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Section 1: 10-Q (10-Q)

Document



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________

Commission file number 001-37994
391072526_logoverticaltransbluea02.jpg
JBG SMITH PROPERTIES
________________________________________________________________________________
(Exact name of Registrant as specified in its charter)
Maryland
 
81‑4307010

(State or other jurisdiction of
 incorporation or organization)
 
(I.R.S. Employer
Identification No.)
4445 Willard Avenue, Suite 400
Chevy Chase, MD
 
20815
(Address of principal executive offices)
 
(Zip Code)
(240) 333‑3600
Registrant’s telephone number, including area code
_______________________________

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer ý Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No ý
As of November 6, 2017, JBG SMITH Properties had 117,957,107 common shares outstanding.
 




 
JBG SMITH PROPERTIES
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2017
 
 
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Item 1.
Page
 
Condensed Consolidated and Combined Balance Sheets (unaudited) as of September 30, 2017
   and December 31, 2016
 
Condensed Consolidated and Combined Statements of Operations (unaudited) for the three and nine
   months ended September 30, 2017 and 2016
 
Condensed Consolidated and Combined Statement of Equity (unaudited) for the nine months ended
   September 30, 2017
 
Condensed Consolidated and Combined Statements of Cash Flows (unaudited) for the nine months ended
   September 30, 2017 and 2016
 
Notes to Condensed Consolidated and Combined Financial Statements (unaudited)
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


1


PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements    
JBG SMITH PROPERTIES
Condensed Consolidated and Combined Balance Sheets
September 30, 2017 and December 31, 2016
(Unaudited)
(In thousands, except par value amounts)
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Real estate, at cost:
 
 
 
Land and improvements
$
1,272,997

 
$
939,592

Buildings and improvements
3,662,853

 
3,064,466

Construction in progress, including land
906,680

 
151,333

 
5,842,530

 
4,155,391

Less accumulated depreciation
(982,454
)
 
(930,769
)
Real estate, net
4,860,076

 
3,224,622

Cash and cash equivalents
367,896

 
29,000

Restricted cash
17,521

 
3,263

Tenant and other receivables, net
50,474

 
33,380

Deferred rent receivable, net
145,683

 
136,582

Investments in and advances to unconsolidated real estate ventures
284,986

 
45,776

Receivable from former parent

 
75,062

Other assets, net
288,391

 
112,955

TOTAL ASSETS
$
6,015,027

 
$
3,660,640

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgages payable, net
$
1,977,674

 
$
1,165,014

Revolving credit facility
115,751

 

Unsecured term loan, net
46,389

 

Payable to former parent

 
283,232

Accounts payable and accrued expenses
131,627

 
40,923

Other liabilities, net
100,774

 
49,487

Total liabilities
2,372,215

 
1,538,656

Commitments and contingencies

 

Redeemable noncontrolling interests
567,001

 

Shareholders' equity:
 
 
 
Preferred shares, $0.01 par value - 200,000 shares authorized, none issued

 

Common shares, $0.01 par value - 500,000 shares authorized and 117,957 shares issued and outstanding at September 30, 2017
1,180

 

Additional paid-in capital
3,099,056

 

Accumulated deficit
(28,827
)
 

Total shareholders' equity of JBG SMITH Properties
3,071,409

 

Former parent equity

 
2,121,689

Noncontrolling interests in consolidated subsidiaries
4,402

 
295

Total equity
3,075,811

 
2,121,984

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
$
6,015,027

 
$
3,660,640


See accompanying notes to the condensed consolidated and combined financial statements.

2


JBG SMITH PROPERTIES
Condensed Consolidated and Combined Statements of Operations
For the three and nine months ended September 30, 2017 and 2016
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
REVENUE
 
 
 
 
 
 
 
Property rentals
$
116,458

 
$
103,265

 
$
316,899

 
$
299,497

Tenant reimbursements
9,593

 
10,231

 
27,161

 
28,428

Third-party real estate services, including reimbursements
25,141

 
8,297

 
38,881

 
24,617

Other income
1,158

 
1,564

 
3,701

 
3,938

Total revenue
152,350

 
123,357

 
386,642

 
356,480

EXPENSES
 
 
 
 
 
 
 
Depreciation and amortization
43,951

 
31,377

 
109,726

 
98,291

Property operating
29,634

 
27,287

 
77,341

 
75,087

Real estate taxes
17,194

 
14,462

 
47,978

 
43,712

General and administrative:
 
 
 
 
 
 
 
Corporate and other
10,593

 
10,913

 
35,536

 
36,040

Third-party real estate services
21,178

 
4,779

 
30,362

 
14,272

Share-based compensation related to Formation Transaction
14,445

 

 
14,445

 

Transaction and other costs
104,095

 
1,528

 
115,173

 
1,528

Total operating expenses
241,090

 
90,346

 
430,561

 
268,930

OPERATING (LOSS) INCOME
(88,740
)
 
33,011

 
(43,919
)
 
87,550

(Loss) income from unconsolidated real estate ventures
(1,679
)
 
584

 
(1,365
)
 
(952
)
Interest and other (loss) income, net
(379
)
 
749

 
1,366

 
2,292

Interest expense
(15,309
)
 
(13,028
)
 
(43,813
)
 
(38,662
)
Loss on extinguishment of debt
(689
)
 

 
(689
)
 

Gain on bargain purchase
27,771

 

 
27,771

 

(LOSS) INCOME BEFORE INCOME TAX EXPENSE
(79,025
)
 
21,316

 
(60,649
)
 
50,228

Income tax benefit (expense)
1,034

 
(302
)
 
317

 
(884
)
NET (LOSS) INCOME
(77,991
)
 
21,014

 
(60,332
)
 
49,344

Net loss attributable to redeemable noncontrolling interests
8,160

 

 
2,481

 

NET (LOSS) INCOME ATTRIBUTABLE TO
JBG SMITH PROPERTIES
$
(69,831
)
 
$
21,014

 
$
(57,851
)
 
$
49,344

(LOSS) EARNINGS PER COMMON SHARE:
 
 
 
 
 
 
 
Basic
$
(0.61
)
 
$
0.21

 
$
(0.55
)
 
$
0.49

Diluted
$
(0.61
)
 
$
0.21

 
$
(0.55
)
 
$
0.49

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - basic and diluted
$
114,744

 
$
100,571

 
$
105,347

 
$
100,571



See accompanying notes to the condensed consolidated and combined financial statements.

3


JBG SMITH PROPERTIES
Condensed Consolidated and Combined Statement of Equity
For the nine months ended September 30, 2017
(Unaudited)
(In thousands)
 
Common Shares
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Former
Parent
Equity
 
Noncontrolling Interests in Consolidated Subsidiaries
 
Total Equity
Shares
 
Amount
 
 
 
 
 
BALANCE AT JANUARY 1, 2017
 
 
 
 
 
 
 
 
$
2,121,689

 
$
295

 
$
2,121,984

Net income (loss) attributable to JBG SMITH
Properties

 
$

 
$

 
$
(28,827
)
 
(29,024
)
(1) 

 
(57,851
)
Deferred compensation shares and options, net

 

 

 

 
1,526

 

 
1,526

Contributions from former parent, net

 

 

 

 
334,843

 

 
334,843

Issuance of common limited partnership units
   at the Separation

 

 

 

 
(96,632
)
 

 
(96,632
)
Issuance of common shares at the Separation
94,736

 
947

 
2,331,455

 

 
(2,332,402
)
 

 

Issuance of common shares in connection with the
   Combination
23,221

 
233

 
864,685

 

 

 

 
864,918

Noncontrolling interests acquired in connection
   with the Combination

 

 

 

 

 
3,987

 
3,987

Distributions to noncontrolling interests

 

 

 

 

 
(14
)
 
(14
)
Contributions from noncontrolling interests

 

 

 

 

 
134

 
134

Adjustment to record redeemable noncontrolling
   interest at redemption value

 

 
(97,084
)
 

 

 

 
(97,084
)
BALANCE AT SEPTEMBER 30, 2017
117,957

 
$
1,180

 
$
3,099,056

 
$
(28,827
)
 
$

 
$
4,402

 
$
3,075,811


_______________

(1) 
Net loss earned from January 1, 2017 through July 17, 2017 is attributable to our former parent as it was the sole shareholder prior to July 17, 2017. See Note 1 for additional information.


See accompanying notes to the condensed consolidated and combined financial statements.

4


JBG SMITH PROPERTIES
Condensed Consolidated and Combined Statements of Cash Flows
For the nine months ended September 30, 2017 and 2016
 (Unaudited)
 (In thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
 OPERATING ACTIVITIES:
 
 
 
 Net (loss) income
$
(60,332
)
 
$
49,344

 Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Share-based compensation expense
17,164

 
3,486

 Depreciation and amortization, including amortization of debt issuance costs
111,684

 
99,612

 Deferred rent
(9,249
)
 
(10,772
)
 Loss from unconsolidated real estate ventures
1,365

 
952

Amortization of above- and below-market lease intangibles, net
(872
)
 
(1,012
)
 Return on capital from unconsolidated real estate ventures
1,149

 
1,020

Gain on bargain purchase
(27,771
)
 

 Loss on extinguishment of debt
689

 

Unrealized gain on interest rate swaps
(467
)
 

Bad debt expense
1,808

 
618

 Other non-cash items
6,466

 
3,592

 Changes in operating assets and liabilities:
 
 
 
 Tenant and other receivables
(3,617
)
 
(2,177
)
 Other assets, net
(32,884
)
 
(19,762
)
 Accounts payable and accrued expenses
19,077

 
(4,091
)
 Other liabilities, net
(817
)
 
(19,427
)
 Net cash provided by operating activities
23,393

 
101,383

 INVESTING ACTIVITIES:
 
 
 
Development costs, construction in progress and real estate additions
(115,922
)
 
(185,439
)
Cash received in connection with the Combination
83,942

 

Restricted cash
(798
)
 
3,234

Investments in and advances to unconsolidated real estate ventures
(1,441
)
 
(19,965
)
Repayment of notes receivable
50,934

 

Other investments
(3,531
)
 
(1,935
)
Proceeds from repayment of receivable from former parent
75,000

 

 Net cash provided by (used in) investing activities
88,184

 
(204,105
)
 FINANCING ACTIVITIES:
 
