

 

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.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements contained herein or incorporated by reference constitute forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 prospectus . In particular, information included under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business and Properties” contains forward-looking statements. We also note the following forward-looking statements: in the case of our development and redevelopment projects, the estimated completion date, estimated project cost and cost to complete; and estimates of future capital expenditures, dividends to common shareholders and operating partnership distributions. 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” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

 

You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this prospectus 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 prospectus.

 

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USE OF PROCEEDS

 

We will not receive any proceeds from the sale of shares of our common shares of beneficial interest by the selling shareholders.

 

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DIVIDEND POLICY

 

We have not paid any dividends as of the date of this prospectus. We expect to distribute 100% of our REIT taxable income to our shareholders out of assets legally available therefor. We expect that the cash required to fund our dividends will be provided by cash generated from operations and, to the extent not so provided, from our cash on hand or proceeds from financings and asset sales. Our dividends must be authorized by our board of trustees, in its sole discretion.

 

To qualify as a REIT, we must distribute to our shareholders an amount at least equal to:

 

(i)                                     90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

(ii)                                  90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

 

(iii)                               Any excess non-cash income (as determined under the Code). Please refer to “Material U.S. Federal Income Tax Consequences.”

 

We cannot assure you that our distribution policy will remain the same in the future, or that any estimated distributions will be made or sustained. Distributions made by us will be authorized by our board of trustees, in its sole discretion, and declared by us out of legally available funds, and will be dependent upon a number of factors, including restrictions under applicable law, actual and projected financial condition, liquidity, funds from operations and results of operations, the revenue we actually receive from our assets, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, the annual REIT distribution requirements and such other factors as our board of trustees deems relevant. For more information regarding risk factors that could materially and adversely affect our ability to make distributions, please refer to “Risk Factors.”

 

Our distributions may be funded from a variety of sources. In particular, we expect that initially our distributions may exceed our net income under GAAP because of non-cash expenses, principally depreciation and amortization expense, included in net income under GAAP. To the extent that our cash available for distribution is less than 100% of our taxable income, we may consider various means to satisfy any such shortfall, including borrowing, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related or debt securities or declaring taxable share dividends. In addition, our declaration of trust will allow us to issue shares of preferred equity that could have a preference on distributions and, if we do, the distribution preference on the preferred equity could limit our ability to make distributions to the holders of our common shares.

 

For a discussion of the tax treatment of distributions to holders of our common shares, please refer to “Material U.S. Federal Income Tax Consequences.”

 

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Table of Contents

 

SELECTED HISTORICAL COMBINED FINANCIAL DATA

 

The following tables set forth the summary historical combined financial and other data of JBG SMITH prior to the combination, when we owned the Vornado Included Assets but had not yet have acquired the JBG Included Assets, which have been carved out from the financial information of Vornado as described below. JBG SMITH was formed for the purpose of receiving, via contribution from Vornado, all of the assets and liabilities of Vornado’s Washington, DC segment (other than its 46.2% interest in Rosslyn Plaza) (the “Vornado Included Assets”), and combining Vornado’s Washington, DC segment (which operated as Vornado / Charles E. Smith) and the management business and certain Washington, DC assets of the JBG Companies. Prior to the completion of the distributions by each of Vornado and VRLP, we did not conduct any business and did not have any material assets or liabilities. The selected historical financial data set forth below as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 have been derived from our audited combined financial statements, which are included elsewhere in this prospectus. The selected financial historical data set forth below as of December 31, 2014 and 2013 and for the year ended December 31, 2013 have been derived from our audited combined financial statements, which are not included in this prospectus. The selected historical combined financial data as of December 31, 2012 and for the year ended December 31, 2012 have been derived from our unaudited combined financial statements, which are not included in this prospectus. The income statement data for each of the six months ended June 30, 2017 and 2016 and the balance sheet data as of June 30, 2017 have been derived from our unaudited interim combined financial statements included elsewhere in this prospectus. Our unaudited interim combined financial statements as of June 30, 2017 and for the six months ended June 30, 2017 and 2016 were prepared on the same basis as our audited combined financial statements as of December 31, 2016, 2015 and 2014 and for each of the years ended December 31, 2016, 2015 and 2014 and, in the opinion of management, include all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly our financial position and results of operations for these periods. The interim results of operations are not necessarily indicative of operations for a full fiscal year.