 
 
Contributions from former parent, net
160,203

 
32,955

Repayment of borrowings from former parent
(115,630
)
 

Capital lease payments
(17,776
)
 

Proceeds from borrowings from former parent
4,000

 
39,000

Proceeds from borrowings
407,769

 

Repayments of borrowings
(192,681
)
 
(8,871
)
Debt issuance costs
(18,686
)
 
(37
)
Contributions from noncontrolling interests
134

 

Distributions to noncontrolling interests
(14
)
 
(7
)
 Net cash provided by financing activities
227,319

 
63,040

 Net increase (decrease) in cash and cash equivalents
338,896

 
(39,682
)
 Cash and cash equivalents at beginning of the period
29,000

 
74,966

 Cash and cash equivalents at end of the period
$
367,896

 
$
35,284

 
 
 
 

5


JBG SMITH PROPERTIES
Condensed Consolidated and Combined Statements of Cash Flows
For the nine months ended September 30, 2017 and 2016
 (Unaudited)
 (In thousands)

 
Nine Months Ended September 30,
 
2017
 
2016
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION: (1)
 
 
 
Transfer of mortgage payable to former parent
$

 
$
115,022

 Cash paid for interest (net of capitalized interest of $2,285 and $3,690 in
   2017 and 2016, respectively)
45,354

 
37,540

Accrued capital expenditures included in accounts payable and accrued expenses
17,633

 
15,206

Write-off of fully depreciated assets
(24,909
)
 
(87,220
)
Cash payments for income taxes
3,681

 
1,087

Non-cash transactions related to the Formation Transaction:
 
 
 
Issuance of common limited partnership units at the Separation
96,632

 

Issuance of common shares at the Separation
2,332,402

 

Issuance of common shares in connection with the Combination
864,918

 

Issuance of common limited partnership units in connection with the Combination
359,967

 

Adjustment to record redeemable noncontrolling interest at redemption value
97,084

 

Contribution from former parent in connection with the Separation
174,639

 


(1) See Note 3 for information about assets, liabilities and noncontrolling interests acquired in the Formation Transaction.


See accompanying notes to the condensed consolidated and combined financial statements.

6


JBG SMITH PROPERTIES
Notes to Condensed Consolidated and Combined Financial Statements
September 30, 2017
(Unaudited)

1.    Organization and Basis of Presentation
Organization

JBG SMITH Properties ("JBG SMITH") was organized by Vornado Realty Trust ("Vornado" or "former parent") as a Maryland real estate investment trust ("REIT") on October 27, 2016 (capitalized on November 22, 2016). JBG SMITH was formed for the purpose of receiving, via the spin-off on July 17, 2017 (the "Separation"), substantially all of the assets and liabilities of Vornado’s Washington, DC segment, which operated as Vornado / Charles E. Smith, (the "Vornado Included Assets"). On July 18, 2017, JBG SMITH acquired the management business and certain assets and liabilities (the "JBG Assets") of The JBG Companies (the "Combination"). The Separation and the Combination are collectively referred to as the "Formation Transaction." Unless the context otherwise requires, all references to "we," "us," and "our," refer to the Vornado Included Assets, our predecessor and accounting acquirer, for periods prior to the Separation and to JBG SMITH for periods from and after the Separation and Combination.

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, consisting of Vornado and the other common limited partners of VRLP. Following such distribution by VRLP and prior to such distribution by Vornado, Vornado contributed to JBG SMITH all of the OP Units it received in exchange for common shares of JBG SMITH. Each Vornado common shareholder received one JBG SMITH common share for every two Vornado common shares held as of the close of business on July 7, 2017 (the "Record Date").  Vornado and each of the other limited partners of VRLP received one JBG SMITH LP OP Unit for every two common limited partnership units in VRLP held as of the close of business on the Record Date. Our operations are presented as if the transfer of the Vornado Included Assets had been consummated prior to all historical periods presented in the accompanying condensed consolidated and combined financial statements at the carrying amounts of such assets and liabilities reflected in Vornado’s books and records.
In connection with the Separation, JBG SMITH issued 94.7 million common shares and JBG SMITH LP issued 5.8 million OP Units to parties other than JBG SMITH. In connection with the Combination, JBG SMITH issued 23.3 million common shares and JBG SMITH LP issued 13.9 million OP Units to parties other than JBG SMITH. As of the completion of the Formation Transaction there were 118.0 million JBG SMITH common shares outstanding and 19.8 million JBG SMITH LP OP Units outstanding that were owned by parties other than JBG SMITH. As of July 18, 2017 and September 30, 2017, we, as its sole general partner controlled JBG SMITH LP and owned 85.6% of its OP Units.
We own and operate a portfolio of high-quality office and multifamily assets, many of which are amenitized with ancillary retail. Our portfolio reflects our longstanding strategy of 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 a Metro station. 
As of September 30, 2017, our portfolio comprised: (i) 69 operating assets comprising 51 office assets totaling over 13.7 million square feet (11.8 million square feet at our share), 14 multifamily assets totaling 6,016 units (4,232 units at our share) and four other assets totaling approximately 765,000 square feet (348,000 square feet at our share); (ii) nine assets under construction comprising four office assets totaling approximately 1.3 million square feet (1.2 million square feet at our share), four multifamily assets totaling 1,334 units (1,149 units at our share) and one other asset totaling approximately 41,100 square feet (4,100 square feet at our share; (iii) one near-term development multifamily asset totaling 433 units (303 units at our share), and (iv) 42 future development assets totaling approximately 21.3 million square feet (17.6 million square feet at our share) of estimated potential development density.
Our revenues are derived primarily from leases with office and multifamily tenants, including fixed rents and reimbursements from tenants for certain expenses such as real estate taxes, property operating expenses, and repairs and maintenance. In addition to our portfolio, we have a third-party real estate services business that provides fee-based real estate services to our real estate ventures, legacy funds formerly organized by JBG ("JBG Legacy Funds") and other third parties.

7



Only the U.S. federal government accounted for 10% or more of our rental revenue for the three and nine months ended September 30, 2017 and 2016, as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands)
2017
 
2016
 
2017
 
2016
U.S. federal government
$
22,492

 
$
27,594

 
$
68,869

 
$
74,939

Percentage of office segment revenue
22.6
%
 
30.5
%
 
25.3
%
 
28.5
%
Percentage of total rental revenue
17.8
%
 
24.3
%
 
20.0
%
 
22.9
%
Basis of Presentation
The accompanying unaudited condensed consolidated and combined financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited condensed consolidated and combined financial statements do not contain certain information required in annual financial statements and notes as required under GAAP. In our opinion, all adjustments considered necessary for a fair presentation have been included, and all such adjustments are of a normal recurring nature. All intercompany transactions and balances have been eliminated. The results of operations for the three and nine months ended September 30, 2017 and 2016 are not necessarily indicative of the results that may be expected for a full year. These condensed consolidated and combined financial statements should be read in conjunction with our Registration Statement on Form 10, as amended, filed with the Securities and Exchange Commission (the "SEC") and declared effective on June 26, 2017 as well as the final Information Statement filed with the SEC as Exhibit 99.1 to our Current Report on Form 8-K filed on June 27, 2017.
The accompanying condensed consolidated and combined financial statements include the accounts of JBG SMITH and our wholly-owned subsidiaries and those other entities in which we have a controlling financial interest, including where we have been determined to be a primary beneficiary of a variable interest entity ("VIE"). See Note 6 for more information on our consolidated VIEs. The portions of the equity and net (loss) income of consolidated subsidiaries that are not attributable to JBG SMITH are presented separately as amounts attributable to noncontrolling interests in the condensed consolidated and combined financial statements.
Combination
JBG SMITH and the Vornado Included Assets were under common control of Vornado for all periods prior to the Separation at July 17, 2017. The transfer of the Vornado Included Assets from Vornado to JBG SMITH was completed prior to the Separation, at net book values (historical carrying amounts) carved out from Vornado’s books and records. For purposes of the formation of JBG SMITH, the Vornado Included Assets were designated as the predecessor and the accounting acquirer of JBG SMITH. Consequently, the financial statements of JBG SMITH, as set forth herein, represent a continuation of the financial information of the Vornado Included Assets as the predecessor and accounting acquirer such that the historical financial information included herein as of any date or for any periods on or prior to the completion of the Combination represents the pre-Combination financial information of the Vornado Included Assets. The financial statements reflect the common shares as of the date of the Separation as outstanding for all prior periods prior to July 17, 2017. The acquisition of the management business and certain assets and liabilities of JBG completed subsequently by JBG SMITH was accounted for as a business combination using the acquisition method whereby identifiable assets acquired and liabilities assumed are recorded at the acquisition-date fair values and income and cash flows from the operations were consolidated into the financial statements of JBG SMITH commencing July 18, 2017.
The accompanying condensed consolidated and combined statements of operations for the three and nine months ended September 30, 2017 include our consolidated accounts and the combined accounts of the Vornado Included Assets. Accordingly, the results of operations for the three and nine months ended September 30, 2017 reflect the aggregate operations and changes in cash flows and equity on a combined basis for all periods prior to July 17, 2017 and on a consolidated basis for all periods subsequent to July 17, 2017. The accompanying condensed combined financial statements for the three and nine months ended September 30, 2016 include the Vornado Included Assets. Therefore, the discussion of our results of operations, cash flows and financial condition set forth in this report is not necessarily indicative of our future results of operations, cash flows or financial condition as an independent, publicly traded company.
References to the financial statements refer to our condensed consolidated and combined financial statements as of September 30, 2017 and December 31, 2016, and for the three and nine months ended September 30, 2017 and 2016. References to the balance sheets refer to our condensed consolidated and combined balance sheets as of September 30, 2017 and December 31, 2016. References to the statement of operations refer to our condensed consolidated and combined statements of operations for the three

8



and nine months ended September 30, 2017 and 2016. References to the statement of cash flows refer to our condensed consolidated and combined statements of cash flows for the nine months ended September 30, 2017 and 2016.
The historical financial results for the Vornado Included Assets reflect charges for certain corporate costs allocated by the former parent which we believe are reasonable. These charges were based on either actual costs incurred or a proportion of costs estimated to be applicable to the Vornado Included Assets based on an analysis of key metrics, including total revenues. Such costs do not necessarily reflect what the actual costs would have been if JBG SMITH had been operating as a separate standalone public company. These charges are discussed further in Note 17.
Recasting of 2016 Financial Information
The historical financial information of the Vornado Included Assets was recast to exclude Vornado's interest in Rosslyn Plaza as it was omitted from the Separation. Financial information disclosed herein as of any date or for any periods on or prior to the completion of the Separation represents such recast amounts.
Reclassifications
Certain prior period data have been reclassified to conform to the current period presentation as follows:
Reclassification of $4.0 million of investments to "Other assets" on our balance sheet as of December 31, 2016 as a result of the revision in the line item "Investments in and advances to unconsolidated real estate ventures" on our balance sheet to include only real estate investments.
Reclassification of $4.8 million and $14.3 million of expenses for the three and nine months ended September 30, 2016, respectively, to “General and administrative: third-party real estate services” from “Property operating expenses” as it relates to known expenses incurred to operate our third-party real estate services. Additionally, we reclassified $2.0 million and $6.0 million of income for the three and nine months ended September 30, 2016, respectively, to “Third-party real estate services, including reimbursements” from “Other income” as it relates to revenue earned from our third-party business.