 

The historical results set forth below do not indicate results expected for any future periods. The selected financial data set forth below are qualified in their entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and related notes thereto included elsewhere in this prospectus.

 

The following tables set forth selected financial and operating data for the Vornado Included Assets. This data may not be comparable to, or indicative of, future operating results.

 

 

 

(Unaudited)

 

As of December 31,

 

 

 

As of
June 30,

 

(Audited)

 

(Audited)

 

(Audited)

 

(Audited)

 

(Unaudited)

 

(Amounts in thousands)

 

2017

 

2016

 

2015

 

2014

 

2013

 

2012

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

3,909,945

 

$

3,660,640

 

$

3,575,878

 

$

3,357,744

 

$

3,226,203

 

$

3,223,365

 

Real estate, at cost

 

4,171,313

 

4,155,391

 

4,038,206

 

3,809,213

 

3,700,763

 

3,641,205

 

Accumulated depreciation and amortization

 

959,352

 

930,769

 

908,233

 

797,806

 

732,707

 

661,597

 

Mortgages payable, net of deferred financing costs

 

1,376,077

 

1,165,014

 

1,302,956

 

1,277,889

 

1,180,480

 

1,354,895

 

Payable to Vornado

 

289,904

 

283,232

 

82,912

 

 

 

 

Noncontrolling interest in consolidated subsidiaries

 

295

 

295

 

515

 

568

 

536

 

448

 

Total equity

 

2,162,140

 

2,121,984

 

2,059,491

 

1,988,915

 

1,966,321

 

1,771,398

 

 

 

 

(Unaudited)

 

For the Year Ended December 31,

 

 

 

Six Months
Ended June 30,

 

(Audited)

 

(Audited)

 

(Audited)

 

(Audited)

 

(Unaudited)

 

(Amounts in thousands)

 

2017

 

2016

 

2016

 

2015

 

2014

 

2013

 

2012

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

234,292

 

$

233,123

 

$

478,519

 

$

470,607

 

$

472,923

 

$

476,311

 

$

479,800

 

Operating income

 

44,821

 

54,539

 

112,793

 

102,597

 

138,619

 

149,674

 

142,904

 

Net income attributable

 

17,659

 

28,330

 

61,974

 

49,628

 

81,299

 

92,026

 

59,626

 

Cash Flow Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provided by operating activities

 

72,658

 

90,920

 

159,541

 

178,230

 

187,386

 

176,255

 

195,690

 

Used in investing activities

 

(56,629

)

(144,741

)

(256,590

)

(237,953

)

(236,923

)

(99,018

)

(70,065

)

Provided by (used in) financing activities

 

235,584

 

25,118

 

51,083

 

122,671

 

33,353

 

(73,711

)

(123,770

)

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

The following unaudited pro forma combined financial statements have been prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the unaudited pro forma combined financial statements by applying pro forma adjustments to the historical combined financial statements to reflect the spin-off on July 17, 2017 of the Vornado Included Assets from Vornado, referred to as the separation, and the acquisition on July 18, 2017 of the JBG Included Assets and JBG Operating Partners, referred to as the combination, as described elsewhere in this prospectus. The unaudited pro forma combined balance sheet gives effect to the transaction as if it had occurred on June 30, 2017. The unaudited pro forma combined statements of operations give effect to the transaction as if it had occurred on January 1, 2016. All significant pro forma adjustments and underlying assumptions are described in the notes to the unaudited pro forma combined financial statements.

 

The unaudited pro forma adjustments include the following:

 

·      The contribution from Vornado to JBG SMITH of the assets and liabilities that comprise the Vornado Included Assets’ business;

 

·      The acquisition of the JBG Included Assets and JBG Operating Partners;

 

·      The issuance of 94.7 million JBG SMITH common shares to Vornado’s common shareholders and the distribution of 5.8 million JBG SMITH LP OP Units to VRLP unit holders in connection with the separation and distribution.  In the distribution, holders of Vornado common shares and VRLP common limited partnership units received one common share of JBG SMITH or one JBG SMITH LP OP Unit, as applicable, for every two Vornado common shares or VRLP common limited partnership units of VRLP held by them;

 

·      The issuance of 23.3 million JBG SMITH common shares and the distribution of 13.9 million JBG SMITH LP OP Units to JBG designees in connection with the combination;

 

As of the completion of the separation and the combination there were 118.0 million JBG SMITH common shares outstanding and 19.7 million JBG SMITH LP OP Units outstanding that were owned by parties other than JBG SMITH; and

 

·      The execution of our $1.4 billion credit agreement and draw downs on the facility.