2.    Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Business Combinations
We account for business combinations, including the acquisition of real estate, using the acquisition method by recognizing and measuring the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree at their acquisition date fair values. As a result, upon the acquisition, we estimate the fair value of the acquired tangible assets (consisting of real estate, cash and cash equivalents, tenant and other receivables, investments in unconsolidated real estate ventures and other assets, as applicable), identified intangible assets and liabilities (consisting of the value of in-place leases, above- and below-market leases, options to enter into ground lease and management contracts, as applicable), assumed debt and other liabilities, and noncontrolling interests, as applicable, based on our evaluation of information and estimates available at that date. Based on these estimates, we allocate the purchase price to the identified assets acquired and liabilities assumed. Any excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. Any excess of the fair value of assets acquired over the purchase price is recorded as a gain on bargain purchase. If, up to one year from the acquisition date, information regarding the fair value of the net assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments are made on a prospective basis to the purchase price allocation, which may include adjustments to identified assets, assumed liabilities, and goodwill or the gain on bargain purchase, as applicable. Transaction costs related to business combinations are expensed as incurred and included in "Transaction and other costs" in our statements of operations.

The fair values of tangible real estate assets are determined using the “as-if vacant” approach whereby we use discounted income, or cash flow models with inputs and assumptions that we believe are consistent with current market conditions for similar assets. The most significant assumptions in determining the allocation of the purchase price to tangible assets are the exit capitalization rate, discount rate, estimated market rents and hypothetical expected lease-up periods.

9


The fair values of identified intangible assets are determined based on the following:

The value allocable to the above- or below-market component of an acquired in-place lease is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be received pursuant to the lease over its remaining term and (ii) management’s estimate of the amounts that would be received using market rates over the remaining term of the lease. Amounts allocated to above- market leases are recorded as "Identified intangible assets" in "Other assets, net" in the balance sheets, and amounts allocated to below-market leases are recorded as "Lease intangible liabilities" in "Other liabilities, net" in the balance sheets. These intangibles are amortized to "Property rentals" in our statements of operations over the remaining terms of the respective leases.
Factors considered in determining the value allocable to in-place leases include estimates, during hypothetical lease-up periods, related to space that is actually leased at the time of acquisition. These estimates include (i) lost rent at market rates, (ii) fixed operating costs that will be recovered from tenants and (iii) theoretical leasing commissions required to execute similar leases. These intangible assets are recorded as "Identified intangible assets" in "Other assets, net" in the balance sheets and are amortized over the remaining term of the existing lease.
The fair value of the in-place property management, leasing, asset management, and development and construction management contracts is based on revenue and expense projections over the estimated life of each contract discounted using a market discount rate. These management contract intangibles are amortized over the weighted average life of the management contracts.
The fair value of investments in unconsolidated real estate ventures and related noncontrolling interests is based on the estimated fair values of the identified assets acquired and liabilities assumed of each entity.
The fair value of the mortgages payable assumed was determined using current market interest rates for comparable debt financings. The fair values of the interest rate swaps and caps are based on the estimated amounts we would receive or pay to terminate the contract at the reporting date and are determined using interest rate pricing models and observable inputs. The carrying value of cash, restricted cash, working capital balances, leasehold improvements and equipment, and other assets acquired and liabilities assumed approximates fair value.

The results of operations of acquisitions are included in our financial statements as of the dates they are acquired. The intangible assets and liabilities associated with acquisitions are included in "Other assets, net" and "Other liabilities, net", respectively, in our balance sheets.
Real Estate
Real estate is carried at cost, net of accumulated depreciation and amortization. Maintenance and repairs are expensed as incurred. As real estate is undergoing redevelopment activities, all property operating expenses directly associated with and attributable to the redevelopment, including interest expense, are capitalized to the extent that we believe such costs are recoverable through the value of the property. The capitalization period begins when redevelopment activities are underway and ends when the project is substantially complete. General and administrative costs are expensed as incurred. Depreciation requires an estimate by management of the useful life of each property and improvement as well as an allocation of the costs associated with a property to its various components. Depreciation is recognized on a straight‑line basis over estimated useful lives, which range from three to 40 years. Tenant allowances are amortized on a straight‑line basis over the lives of the related leases, which approximate the useful lives of the tenant improvements.
Construction in progress, including land, is carried at cost, and no depreciation is recorded. Real estate undergoing significant renovations and improvements is considered under development. All direct and indirect costs related to development activities are capitalized into "Construction in progress, including land" on our balance sheets, except for certain demolition costs, which are expensed as incurred. Costs incurred include pre-development expenditures directly related to a specific project, development and construction costs, interest, insurance and real estate taxes. Indirect development costs include employee salaries and benefits, travel and other related costs that are directly associated with the development real estate. Our method of calculating capitalized interest expense is based upon applying our weighted average borrowing rate to the actual accumulated expenditures if the property does not have property specific debt. The capitalization of such expenses ceases when the real estate is ready for its intended use, but no later than one-year from substantial completion of major construction activity. If we determine that a project is no longer viable, all pre-development project costs are immediately expensed. Similar costs related to properties not under development are expensed as incurred.
Our assets and related intangible assets are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Estimates

10


of future cash flows are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and is measured based on the excess of the property’s carrying amount over its estimated fair value. If our estimates of future cash flows, anticipated holding periods, or fair values change, based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our financial statements. Estimates of future cash flows are subjective and are based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.
Real Estate Held for Sale
Real estate held for sale is recorded at the lower of the carrying amount or the expected sales price less costs to sell. Operations of real estate held for sale and real estate sold are reported in continuing operations if their disposition does not represent a strategic shift that has or will have a major effect on our operations and financial results.
The application of the accounting principles that govern the classification any of our real estate as held for sale requires management to make certain significant judgments. In evaluating whether real estate meets the held for sale criteria set forth by the Property, Plant and Equipment Topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"), we make a determination as to the point in time that it is probable that a sale will be consummated. Given the nature of all real estate sales contracts, it is not unusual for such contracts to allow potential buyers a period of time to evaluate the property prior to formal acceptance of the contract. In addition, certain other matters critical to the final sale, such as financing arrangements, often remain pending even upon contract acceptance. As a result, real estate under contract may not close within the expected time period or may not close at all. Therefore, any real estate categorized as held for sale represents only those properties that management has determined are probable to close within the requirements set forth in the Property, Plant and Equipment Topic of the FASB ASC.
We do not have any real estate classified as held for sale as of September 30, 2017 and December 31, 2016.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less and are carried at cost, which approximates fair value, due to their short‑term maturities.
Restricted Cash
Restricted cash consists primarily of security deposits held on behalf of our tenants, cash escrowed under loan agreements for debt service, real estate taxes, property insurance and capital improvements.
Allowance for Doubtful Accounts
We periodically evaluate the collectability of amounts due from tenants, including the receivable arising from deferred rent receivable, and maintain an allowance for doubtful accounts for the estimated losses resulting from the inability of tenants to make required payments under lease agreements. We exercise judgment in establishing these allowances and consider payment history and current credit status in developing these estimates.
Investments in and Advances to Real Estate Ventures
We analyze our real estate ventures to determine whether the respective entities should be consolidated. If it is determined that these investments do not require consolidation because the entities are not VIEs in accordance with the Consolidation Topic of the FASB ASC, we are not considered the primary beneficiary of the entities determined to be VIEs, we do not have voting control, and/or the limited partners (or non-managing members) have substantive participatory rights, then the selection of the accounting method used to account for our investments in unconsolidated real estate ventures is generally determined by our voting interests and the degree of influence we have over the entity. Management uses its judgment when determining if we are the primary beneficiary of, or have a controlling financial interest in, an entity in which we have a variable interest. Factors considered in determining whether we have the power to direct the activities that most significantly impact the entity’s economic performance include risk and reward sharing, experience and financial condition of the other partners, voting rights, involvement in day-to-day capital and operating decisions and the extent of our involvement in the entity.

We use the equity method of accounting for investments in unconsolidated real estate ventures when we own 20% or more of the voting interests and have significant influence but do not have a controlling financial interest, or if we own less than 20% of the voting interests but have determined that we have significant influence. Under the equity method, we record our investments in and advances to these entities in our balance sheets, and our proportionate share of earnings or losses earned by the real estate venture is recognized in "(Loss) income of unconsolidated real estate ventures" in the accompanying statements of operations. We earn revenues from the management services we provide to unconsolidated entities. These fees are determined in accordance with the terms specific to each arrangement and may include property and asset management fees or transactional fees for leasing,

11


acquisition, development and construction, financing, and legal services provided. We account for this revenue gross of our ownership interest in each respective real estate venture and recognize such revenue in "Third-party real estate services, including reimbursements" in our statements of operations. Our proportionate share of related expenses is recognized in "(Loss) income of unconsolidated real estate ventures" in our statements of operations. We may also earn incremental promote distributions if certain financial return benchmarks are achieved upon ultimate disposition of the underlying properties. Management fees are recognized when earned, and promote fees are recognized when certain earnings events have occurred, and the amount is determinable and collectible. Any promote fees are reflected in "(Loss) income from unconsolidated real estate ventures" in our statements of operations.
On a periodic basis, we evaluate our investments in unconsolidated entities for impairment. We assess whether there are any indicators, including underlying property operating performance and general market conditions, that the value of our investments in unconsolidated real estate ventures may be impaired. An investment in a real estate venture is considered impaired only if we determine that its fair value is less than the net carrying value of the investment in that real estate venture on an other-than-temporary basis. Cash flow projections for the investments consider property level factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. We consider various qualitative factors to determine if a decrease in the value of our investment is other-than-temporary. These factors include age of the venture, our intent and ability to retain our investment in the entity, financial condition and long-term prospects of the entity and relationships with our partners and banks. If we believe that the decline in the fair value of the investment is temporary, no impairment charge is recorded. If our analysis indicates that there is an other-than temporary impairment related to the investment in a particular real estate venture, the carrying value of the venture will be adjusted to an amount that reflects the estimated fair value of the investment.

Intangibles
Intangible assets consist of in-place leases, below-market ground rent obligations, above-market real estate leases, lease origination costs and options to enter into ground lease that were recorded in connection with the acquisition of properties. Intangible assets also include management and leasing contracts acquired as part of the Combination. Intangible liabilities consist of above-market ground rent obligations and below-market real estate leases that are also recorded in connection with the acquisition of properties. Both intangible assets and liabilities are amortized and accreted using the straight-line method over their applicable remaining useful life. When a lease or contract is terminated early, any remaining unamortized or unaccreted balances are charged to earnings. The useful lives of intangible assets are evaluated each reporting period with any changes in estimated useful lives being accounted for over the revised remaining useful life.

Deferred Costs
Deferred financing costs consist of loan issuance costs directly related to financing transactions that are deferred and amortized over the term of the related loan as a component of interest expense. Unamortized deferred financing costs related to our mortgages payable and unsecured term loan are presented as a direct deduction from the carrying amounts of the related debt instruments, while such costs related to our revolving credit facility are included in other assets.
Direct salaries, third-party fees and other costs incurred by us to originate a lease are capitalized in "Other assets, net" in the balance sheets and are amortized against the respective leases using the straight-line method over the term of the related leases.

Noncontrolling Interests
Redeemable noncontrolling interests consists of OP Units issued in conjunction with the Formation Transaction. The OP Units are redeemable for our common shares or cash beginning August 1, 2018, subject to certain limitations. Redeemable noncontrolling interests are generally redeemable at the option of the holder and are presented in the mezzanine section between total liabilities and shareholders' equity on the balance sheets. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized in "Additional paid-in capital".
Noncontrolling interests in consolidated subsidiaries represents the portion of equity that we do not own in entities we consolidate, including interests in consolidated real estate ventures or VIEs in connection with property acquisitions. We identify our noncontrolling interests separately within the equity section on the balance sheets. See Note 10 for further information.
Amounts of consolidated net (loss) income attributable to redeemable noncontrolling interests and to the noncontrolling interests in consolidated subsidiaries are presented separately in the statements of operations.

Derivative Financial Instruments and Hedge Accounting
Derivative financial instruments are used at times to manage exposure to variable interest rate risk. Derivative financial instruments, consisting of interest rate swaps and caps, are considered economic hedges, but not designated as accounting hedges, and are

12


carried at their estimated fair value on a recurring basis. Realized and unrealized gains are recorded in "Interest and other (loss) income, net" in the statements of operations in the period in which the change occurs.

Fair Value of Assets and Liabilities

ASC 820, Fair Value Measurement and Disclosures, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels:
Level 1 — quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities;
Level 2 — observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and
Level 3 — unobservable inputs that are used when little or no market data is available.
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value.
Revenue Recognition
Property rentals income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a straight-line basis over the non-cancellable term of the lease, which includes the effects of periodic step-ups in rent and rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of the leased space and the leased space is substantially ready for its intended use. In circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of property rentals revenue on a straight-line basis over the term of the lease. Differences between rental income recognized and amounts due under the respective lease agreements are recorded as an increase or decrease to “Deferred rent receivable, net” on our balance sheets. Property rentals also includes the amortization of acquired above-and below-market leases, net.
Tenant reimbursements provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective assets. Tenant reimbursements are accrued in the same periods as the related expenses are incurred.
Third-party real estate services revenue, including reimbursements, is determined in accordance with the terms specific to each arrangement and may include property and asset management fees or transactional fees for leasing, acquisition, development and construction, financing, and legal services provided. These fees are determined in accordance with the terms specific to each arrangement and are recognized as the related services are performed. Development and construction fees earned from providing services to our unconsolidated real estate joint ventures are recorded on a percentage of completion basis.
Third-Party Real Estate Services Expenses
Third-party real estate services expenses include the costs associated with the management services provided to our unconsolidated real estate joint ventures and other third parties. We allocate personnel and other overhead costs using the estimates of the time spent performing services for our third-party business and other allocation methodologies.
Income Taxes
We intend to elect to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with the filing of our tax return for the 2017 calendar year, effective for our tax year ending December 31, 2017. Under those sections, a REIT which distributes at least 90% of its REIT taxable income as dividends to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Prior to the Separation, the Vornado Included Assets historically operated under Vornado’s REIT structure. Since Vornado operates as a REIT and distributes 100% of taxable income to its shareholders, no provision for federal income taxes has been made in the accompanying financial statements for the periods prior to the Separation. We intend to continue to adhere to these requirements and maintain our REIT status in future periods.

As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions to shareholders. Future distributions will be declared and paid at the discretion of the Board of Trustees and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual dividend requirements under the REIT provisions of the Code, as amended, and such other factors as our Board of Trustees deems relevant.

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We also participate in certain activities conducted by entities which elected to be treated as taxable REIT subsidiaries ("TRS") under the Code. As such, we are subject to federal, state, and local taxes on the income from these activities. Income taxes attributable to our TRSs are accounted for under the asset and liability method. Under the asset and liability method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future.
ASC 740-10, Income Taxes, provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740-10 requires the evaluation of tax positions taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold are recorded as a tax expense in the current year. As of September 30, 2017, and December 31, 2016, we determined that no liabilities are required in connection with uncertain tax positions.
(Loss) Earnings Per Share
Basic (loss) earnings per common share ("EPS") is computed by dividing net (loss) income attributable to common shareholders by the weighted average common shares outstanding during the period. Unvested and vested share-based payment awards that entitle holders to receive non-forfeitable dividends, which include OP Units, long-term incentive partnership units ("LTIP Units") and out-performance award units ("OPP Units"), are considered participating securities. Consequently, we are required to apply the two-class method of computing basic and diluted earnings that would otherwise have been available to common shareholders. Under the two-class method, earnings for the period are allocated between common shareholders and participating securities based on their respective rights to receive dividends. During periods of net loss, losses are allocated only to the extent the participating securities are required to absorb their share of such losses. Diluted earnings per common share reflects the potential dilution of the assumed exchange of various units into common shares unvested share-based payment awards to the extent they are dilutive.

Share-Based Compensation
We granted OP Units, formation awards ("Formation Awards"), LTIP Units and OPP Units to our trustees, management and employees in connection with the Separation and Combination. The term and vesting of each award were determined by the compensation committee of our Board of Trustees (the “Compensation Committee”).

Fair value is determined, depending on the type of award, using the Monte Carlo method or post-vesting restriction periods, which is intended to estimate the fair value of the awards at the grant date using dividend yields and expected volatilities that are primarily based on available implied data and peer group companies' historical data. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The shortcut method is used for determining the expected life used in the valuation method.

Compensation expense for the Formation Awards, LTIP Units, OPP Units and certain OP Units is based on the fair value of our common shares at the date of the grant and is recognized ratably over the vesting period. For grants with a graded vesting schedule that are only subject to service conditions, we have elected to recognize compensation expense on a straight-line basis.
We also elected to account for forfeitures as they occur, rather than estimate expected forfeitures. Distributions paid on unvested OP Units, LTIPs and OPPs are charged to “net income attributable to noncontrolling interests” in the statements of operations.
Recent Accounting Pronouncements
The following table provides a brief description of recent accounting pronouncements (Accounting Standards Update or "ASU") by the FASB that could have a material effect on our financial statements:
Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other
Significant Matters
 
 
 
 
 
 
 
Standard adopted
 
 
 
 
 
 
ASU 2017‑01 Business Combinations (Topic 805): Clarifying the
Definition of a Business

 
This standard provides a screen to determine when an asset acquired or group of assets acquired is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated.

 
September
2017
 
The adoption and implementation of this standard did not have an impact on our results of operations, financial condition or cash flows.


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Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other
Significant Matters
Standards not yet adopted
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
 
The standard provides new guidance for the determination of eligibility for hedge accounting and effectiveness. It also amends the presentation and disclosure requirements. ASU 2017-12 requires a modified retrospective transition method which requires the recognition of the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption.

 
January 2019
 
We are currently evaluating the overall impact of the adoption of ASU 2017-12. The adoption of this standard is not expected to have a material impact on our financial statements.
ASU 2017‑09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
 
This standard clarifies which changes to the terms or conditions of a share-based payment award are subject to the guidance on modification accounting under ASC Topic 718. Entities would apply the modification accounting guidance unless the value, vesting requirements and classification of a share-based payment award are the same immediately before and after a change to the terms or conditions of the award.
 
January 2018
 
We are currently evaluating the overall impact of the adoption of ASU 2017-09. The adoption of this standard is not expected to have a material impact on our financial statements.
ASU 2017‑05, Other Income—Gains and Losses from the Derecognition
of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for
Partial Sales of Nonfinancial Assets

 
This standard clarifies the scope of recently established guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. This update conforms the derecognition guidance on nonfinancial assets with the model for transactions in ASC 606.

 
January 2018
 
The adoption of this standard is not expected to have a material impact on our financial statements.
ASU 2016-15,
Statement of Cash
Flows (Topic 230):
Classification of
Certain Cash
Receipts and Cash
Payments and ASU
2016-18, Statement
of Cash Flows
(Topic 230):
Restricted Cash

 
These standards amend the existing guidance and address specific cash flow issues with the objective of reducing existing diversity in practice. ASU 2016-15 addresses eight specific cash flow issues and ASU 2016-18 specifically addresses presentation of restricted cash and restricted cash equivalents in the statements of cash flows. These standards require a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, entities may apply the amendments prospectively as of the earliest date practicable.