 

The accompanying unaudited pro forma combined financial statements do not give effect to the potential impact of cost savings that may result from the transactions described above or items that will not have a recurring impact. While Vornado is providing JBG SMITH with certain information technology, financial reporting, and payroll services on a transitional basis pursuant to a Transition Services Agreement, a significant portion of these services are less than one year in duration. Accordingly, the accompanying unaudited pro forma combined financial statements do not give effect to the Transition Services Agreement with Vornado.

 

The unaudited pro forma combined financial statements are presented for illustrative purposes only and are not necessarily indicative of the financial position or financial results that would have actually been reported had the transaction occurred on January 1, 2016 or June 30, 2017, as applicable, nor are they indicative of our future financial position or financial results. The differences that may occur between the preliminary estimates and the final acquisition accounting could have a material impact on the unaudited pro forma combined financial statements, including the impact on pro forma amortization of intangible assets and depreciation of property, plant and equipment.

 

The unaudited pro forma combined financial statements include the results of the carve-out of the Vornado Included Assets from the financial information of Vornado. The historical financial results of the Vornado Included

 

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Table of Contents

 

Assets reflect charges for certain corporate expenses which include costs related to human resources, security, payroll and benefits, legal, corporate communications, and information services. Costs of the services that were allocated or charged to the Vornado Included Assets were based on either actual costs incurred or a proportion of costs estimated to be applicable to the Vornado Included Assets based on a number of factors, most significantly, the Vornado Included Assets’ percentage of Vornado’s revenue. The unaudited pro forma financial statements are based on available information and various assumptions that management believes to be reasonable. These allocated amounts are included as a component of general and administrative expenses on the combined statement of operations and do not necessarily reflect what actual costs would have been if the Vornado Included Assets was a separate standalone public company. Actual costs may be materially different.

 

We considered the guidance in Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 805, Business Combinations, and determined that the Vornado Included Assets is the accounting acquirer and all of its assets, liabilities and results of operations are recorded at their historical carryover basis. Our conclusion is supported by the following considerations: (i) Vornado common shareholders hold a significant majority of the JBG SMITH common shares and the voting rights attendant thereto; (ii) the fair value of the Vornado Included Assets is significantly greater than that of the JBG Included Assets (including JBG Operating Partners); and (iii) while the board of trustees includes six trustees designated by Vornado and six trustees designated by JBG, the Vornado common shareholders hold majority voting rights by virtue of their ownership interest in JBG SMITH common shares, with the ability to determine the outcome of elections for the board of trustees occurring beginning in 2018 (with the full board of trustees subject to reelection within three years) and the outcome of the vote on other matters that require shareholder approval.

 

The unaudited pro forma combined financial statements also include the effect of the acquisition by JBG SMITH of the JBG Included Assets and JBG Operating Partners, which is accounted for under the acquisition method of accounting and recognized at the estimated fair value of the assets acquired and liabilities assumed on the date of such acquisition in accordance with ASC 805.

 

The unaudited pro forma combined financial statements should be read in conjunction with the combined financial statements and related notes thereto contained elsewhere in this prospectus.

 

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Table of Contents

 

JBG SMITH Properties

PRO FORMA COMBINED BALANCE SHEET

As of June 30, 2017

(unaudited and dollar amount in thousands)

 

 

 

 

 

 

 

JBG Included Assets

 

 

 

 

 

 

 

 

 

JBG SMITH
Properties
(A)

 

Vornado
Included Assets
(B)

 

Acquisition of
JBG Operating
Partners
(C)

 

Acquisition of JBG
Consolidated Assets
and Unconsolidated
Real Estate
Ventures
(C)

 

Elimination
Pro Forma
Adjustments
(D)

 

Other Pro Forma
Adjustments
(E)

 

JBG SMITH
Properties Pro
Forma

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate, at cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and improvements