 
January 2018
 
Other than the revised statement of cash flows presentation of restricted cash, the adoption of these standards is not expected to have a material impact on our financial statements.


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Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other
Significant Matters
ASU 2016-02, Leases (Topic 842)
 
This standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases.
 
January 2019
 
We are currently evaluating the overall impact of the adoption of ASU 2016-02 on our financial statements, including the timing of adopting this standard. ASU 2016-02 will more significantly impact the accounting for leases in which we are the lessee. We have ground leases for which we will be required to record a right-of-use asset and lease liability equal to the present value of the remaining minimum lease payments upon adoption of this standard. We also expect that this standard will have an impact on the presentation of certain lease and non‑lease components of revenue from leases with no material impact to total revenue.
Under ASU 2016-02, initial direct costs for both lessees and lessors would include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, we may no longer be able to capitalize internal leasing costs and instead may be required to expense these costs as incurred.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as clarified and amended by ASU 2016-08, ASU 2016-10 and ASU 2016-12
 
This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. It requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. This standard may be adopted either retrospectively or on a modified retrospective basis.
 
January 2018
 
We currently expect to utilize the modified retrospective method of adoption. We have commenced the execution of our project plan for adopting this standard, which consists of gathering and evaluating the inventory of our revenue streams. We expect this standard will have an impact on the presentation of certain lease and non-lease components of revenue from leases upon the adoption of ASU 2016‑02, Leases, with no material impact on total revenues. We expect this standard will have an impact on the timing of gains on certain sales of real estate. We are continuing to evaluate the impact of this standard on our financial statements.
3.
The Combination
On July 18, 2017, we completed the Combination and acquired the JBG Assets in exchange for approximately 37.2 million common shares and OP Units. The Combination has been accounted for at fair value under the acquisition method of accounting. The following allocation of the purchase price is based on preliminary estimates and assumptions and is subject to change based on a final determination of the assets acquired and liabilities assumed (in thousands):

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Fair value of purchase consideration:
 
Common shares and OP Units
$
1,224,886

Cash
20,573

Total consideration paid
$
1,245,459

 
 
Fair value of assets acquired and liabilities assumed:
 
Land and improvements
$
342,932

Building and improvements
623,889

Construction in progress, including land
632,664

Leasehold improvements and equipment
7,890

Cash
104,516

Restricted cash
13,460

Investments in and advances to unconsolidated real estate ventures
238,388

Identified intangible assets
146,600

Notes receivable (1)
50,934

Identified intangible liabilities
(8,449
)
Mortgages payable assumed (2)
(768,523
)
Capital lease obligations assumed (3)
(33,543
)
Deferred tax liability (4)
(21,476
)
Other liabilities acquired, net
(52,065
)
Noncontrolling interests in consolidated subsidiaries
(3,987
)
Net assets acquired
1,273,230

Gain on bargain purchase (5)
27,771

Total consideration paid
$
1,245,459

____________________

(1) 
During the three months ended September 30, 2017, we received proceeds of $50.9 million from the repayment of the notes receivable acquired as part of the Combination.
(2) 
Subject to various interest rate swap and cap agreements assumed in the Combination that are considered economic hedges, but not designated as accounting hedges.
(3) 
As part of the Combination, two ground leases were assumed that were capital leases. On July 25, 2017, we purchased a land parcel located in Reston, Virginia associated with one of the ground leases for $19.5 million.
(4) 
Related to the management and leasing contracts acquired in the Combination.
(5) 
The Combination resulted in a gain on bargain purchase because the estimated fair value of the identifiable net assets acquired exceeded the purchase consideration by $27.8 million. The purchase consideration was based on the fair value of the common shares and OP Units issued in the Combination. We continue to reassess the recognition and measurement of identifiable assets and liabilities acquired and have preliminarily concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates of fair values were appropriate. 

The fair value of the common shares and OP Units purchase consideration was determined as follows (in thousands, except exchange ratio and price per share/unit):
Outstanding common shares and common limited partnership units prior to the Combination
100,571

Exchange ratio (1)
2.71

Common shares and OP Units issued in consideration
37,164

Price per share/unit (2)
$
37.10

Fair value of common shares and OP Units issued in consideration
$
1,378,780

Fair value adjustment to OP Units due to transfer restrictions
(43,303
)
Portion of consideration attributable to performance of future services (3)
(110,591
)
Fair value of common shares and OP Units purchase consideration
$
1,224,886

____________________

(1) 
Represents the implied exchange ratio of one common share and OP Unit of JBG SMITH for 2.71 common shares and common limited partnership units prior to the Combination.

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(2) 
Represents the volume weighted average share price on July 18, 2017.
(3) 
OP Unit consideration paid to certain of the owners of the JBG Assets which have an estimated fair value of $110.6 million is subject to post-combination employment with vesting over periods of either 12 or 60 months. In accordance with GAAP, consideration that is subject to future employment is not considered a component of the purchase price for the business combination and amortization is recognized as compensation expense over the period of employment and is included in "General and administrative expense: share-based compensation related to Formation Transaction" in the statements of operations.
The JBG Assets acquired comprise: (i) 30 operating assets comprising 19 office assets totaling approximately 3.6 million square feet (2.3 million square feet at our share), nine multifamily assets with 2,883 units (1,099 units at our share) and two other assets totaling approximately 490,000 square feet (73,000 square feet at our share); (ii) 11 office and multifamily assets under construction totaling over 2.5 million square feet (2.2 million square feet at our share); (iii) two near-term development office and multifamily assets totaling approximately 401,000 square feet (242,000 square feet at our share); (iv) 26 future development assets totaling approximately 11.7 million square feet (8.5 million square feet at our share) of estimated potential development density; and (v) JBG/Operating Partners, L.P., a real estate services company providing investment, development, asset management, property management, leasing, construction management and other services. JBG/Operating Partners, L.P. was owned by 20 unrelated individuals of which 19 became our employees, and three serve on our Board of Trustees.
The fair values of the depreciable tangible and identified intangible assets and liabilities, all of which have definite lives and are amortized, are as follows:  
 
Total Fair Value
 
Weighted Average Amortization Period
 
 
 
 
Useful Life (1)
 
(In thousands)
 
(In years)
 
 
Tangible assets:
 
 
 
 
 
Building and improvements
$
559,042

 
 
 
3 - 40 years
Tenant improvements
64,847

 
 
 
Shorter of useful life or remaining life of the respective lease
Total building and improvements
$
623,889

 
 
 
 
Leasehold improvements
$
4,422

 
 
 
Shorter of useful life or remaining life of the respective lease
Identified intangible assets:
 
 
 
 
 
In-place leases
$
59,351

 
6.4
 
Remaining life of the respective lease
Above-market real estate leases
11,700

 
6.3
 
Remaining life of the respective lease
Below-market ground leases
659

 
88.5
 
Remaining life of the respective lease
Option to enter into ground lease
17,090

 
N/A
 
Remaining life of contract
Management and leasing contracts (2)
57,800

 
7.4
 
Estimated remaining life of contracts, ranging between 3 - 8 years
Total identified intangible assets
$
146,600

 
 
 
 
Identified intangible liabilities:
 
 
 
 
 
Below-market real estate leases
$
8,449

 
10.2
 
Remaining life of the respective lease
____________________
(1) 
In determining these useful lives, we considered the length of time the asset had been in existence, the maintenance history, as well as anticipated future maintenance, and any contractual stipulations that might limit the useful life.
(2) 
Includes in-place property management, leasing, asset management, and development and construction management contracts.

Transaction costs (such as advisory, legal, accounting, valuation and other professional fees) incurred to effect the Formation Transaction are included in "Transaction and other costs" in our statements of operations. We expensed a total of $121.6 million transaction and other costs, of which $104.1 million and $115.2 million were incurred during the three and nine months ended September 30, 2017, and $1.5 million was incurred for both the three and nine months ended September 30, 2016. For the three and nine months ended September 30, 2017, transaction and other costs include severance and transaction bonus expense of $34.3 million, investment banking fees of $33.6 million, legal fees of $13.1 million and accounting fees of $8.1 million.

18


The total revenue of the JBG Assets for the three and nine months ended September 30, 2017 included in our statements of operations from the acquisition date was $34.9 million. The net loss of the JBG Assets for the three and nine months ended September 30, 2017 included in our statements of operations from the acquisition date was $7.8 million.
The accompanying unaudited pro forma information for the three and nine months ended September 30, 2017 and 2016 is presented as if the Formation Transaction had occurred on January 1, 2016. This pro forma information is based upon the historical financial statements and should be read in conjunction with our consolidated and combined financial statements and notes thereto included in our Registration Statement on Form 10, as amended, filed with the SEC and declared effective on June 26, 2017. This unaudited pro forma information does not purport to represent what the actual results of our operations would have been, nor does it purport to predict the results of operations of future periods. The unaudited pro forma information for the three and nine months ended September 30, 2017 and 2016 was adjusted to exclude $27.8 million of gain on bargain purchase. The unaudited pro forma information was adjusted to exclude transaction and other costs of $104.1 million and $115.2 million for the three and nine months ended September 30, 2017, respectively, and $1.5 million for the three and nine months ended September 30, 2016. 

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
(In thousands)
Unaudited pro forma information:
 
 
 
 
 
 
 
Total revenue
$
160,428

 
$
170,498

 
$
481,314

 
$
492,874

Net income (loss) attributable to JBG SMITH
   Properties
$
2,283

 
$
803

 
$
(13,741
)
 
$
(26,701
)
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.02

 
$
0.01

 
$
(0.13
)
 
$
(0.27
)
Diluted
$
0.02

 
$
0.01

 
$
(0.13
)
 
$
(0.27
)


4.    Tenant and Other Receivables, Net
The following is a summary of tenant and other receivables, net as of September 30, 2017 and December 31, 2016:
 
 
September 30,
2017
 
December 31,
2016
 
 
(In thousands)
Tenants
 
$
32,106

 
$
26,278

Other
 
23,835

 
11,314

Allowance for doubtful accounts
 
(5,467
)
 
(4,212
)
Total tenant and other receivables, net
 
$
50,474

 
$
33,380

We incurred bad debt expense of approximately $1.1 million and $1.8 million during the three and nine months ended September 30, 2017, respectively, and $106,000 and $618,000 during the three and nine months ended September 30, 2016, respectively, which is included in "Property operating expenses" in the statement of operations.


19


5.    Investments in and Advances to Unconsolidated Real Estate Ventures
The following is a summary of the composition of our investments in and advances to unconsolidated real estate ventures as of September 30, 2017 and December 31, 2016:
 
 
Ownership
Interest (1)
 
Investment Balance
Real Estate Venture Partners (1)
 
September 30,
2017
 
September 30,
2017
 
December 31,
2016
 
 
 
(In thousands)
Landmark
 
1.8% - 59.0%
 
$
110,562

 
$

CBREI Venture
 
5.0% - 64.0%
 
85,386

 

Canadian Pension Plan Investment Board
 
55.0%
 
36,223

 
36,312

Brandywine
 
30.0%
 
13,753

 

Berkshire Group
 
50.0%
 
27,647

 

MRP Realty
 
70.0%
 
1,802

 

JP Morgan
 
5.0%
 
9,351

 
9,335

Other
 
 
 
242

 
129

Total investments in unconsolidated real estate ventures
 
 
 
284,966

 
45,776

Advances to unconsolidated real estate ventures
 
 
 
20

 

Total investments in and advances to unconsolidated real
   estate ventures
 
 
 
$
284,986

 
$
45,776

_______________
(1) We classify our investments in and advances to unconsolidated real estate ventures by real estate venture partner with which we may have multiple investments with varying ownership interests.
The following is a summary of the debt of our unconsolidated real estate ventures as of September 30, 2017 and December 31, 2016:
 
 
Weighted Average Interest Rate
 
Balance as of
 
 
September 30,
2017
 
September 30,
2017
 
December 31,
2016
 
 
 
 
(In thousands)
Variable rate (1)
 
4.08%
 
$
531,989

 
$
31,000

Fixed rate (2)
 
3.90%
 
643,801

 
273,000

Unconsolidated real estate ventures - mortgages payable
 
 
 
1,175,790

 
304,000

Unamortized deferred financing costs, net
 
 
 
(860
)
 
(1,034
)
Unconsolidated real estate ventures - mortgages payable, net
 
 
 
$
1,174,930

 
$
302,966

______________
(1) 
Includes variable rate mortgages payable with interest rate caps.
(2) 
Includes variable rate mortgages payable with interest rates effectively fixed pursuant to interest rate swaps.



20



The following is a summary of the financial information for our unconsolidated real estate ventures, as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016:
 
 
September 30,
2017
 
December 31, 2016
Combined balance sheet information:
 
(In thousands)
Total assets
 
$
3,446,348

 
$
598,239

Total liabilities
 
1,253,664

 
327,862

Noncontrolling interests
 
343

 
343

Total equity
 
2,192,341

 
270,034

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Combined income statement information:
 
(In thousands)
Total revenue
 
$
46,830

 
$
16,364

 
$
83,387

 
$
51,066

Net (loss) income
 
(5,191
)
 
2,607

 
(414
)
 
5,083

6.    Variable Interest Entities

Unconsolidated VIEs
As of September 30, 2017 and December 31, 2016, we have interests in several investments that are deemed VIEs that are in development stage and do not hold sufficient equity at risk or conduct substantially all their operations on behalf of the investor with disproportionately few voting rights. Although we are engaged to act as the managing partner in charge of day-to-day operations of these investees, we are not the primary beneficiary of these VIEs as we do not hold unilateral power over activities that, when taken together, most significantly impact the respective VIE’s performance. We account for our investment in these entities under the equity method. As of September 30, 2017 and December 31, 2016, the net carrying amounts of our investment in these entities were $203.0 million and $42.4 million, respectively. Our maximum exposure to loss in these entities is limited to our investments, construction commitments and debt guarantees. See Note 16 for additional information.

Consolidated VIEs

JBG SMITH LP, our operating partnership, is our most significant consolidated VIE. We hold the majority membership interest in the operating partnership, act as the general partner and exercise full responsibility, discretion and control over its day-to-day management.
The noncontrolling interests of the operating partnership do not have either substantive liquidation rights, or substantive kick-out rights without cause, or substantive participating rights that could be exercised by a simple majority of noncontrolling interest members (including by such a member unilaterally). Because the noncontrolling interest holders do not have these rights, the operating partnership is a VIE. As general partner, we have the power to direct the core activities of the operating partnership that most significantly affect its performance, and through our majority interest in the operating partnership have both the right to receive benefits from and the obligation to absorb losses of the operating partnership. Accordingly, we are the primary beneficiary of the operating partnership and consolidate the operating partnership in our financial statements. As we conduct our business and hold our assets and liabilities through the operating partnership, the total assets and liabilities of the operating partnership comprise substantially all of our consolidated assets and liabilities.
We also consolidate certain VIEs that have minimal noncontrolling interests (less than 5%). These entities are VIEs because the noncontrolling interests do not have substantive kick-out or participating rights. We consolidate these entities because we control all of their significant business activities. As of September 30, 2017, the total assets and liabilities of such consolidated VIEs, excluding the operating partnership, were approximately $78.8 million and $5.1 million, respectively.

21



7.    Other Assets, Net
The following is a summary of other assets, net as of September 30, 2017 and December 31, 2016:
 
 
September 30,
2017
 
December 31,
2016
 
 
(In thousands)
Deferred leasing costs
 
$
168,344

 
$
157,258

Accumulated amortization
 
(66,403
)
 
(57,910
)
Deferred leasing costs, net
 
101,941

 
99,348

Prepaid expenses
 
21,942

 
2,199

Identified intangible assets, net
 
143,000

 
3,063

Other
 
21,508

 
8,345

Total other assets, net
 
$
288,391

 
$
112,955


The following is a summary of the composition of identified intangible assets, net as of September 30, 2017 and December 31, 2016:
 
September 30,
2017
 
December 31,
2016
Identified intangible assets:
(in thousands)
In-place leases
$
72,081

 
$
12,777

Above-market real estate leases
12,473

 
773

Below-market ground leases
2,874

 
2,215

Option to enter into ground lease
17,090

 

Management and leasing contracts
57,800

 

Other
206

 
206

Total identified intangibles assets
162,524

 
15,971

Accumulated amortization:
 
 
 
In-place leases
15,187

 
10,871

Above-market real estate leases
1,082

 
612

Below-market ground leases
1,344

 
1,278

Management and leasing contracts
1,753

 

Other
158

 
147

Total accumulated amortization
19,524

 
12,908

Identified intangible assets, net
$
143,000

 
$
3,063


The following is a summary of amortization expense included in the statements of operations related to identified intangible assets for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
In-place lease amortization (1)
$
4,104

 
$
233

 
$
4,347

 
$
336

Above-market real estate lease amortization (2)
448

 
20

 
471

 
64

Below-market ground lease amortization (3)
23

 
21

 
66

 
64

Management and leasing contract amortization (1)
1,753

 

 
1,753

 

Other amortization (1)
3

 
22

 
10

 
69

Total identified intangible asset amortization
$
6,331

 
$
296

 
$
6,647

 
$
533


___________________________________________

(1) Amounts are included in "Depreciation and amortization expenses" in our statements of operations.

22




(2) Amounts are included in "Property rentals revenue" in our statements of operations.
(3) Amounts are included in "Property operating expenses" in our statements of operations.

As of September 30, 2017, the estimated amortization of identified intangible assets is as follows for each of the five years commencing January 1, 2018:
Year ending December 31,
 
Amount
 
 
(in thousands)
2018
 
$
15,119

2019
 
12,032

2020
 
10,105

2021
 
6,664

2022
 
5,312

8.    Debt
Mortgages Payable
The following is a summary of mortgages payable as of September 30, 2017 and December 31, 2016:
 
 
Weighted Average Interest Rate
 
Balance as of
 
 
September 30,
2017
 
September 30,
2017
 
December 31,
2016
 
 
 
 
(In thousands)
Variable rate (1)
 
2.95%
 
$
1,152,106

 
$
547,291

Fixed rate (2)
 
4.79%
 
836,141

 
620,327

Mortgages payable (3)
 
 
 
1,988,247

 
1,167,618

Unamortized deferred financing costs and premium/discount, net
 
 
 
(10,573
)
 
(2,604
)
Mortgages payable, net
 
 
 
$
1,977,674

 
$
1,165,014

Payable to former parent (4)
 
 
$

 
$
283,232

__________________________ 
(1) 
Includes variable rate mortgages payable with interest rate caps.
(2) 
Includes variable rate mortgages payable with interest rates effectively fixed pursuant to rate swaps.
(3) 
Includes mortgages payable assumed as part of the Combination. See Note 3 to the financial statements for additional information.
(4) 
In June 2016, the mortgage loan for the Bowen Building was repaid with proceeds of a $115.6 million draw on our former parent's revolving credit facility collateralized by an interest in the property, and, accordingly, was reflected as a component of "Payable to former parent" on the combined balance sheets as of December 31, 2016. We repaid the loan with amounts drawn under our revolving credit facility collateralized by a mortgage on the property.
As of September 30, 2017, the net carrying value of real estate collateralizing our mortgages payable totaled $3.9 billion. Our mortgage loans contain covenants that limit our ability to incur additional indebtedness on these properties and in certain circumstances, require lender approval of tenant leases and/or yield maintenance upon repayment prior to maturity. As of September 30, 2017, we were in compliance with all debt covenants.
As part of the Combination, we assumed mortgages payable with an aggregate principal balance of $768.5 million. During the three months ended September 30, 2017, we repaid mortgages payable with an aggregate principal balance of $181.7 million, which includes mortgages payable totaling $63.7 million assumed in the Combination. We recognized losses on extinguishment of debt in conjunction with these repayments of $689,000 for the three and nine months ended September 30, 2017.