 

$

 

$

930,001

 

$

 

$

353,257

 

$

 

$

 

$

1,283,258

 

Building and improvements

 

 

3,028,517

 

 

630,808

 

 

 

3,659,325

 

Construction in progress

 

 

212,795

 

 

625,618

 

 

 

838,413

 

Leasehold improvements and equipment

 

 

 

11,220

 

 

 

 

11,220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

4,171,313

 

11,220

 

1,609,683

 

 

 

5,792,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

(959,352

)

 

 

 

 

(959,352

)

Real estate, net

 

 

3,211,961

 

11,220

 

1,609,683

 

 

 

4,832,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

1

 

280,613

 

(972

)

100,373

 

 

129,967

 

509,982

 

Restricted cash

 

 

3,735

 

 

16,115

 

 

 

19,850

 

Tenant and other receivables, net

 

 

28,232

 

6,526

 

1,033

 

(2,291

)

 

33,500

 

Deferred rent receivable, net

 

 

143,395

 

 

 

 

 

143,395

 

Investments in unconsolidated real estate ventures

 

 

45,476

 

24

 

229,900

 

 

 

275,400

 

Receivable from Vornado Realty Trust

 

 

76,738

 

 

 

 

 

(76,738

)

 

Other assets, net

 

 

119,795

 

55,957

 

136,426

 

 

11,043

 

323,221

 

 

 

$

1

 

$

3,909,945

 

$

72,755

 

$

2,093,530

 

$

(2,291

)

$

64,272

 

$

6,138,212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgages payable, net

 

$

 

$

1,376,077

 

$

 

$

768,357

 

$

 

$

(43,500

)

$

2,100,934

 

Revolving credit facility

 

 

 

 

 

 

115,751

 

115,751

 

Unsecured term loan

 

 

 

 

 

 

50,000

 

50,000

 

Payable to Vornado Realty Trust

 

 

289,904

 

 

 

 

(289,904

)

 

Accounts payable and accrued expenses

 

 

31,779

 

11,687

 

32,303

 

(2,291

)

5,608

 

79,086

 

Other liabilities, net

 

 

50,045

 

1,675

 

17,413

 

 

 

69,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,747,805

 

13,362

 

818,073

 

(2,291

)

(162,045

)

2,414,904

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

1

 

2,161,845

 

59,393

 

1,270,354

 

 

(227,765

)

3,263,828

 

Noncontrolling interests in consolidated subsidiaries

 

 

295

 

 

5,103

 

 

 

5,398

 

Noncontrolling interests JBG SMITH LP

 

 

 

 

 

 

454,082

 

454,082

 

Total equity

 

1

 

2,162,140

 

59,393

 

1,275,457

 

 

226,317

 

3,723,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1

 

$

3,909,945

 

$

72,755

 

$

2,093,530

 

$

(2,291

)

$

64,272

 

$

6,138,212

 

 

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Table of Contents

 

JBG SMITH Properties

PRO FORMA COMBINED STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2017

(unaudited and dollar amount in thousands)

 

 

 

 

 

 

 

JBG included Assets

 

 

 

 

 

 

 

 

 

JBG
SMITH
Properties
(AA)

 

Vornado
Included Assets
(BB)

 

Acquisition of
JBG Operating
Partners
(CC)

 

Acquisition of
JBG
Consolidated
Assets
(DD)

 

Acquisition of
JBG Unconsolidated
Real Estate
Ventures
(EE)

 

Elimination
Pro Forma
Adjustments
(FF)

 

Other
Pro Forma
Adjustments
(GG)

 

JBG SMITH
Properties
Pro Forma

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property rentals

 

$

 

$

199,771

 

$

 

$

37,368

 

$

 

$

 

$

 

$

237,139

 

Tenant reimbursements

 

 

17,667

 

 

3,613

 

 

 

 

21,280

 

Third-party real estate services

 

 

9,923

 

32,646

 

 

 

(1,247

)

 

41,322

 

Other income

 

 

6,931

 

13,758

 

456

 

 

 

 

21,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

 

234,292

 

46,404

 

41,437

 

 

(1,247

)

 

320,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

65,775

 

4,829

 

18,090

 

 

 

 

88,694

 

Property operating

 

 

56,466

 

13,758

 