23


Credit Facility

On July 18, 2017, we entered into a $1.4 billion credit facility, consisting of a $1.0 billion revolving credit facility maturing in July 2021, with two six-month extension options, a delayed draw $200.0 million unsecured term loan ("Tranche A-1 Term Loan") maturing in January 2023 and a delayed draw $200.0 million unsecured term loan ("Tranche A-2 Term Loan") maturing in July 2024. The interest rate for the credit facility varies based on a ratio of our total outstanding indebtedness to a valuation of certain real property and assets and ranges (a) in the case of the revolving credit facility, from LIBOR plus 1.10% to LIBOR plus 1.50%, (b) in the case of the Tranche A-1 Term Loan, from LIBOR plus 1.20% to LIBOR plus 1.70% and (c) in the case of the Tranche A-2 Term Loan, from LIBOR plus 1.55% to LIBOR plus 2.35%.
On July 18, 2017, in connection with the Combination, we drew $115.8 million on the revolving credit facility and $50.0 million under the Tranche A-1 Term Loan. In connection with the execution of the credit facility, we incurred $11.2 million in fees and expenses.
The following is a summary of amounts outstanding under the credit facility as of September 30, 2017:
 
 
Interest Rate
 
Balance as of
 
 
September 30,
2017
 
September 30,
2017
 
 
 
 
(In thousands)
Revolving credit facility (1)
 
2.34%
 
$
115,751

 
 
 
 
 
Tranche A-1 Term Loan
 
2.44%
 
$
50,000

Unamortized deferred financing costs, net
 
 
 
(3,611
)
Unsecured term loan, net
 
 
 
$
46,389

__________________________ 
(1) 
As of September 30, 2017, letters of credit with an aggregate face amount of $5.2 million were provided under our revolving credit facility.
Principal Maturities
Principal maturities of debt outstanding as of September 30, 2017, including mortgages payable, the Tranche A-1 Term Loan and borrowings on the revolving credit facility, are as follows:
Year ending December 31,
 
Amount
 
 
(In thousands)
2017
 
$

2018
 
376,019

2019
 
227,919

2020
 
215,096

2021
 
215,592

2022
 
327,500

Thereafter
 
791,872

Total
 
$
2,153,998



24



9.    Other Liabilities, Net
The following is a summary of other liabilities, net as of September 30, 2017 and December 31, 2016:
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Lease intangible liabilities
$
44,965

 
$
36,515

Accumulated amortization
(26,287
)
 
(24,945
)
Lease intangible liabilities, net
18,678

 
11,570

Prepaid rent
12,445

 
9,163

Lease assumptions liabilities and accrued tenant incentives
12,090

 
14,907

Capital lease obligation
15,976

 

Security deposits
13,795

 
10,324

Ground lease deferred rent payable
3,559

 
3,331

Deferred tax liability (1)
22,007

 

Other
2,224

 
192

Total other liabilities, net
$
100,774

 
$
49,487

___________________________________________
(1) 
As of September 30, 2017, the deferred tax liability of $22.0 million is related to the management and leasing contracts assumed in the Combination. See Note 3 for additional information.
The following is a summary of amortization expense included in the statements of operations related to lease intangible liabilities:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Lease intangible liabilities amortization (1)
$
633

 
$
359

 
$
1,343

 
$
1,076


___________________________________________

(1) Amounts are included in "Property rentals" in our statements of operations.
As of September 30, 2017, the estimated amortization of lease intangible liabilities is as follows for each of the five years commencing January 1, 2018:
Year ending December 31,
 
Amount
 
 
(in thousands)
2018
 
$
2,765

2019
 
2,679

2020
 
2,392

2021
 
1,917

2022
 
1,798

10.    Redeemable Noncontrolling Interests
In conjunction with the Formation Transaction, JBG SMITH LP issued 19.8 million OP Units to persons other than JBG SMITH that are redeemable for cash or our common shares beginning August 1, 2018, subject to certain limitations. These OP Units represent a 14.4% interest in JBG SMITH LP as of September 30, 2017. The carrying amount of the redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized in "Additional paid-in capital". Redemption value is equivalent to the market value of one of our common

25



shares at the end of the period multiplied by the number of vested OP Units outstanding. Below is a summary of the activity of redeemable noncontrolling interests for the nine months ended September 30, 2017:
 
Nine Months Ended September 30,
 
2017
 
(In thousands)
Balance at January 1, 2017 (1)
$

OP Units issued at the Separation
96,632

OP Units issued in connection with the Combination (2)
359,967

Net loss attributable to redeemable noncontrolling interests
(2,481
)
Share-based compensation expense
15,799

Adjustment to redemption value
97,084

Balance as of September 30, 2017
$
567,001

__________________

(1) 
We did not have any redeemable noncontrolling interests prior to the Separation on July 17, 2017.
(2) 
Excludes certain OP Units issued as part of the Combination which have an estimated fair value of $110.6 million, that are subject to post-combination employment with vesting over periods of either 12 or 60 months. See Note 11 for further information.

11.     Share-Based Payments and Employee Benefits

OP UNITS

Certain OP Units issued as part of the Combination which have an estimated fair value of $110.6 million, are subject to post-combination employment with vesting over periods of either 12 or 60 months. The fair value of these 3.3 million OP Units was estimated based on the post-vesting restriction periods of the units. The significant assumptions used to value the units include expected volatilities (18.0% to 27.0% ), risk-free interest rates (1.3% to 1.5%) and post-vesting restriction periods (1 year to 3 years). Compensation expense for these units is recognized over the graded vesting period. See Note 3 for additional information. As of September 30, 2017, none of these OP Units had vested or been forfeited.

JBG SMITH 2017 Omnibus Share Plan
 
On June 23, 2017, our Board of Trustees adopted the JBG SMITH 2017 Omnibus Share Plan (the "Plan"), effective as of July 17, 2017, and authorized the reservation of approximately 10.3 million of our common shares pursuant to the Plan. On July 10, 2017, our then sole-shareholder approved the Plan. As of September 30, 2017, there were 6.6 million common shares available for issuance under the Plan.
Formation Awards
Pursuant to the Plan, on July 18, 2017, we granted approximately 2.7 million Formation Awards based on an aggregate notional value of approximately $100.0 million divided by the volume-weighted average price on July 18, 2017 of $37.10 per common share. The Formation Awards are structured in the form of profits interests in JBG SMITH LP that provide for a share of appreciation determined by the increase in the value of a common share at the time of conversion over the $37.10 volume-weighted average price of a common share at the time the formation unit was granted. The Formation Awards, subject to certain conditions, generally vest 25% on each of the third and fourth anniversaries and 50% on the fifth anniversary, of the closing of the Combination, subject to continued employment with JBG SMITH through each vesting date.
The value of vested Formation Awards is realized through conversion into a number of LTIP Units, and subsequent conversion into a number of OP Units determined based on the difference between $37.10 and the value of a common share on the conversion date. The conversion ratio between Formation Awards and OP Units, which starts at zero, is the quotient of (i) the excess of the value of a common share on the conversion date above the per share value at the time the Formation Award was granted over (ii) the value of a common share as of the date of conversion. This is similar to a “cashless exercise” of stock options, whereby the holder receives a number of shares equal in value to the difference between the full value of the total number of shares for which the option is being exercised and the total exercise price. Like options, Formation Awards have a finite term over which their value is allowed to increase and during which they may be converted into LTIP Units (and in turn, OP Units). Holders of Formation Awards will not receive distributions or allocations of net income or net loss prior to vesting and conversion to LTIP Units.

26



The fair value of the Formation Awards on the grant date was $23.7 million or $8.84 per unit estimated using Monte Carlo simulations. The significant assumptions used to value the awards include expected volatility (26.0%), dividend yield (2.3%), risk-free interest rate (2.3%) and expected life (7 years). Compensation expense for these awards is being recognized over a five-year period. As of September 30, 2017, none of these Formation Awards had vested or been forfeited.
                
LTIP Units
On July 18, 2017, we granted a total of 47,166 fully vested LTIP Units to the seven non-employee trustees in the notional amount of $250,000 each. The LTIP Units may not be sold while such non-employee trustee is serving on the Board. On the same date, we also granted 59,927 LTIP units to a key employee 50%, which vested immediately and 50% of which vests in equal monthly installments from the 31st to 60th months following the grant date. These LTIP Units had an aggregate fair value of $3.5 million.
On August 1, 2017, we granted approximately 302,500 LTIP Units to management and other employees under our Plan. The LTIP units vest in four equal installments on August 1 of each year, subject to continued employment. These LTIP Units were valued at a weighted average grant-fair value of $33.71 per unit. Compensation expense for these units is being recognized over a four-year period. As of September 30, 2017, none of these LTIP Units had vested or been forfeited.
The fair value of the LTIP Units was estimated based on the post-vesting restriction periods. The significant assumptions used to value the units include expected volatilities (17.0% to 19.0%), risk-free interest rates (1.3% to 1.5%) and post-vesting restriction periods (2 years to 3 years). Net income and net loss is allocated to each LTIP Unit. LTIP Unit holders have the right to convert all or a portion of vested LTIP Units into OP Units, which are then subsequently exchangeable for our common shares. LTIP Units do not have redemption rights, but any OP Units into which LTIP Units are converted are entitled to redemption rights. LTIP Units, generally, vote with the OP Units and do not have any separate voting rights except in connection with actions that would materially and adversely affect the rights of the LTIP Units.
OPP Units
On August 1, 2017, we granted approximately 605,100 OPP Units to management and other employees under the Plan. OPP Units are performance-based equity compensation pursuant to which participants have the opportunity to earn OPP units based on the relative performance of the total shareholder return ("TSR") of our common shares compared to the companies in the FTSE NAREIT Equity Office Index, over the three-year performance period beginning on the August 1, 2017 grant date, inclusive of dividends and stock price appreciation. Fifty percent of any OPP Units that are earned vest at the end of the three-year performance period and the remaining 50% on the fourth anniversary of the date of grant, subject to continued employment. Net income and net loss are allocated to each OPP Unit. The fair value of the OPP Units on the date of grant was $9.7 million or $15.95 per unit estimated using Monte Carlo simulations. The significant assumptions used to value the OPP Units include expected volatility (18.0%), dividend yield (2.3%) and risk-free interest rates (1.5%). Compensation expense for these units is being recognized over a four-year period. As of September 30, 2017, none of these OPP Units had vested or been forfeited.
Share-Based Compensation Expense

Share-based compensation expense for the nine months ended September 30, 2017 is summarized as follows (in thousands):
Formation Awards
$
3,963

LTIP Units that vested immediately
2,546

OP Units (1)
7,936

 Share-based compensation related to Formation Transaction (2)
14,445

LTIP Units that vest over four years
885

OPP Units
469

Other equity awards
1,526

Share-based compensation expense - other (3)
2,880

Total share-based compensation expense
17,325

Less amount capitalized
(161
)
Net share-based compensation expense (4)
$
17,164


______________________________________________ 
(1) 
Represents share-based compensation expense for OP Units subject to post-combination employment. See Note 3 for further information.
(2) 
Included in "General and administrative expense: share-based compensation related to Formation Transaction" in the accompanying statements of operations.
(3) 
Included in "General and administrative expense" in the accompanying statements of operations.