12,558

 

 

(1,247

)

 

81,535

 

Real estate taxes

 

 

30,754

 

 

5,610

 

 

 

 

36,364

 

General and administrative

 

 

25,398

 

32,966

 

 

 

 

18,151

 

76,515

 

Transaction and other costs

 

 

11,078

 

 

 

 

 

(11,078

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Expenses

 

 

189,471

 

51,553

 

36,258

 

 

(1,247

)

7,073

 

283,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

44,821

 

(5,149

)

5,179

 

 

 

(7,073

)

37,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from unconsolidated real estate ventures

 

 

314

 

 

 

(4,424

)

 

 

(4,110

)

Interest and other income, net

 

 

1,745

 

 

154

 

 

 

(1,675

)

224

 

Interest expense

 

 

(28,504

)

 

(11,129

)

 

 

(1,075

)

(40,708

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Tax Expense

 

 

18,376

 

(5,149

)

(5,796

)

(4,424

)

 

(9,823

)

(6,816

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(717

)

(2,532

)

 

 

 

 

(3,249

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

17,659

 

(7,681

)

(5,796

)

(4,424

)

 

(9,823

)

(10,065

)

Net Income (Loss) Attributable to Noncontrolling Interests

 

 

 

 

 

 

 

(1,228

)

(1,228

)

Net Income (Loss) Attributable to JBG Smith Properties

 

$

 

$

17,659

 

$

(7,681

)

(5,796

)

$

(4,424

)

$

 

$

(8,595

)

$

(8,837

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

118,049

 

Earnings per share - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(0.07

)

 

38



Table of Contents

 

JBG SMITH Properties

PRO FORMA COMBINED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2016

(unaudited and dollar amount in thousands)

 

 

 

 

 

 

 

JBG included Assets

 

 

 

 

 

 

 

 

 

JBG SMITH
Properties
(AA)

 

Vornado
Included Assets
(BB)

 

Acquisition of
JBG Operating
Partners
(CC)

 

Acquisition of
JBG Consolidated
Assets
(DD)

 

Acquisition of
JBG Unconsolidated
Real Estate Ventures
(EE)

 

Elimination
Pro Forma
Adjustments
(FF)

 

Other
Pro Forma
Adjustments
(GG)

 

JBG SMITH
Properties
Pro Forma

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property rentals

 

$

 

$

401,577

 

$

 

$

75,821

 

$

 

$

 

$

 

$

477,398

 

Tenant expense reimbursements

 

 

38,291

 

 

6,146

 

 

 

 

44,437

 

Third-party real estate services

 

 

25,458

 

70,040

 

 

 

(2,799

)

(2,038

)

90,661

 

Other income

 

 

13,193

 

28,988

 

965

 

 

 

 

43,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

 

478,519

 

99,028

 

82,932

 

 

(2,799

)

(2,038

)

655,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

133,343

 

9,657

 

40,394

 

 

 

 

183,394

 

Property operating and reimbursement from managed properties

 

 

117,708

 

28,988

 

25,883

 

 

(2,799

)

 

169,780

 

Real estate taxes

 

 

57,784

 

 

10,573

 

 

 

 

68,357

 

General and administrative

 

 

50,416

 

70,677

 

 

 

 

35,934

 

157,027

 

Transaction and other costs

 

 

6,476

 

 

 

 

 

(6,476

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Expenses

 

 

365,727

 

109,322

 

76,850

 

 

(2,799

)

29,458

 

578,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

112,792

 

(10,294

)

6,082

 

 

 

(31,496

)

77,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from unconsolidated real estate ventures

 

 

(1,242

)

 

 

(18,165

)

 

 

(19,407

)

Interest and other income, net

 

 

3,287

 

(9

)

430

 

 

 

(3,290

)

418

 

Interest expense

 

 

(51,781

)

 

(22,496

)

 

 

(4,292

)

(78,569

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) before Income Tax Expense

 

 

63,056

 

(10,303

)

(15,984

)

(18,165

)

 

(39,078

)

(20,474

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(1,083

)

(5,335

)

 

 

 

 

(6,418

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

61,973

 

(15,638

)

(15,984

)

(18,165

)

 

(39,078

)

(26,892

)

Net Income (Loss) Attributable to Noncontrolling Interests