27



(4) 
Net share-based compensation expense for the three months ended September 30, 2017 was $16.0 million.
As of September 30, 2017, we had $141.4 million of total unrecognized compensation expense related to unvested share-based payment arrangements (unvested OP Units, Formation Awards, LTIP Units and OPP Units). This expense is expected to be recognized over a weighted average period of 3.4 years.
Employee Benefits
We have a 401(k) defined contribution plan (the “401(k) Plan”) covering substantially all of our officers and employees which permits participants to defer compensation up to the maximum amount permitted by law. We provide a discretionary matching contribution. Employees’ contributions vest immediately and our matching contributions vest over five years. Our contributions to the 401(k) Plan for three months ended September 30, 2017 and 2016 were $401,000 and $868,000, respectively. Our contributions during the nine months ended September 30, 2017 and 2016 were $3.2 million and $3.1 million, respectively.

12.     (Loss) Earnings Per Share
The following summarizes the calculation of basic and diluted EPS and provides a reconciliation of the amounts of net (loss) income available to common shareholders and shares of common stock used in calculating basic and diluted EPS for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share amounts)
Net (loss) income attributable to JBG SMITH Properties
$
(69,831
)
 
$
21,014

 
$
(57,851
)
 
$
49,344

 
 
 
 
 
 
 
 
Weighted average shares outstanding — basic and diluted (1)
114,744

 
100,571

 
105,347

 
100,571

 
 
 
 
 
 
 
 
(Loss) earnings per share available to common shareholders:
 
 
 
 
 
 
 
Basic
$
(0.61
)
 
$
0.21

 
$
(0.55
)
 
$
0.49

Diluted
$
(0.61
)
 
$
0.21

 
$
(0.55
)
 
$
0.49

_______________
(1) 
Reflects the weighted average common shares outstanding as of the date of the Separation in all periods prior to July 17, 2017.

The effect of the conversion of 13,408 and 4,518 weighted average vested OP Units for the three and nine months ended September 30, 2017 is excluded in the computation of basic and diluted loss per share, as the assumed exchange of such units for common shares on a one-for-one basis was antidilutive (the assumed conversion of these units would have no net impact on the determination of diluted earnings per share). As vested and outstanding OP Units are held by a noncontrolling interest, losses are attributable to them based on the weighted average outstanding units and are thus excluded from the numerator in calculating basic and diluted loss per share. The number of securities that were excluded from the calculation of diluted (loss) earnings per share because they were antidilutive that potentially could be dilutive in the future are included in the following table:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
OP Units
3,281

 

 
3,281

 

Formation Awards
2,681

 

 
2,681

 

LTIP Units
410

 

 
410

 

OPP Units
605

 

 
605

 


13.     Future Minimum Rental Income

28



We lease space to tenants under operating leases that expire at various dates through the year 2036. The leases provide for the payment of fixed base rents payable monthly in advance as well as reimbursements of real estate taxes, insurance and maintenance costs. Retail leases may also provide for the payment by the lessee of additional rents based on a percentage of their sales. As of September 30, 2017, future base rental revenue under these non-cancelable operating leases excluding extension options is as follows:
Year ending December 31,
 
Amount
 
 
(In thousands)
2017
 
$
133,025

2018
 
387,636

2019
 
310,230

2020
 
277,278

2021
 
234,005

2022
 
195,750

Thereafter
 
868,284

14.    Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of September 30, 2017, we had various interest rate swap and cap agreements assumed in the Combination that are measured at fair value on a recurring basis. There were no interest rate swaps or caps prior to the Combination. The net unrealized gain on our interest rate swaps and caps was $467,000 for both the three and nine months ended September 30, 2017 and are included in "Interest expense" in the accompanying statements of operations. The fair values of the interest rate swaps and caps are based on the estimated amounts we would receive or pay to terminate the contract at the reporting date and are determined using interest rate pricing models and observable inputs. The interest rate swaps and caps are classified within Level 2 of the valuation hierarchy.
The following are liabilities measured at fair value on a recurring basis as of September 30, 2017:
 
Fair Value Measurements
 
Total
 
Level 1
 
Level 2
 
Level 3
September 30, 2017
(In thousands)
Interest rate swaps and caps:
 
 
 
 
 
 
 
Classified as liabilities in "Other liabilities, net"
$
703

 
$

 
$
703

 
$

Financial Assets and Liabilities Not Measured at Fair Value
As of September 30, 2017 and December 31, 2016, all financial instruments and liabilities were reflected in our balance sheets at amounts which, in our estimation, reasonably approximated their fair values, except for the following:
 
September 30, 2017
 
December 31, 2016
 
     Carrying
      Amount (1)
 
Fair Value
 
     Carrying
      Amount (1)
 
Fair Value
 
(In thousands)
Financial liabilities:
 
 
 
 
 
 
 
Mortgages payable
$
1,988,247

 
$
2,015,653

 
$
1,167,618

 
$
1,192,267

______________________________________ 
(1) The carrying amount consists of principal only.

29



The fair value of our mortgages payable is estimated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit ratings, which are provided by a third-party specialist. The fair value of the mortgages payable and unsecured term loan was determined using Level 2 inputs of the fair value hierarchy.

The fair value of our unsecured term loan is calculated based on the net present value of payments over the term of the loan using estimated market rates for similar notes and remaining terms. The fair value of the unsecured term loan was determined using Level 2 inputs of the fair value hierarchy.

15.    Segment Information

We review operating and financial data for each property on an individual basis; therefore, each of our individual properties is a separate operating segment. As a result of the Formation Transaction, we redefined our reportable segments to be aligned with our method of internal reporting and the way our Chief Executive Officer, who is also our Chief Operating Decision Maker (“CODM”), makes key operating decisions, evaluates financial results, allocates resources and manages our business. Accordingly, we aggregate our operating segments into three reportable segments (office, multifamily, and third-party real estate services) based on the economic characteristics and nature of our assets and services. In connection therewith, we have reclassified the prior period segment financial data to conform to the current period presentation.

The CODM measures and evaluates the performance of our operating segments, with the exception of the third-party real estate services business, based on the net operating income (“NOI”) of properties within each segment. NOI includes property rental revenues and tenant reimbursements and deducts property operating expenses and real estate taxes.

With respect to the third-party real estate services business, the CODM reviews revenues streams generated by this segment (third-party real estate services, including reimbursements), as well as the expenses attributable to the segment (general and administrative: third-party real estate services), which are disclosed separately in the statements of operations. Management company assets primarily consist of management and leasing contracts with a net book value of $56.0 million classified in "Other assets, net" in the balance sheet as of September 30, 2017. Consistent with the CODM approach and our definition of NOI, the third-party real estate services operating results are excluded from the NOI data below.

The following table reflects the reconciliation of net (loss) income attributable to JBG SMITH Properties to NOI for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Net (loss) income attributable to JBG SMITH Properties
$
(69,831
)
 
$
21,014

 
$
(57,851
)
 
$
49,344

Add:
 
 
 
 
 
 
 
Depreciation and amortization expense
43,951

 
31,377

 
109,726

 
98,291

General and administrative expense:
 
 
 
 
 
 
 
Corporate and other
10,593

 
10,913

 
35,536

 
36,040

Third-party real estate services
21,178

 
4,779

 
30,362

 
14,272

Share-based compensation related to Formation Transaction
14,445

 

 
14,445

 

Transaction and other costs
104,095

 
1,528

 
115,173

 
1,528

Interest expense
15,309

 
13,028

 
43,813

 
38,662

Loss on extinguishment of debt
689

 

 
689

 

Income tax (benefit) expense
(1,034
)
 
302

 
(317
)
 
884

Less:
 
 
 
 
 
 
 
Third-party real estate services, including reimbursements
25,141

 
8,297

 
38,881

 
24,617

Other income
1,158

 
1,564

 
3,701

 
3,938

(Loss) income from unconsolidated real estate ventures
(1,679
)
 
584

 
(1,365
)
 
(952
)
Interest and other (loss) income, net
(379
)
 
749

 
1,366

 
2,292

Gain on bargain purchase
27,771

 

 
27,771

 

Net loss attributable to redeemable noncontrolling interests
8,160

 

 
2,481

 

NOI
$
79,223

 
$
71,747

 
$
218,741

 
$
209,126


30




Below is a summary of NOI by segment for the three and nine months ended September 30, 2017 and 2016:

 
Three Months Ended September 30, 2017
 
Office
 
Multifamily
 
Other
 
Eliminations
 
Total
 
(In thousands)
Rental revenue:
 
 
 
 
 
 
 
 
 
Property rentals
$
91,534

 
$
23,397

 
$
4,171

 
$
(2,644
)
 
$
116,458

Tenant reimbursements
7,917

 
1,548

 
128

 

 
9,593

Total rental revenue
99,451

 
24,945

 
4,299

 
(2,644
)
 
126,051

Rental expense:
 
 
 
 
 

 
 
 
Property operating
27,000

 
6,796

 
3,502

 
(7,664
)
 
29,634

Real estate taxes
13,038

 
2,952

 
1,204

 

 
17,194

Total rental expense
40,038

 
9,748

 
4,706

 
(7,664
)
 
46,828

NOI
$
59,413

 
$
15,197

 
$
(407
)
 
$
5,020

 
$
79,223


 
Three Months Ended September 30, 2016
 
Office
 
Multifamily
 
Other
 
Eliminations
 
Total
 
(In thousands)
Rental revenue:
 
 
 
 
 
 
 
 
 
Property rentals
$
81,575

 
$
15,850

 
$
4,898

 
$
942

 
$
103,265

Tenant reimbursements
8,977