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Section 1: 10-Q (10-Q)

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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 June 30, 2018
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
394587532_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)
Registrant’s telephone number, including area code: (240) 333‑3600
 
_______________________________                

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 August 3, 2018, JBG SMITH Properties had 120,328,976 common shares outstanding.






JBG SMITH PROPERTIES
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS

 
 
 
 
Item 1.
Page
 
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2018 and
   December 31, 2017
 
Condensed Consolidated and Combined Statements of Operations (unaudited) for the three and six months
   ended June 30, 2018 and 2017
 
Condensed Consolidated and Combined Statements of Comprehensive Income (unaudited) for the
  three and six months ended June 30, 2018 and 2017
 
Condensed Consolidated and Combined Statements of Equity (unaudited) for the six months
   ended June 30, 2018 and 2017
 
Condensed Consolidated and Combined Statements of Cash Flows (unaudited) for the six months
   ended June 30, 2018 and 2017
 
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.

















2



PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

JBG SMITH PROPERTIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value amounts)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Real estate, at cost:
 
 
 
Land and improvements
$
1,444,872

 
$
1,368,294

Buildings and improvements
3,832,013

 
3,670,268

Construction in progress, including land
595,063

 
978,942

 
5,871,948

 
6,017,504

Less accumulated depreciation
(1,045,632
)
 
(1,011,330
)
Real estate, net
4,826,316

 
5,006,174

Cash and cash equivalents
239,440

 
316,676

Restricted cash
22,248

 
21,881

Tenant and other receivables, net
37,860

 
46,734

Deferred rent receivable, net
144,837

 
146,315

Investments in and advances to unconsolidated real estate ventures
368,308

 
261,811

Other assets, net
273,722

 
263,923

Assets held for sale
2,218

 
8,293

TOTAL ASSETS
$
5,914,949

 
$
6,071,807

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgages payable, net
$
1,906,402

 
$
2,025,692

Revolving credit facility
35,729

 
115,751

Unsecured term loan, net
96,833

 
46,537

Accounts payable and accrued expenses
130,431

 
138,607

Other liabilities, net
126,265

 
161,277

Total liabilities
2,295,660

 
2,487,864

Commitments and contingencies

 

Redeemable noncontrolling interests
665,623

 
609,129

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

 

Common shares, $0.01 par value - 500,000 shares authorized and 117,955 shares issued and outstanding as of June 30, 2018 and December 31, 2017
1,180

 
1,180

Additional paid-in capital
3,035,194

 
3,063,625

Accumulated deficit
(105,962
)
 
(95,809
)
Accumulated other comprehensive income
19,662

 
1,612

Total shareholders' equity of JBG SMITH Properties
2,950,074

 
2,970,608

Noncontrolling interests in consolidated subsidiaries
3,592

 
4,206

Total equity
2,953,666

 
2,974,814

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
$
5,914,949

 
$
6,071,807


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

3


JBG SMITH PROPERTIES
Condensed Consolidated and Combined Statements of Operations
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
REVENUE
 
 
 
 
 
 
 
Property rentals
$
125,240

 
$
100,747

 
$
251,891

 
$
199,771

Tenant reimbursements
7,967

 
8,947

 
18,907

 
17,488

Third-party real estate services, including reimbursements
24,160

 
6,794

 
48,490

 
13,919

Other income
2,080

 
1,532

 
3,196

 
3,114

Total revenue
159,447

 
118,020

 
322,484

 
234,292

EXPENSES
 
 
 
 
 
 
 
Depreciation and amortization
48,117

 
31,993

 
97,277

 
65,775

Property operating
30,416

 
23,955

 
61,277

 
47,736

Real estate taxes
17,509

 
15,582

 
37,119

 
30,754

General and administrative:
 
 
 
 
 
 
 
Corporate and other
12,651

 
11,552

 
25,362

 
24,944

Third-party real estate services
21,189

 
4,486

 
43,798

 
9,184

Share-based compensation related to Formation Transaction
9,097

 

 
18,525

 

Transaction and other costs
3,787

 
5,237

 
8,008

 
11,078

Total operating expenses
142,766

 
92,805

 
291,366

 
189,471

OPERATING INCOME
16,681

 
25,215

 
31,118

 
44,821

Income from unconsolidated real estate ventures, net
3,836

 
105

 
1,934

 
314

Interest and other income, net
513

 
970

 
1,086

 
1,745

Interest expense
(18,027
)
 
(14,586
)
 
(37,284
)
 
(28,504
)
Gain on sale of real estate
33,396

 

 
33,851

 

Loss on extinguishment of debt
(4,457
)
 

 
(4,457
)
 

Reduction of gain on bargain purchase
(7,606
)
 

 
(7,606
)
 

INCOME BEFORE INCOME TAX (EXPENSE) BENEFIT
24,336

 
11,704

 
18,642

 
18,376

Income tax (expense) benefit
(313
)
 
(363
)
 
595

 
(717
)
NET INCOME
24,023

 
11,341

 
19,237

 
17,659

Net income attributable to redeemable noncontrolling interests
(3,574
)
 

 
(2,980
)
 

Net loss attributable to noncontrolling interests
125

 

 
127

 

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
20,574

 
$
11,341

 
$
16,384

 
$
17,659

EARNINGS PER COMMON SHARE:
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.11

 
$
0.14

 
$
0.18

Diluted
$
0.17

 
$
0.11

 
$
0.14

 
$
0.18

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING:
 
 
 
 
 
 
 
Basic
117,955

 
100,571

 
117,955

 
100,571

Diluted
117,955

 
100,571

 
117,955

 
100,571


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

4


JBG SMITH PROPERTIES
Condensed Consolidated and Combined Statements of Comprehensive Income
(Unaudited)
(In thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
NET INCOME
$
24,023

 
$
11,341

 
$
19,237

 
$
17,659

OTHER COMPREHENSIVE INCOME:
 
 
 
 
 
 
 
Change in fair value of derivative financial instruments
5,215

 

 
19,311

 

Reclassification of net loss on derivative financial instruments
   from accumulated other comprehensive income into
   interest expense
414

 

 
1,449

 

Other comprehensive income
5,629

 

 
20,760

 

COMPREHENSIVE INCOME
29,652

 
11,341

 
39,997

 
17,659

Net income attributable to redeemable noncontrolling interests
(3,574
)
 

 
(2,980
)
 

Other comprehensive income attributable to redeemable
noncontrolling interests
(834
)
 

 
(2,710
)
 

Net loss attributable to noncontrolling interests
125

 

 
127

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO
JBG SMITH PROPERTIES
$
25,369

 
$
11,341

 
$
34,434

 
$
17,659


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









5


JBG SMITH PROPERTIES
Condensed Consolidated and Combined Statements of Equity
(Unaudited)
(In thousands)
 
Common Shares
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Former
Parent
Equity
 
Noncontrolling Interests in Consolidated Subsidiaries
 
Total Equity
Shares
 
Amount
 
 
 
 
 
 
BALANCE AS OF JANUARY 1, 2018
117,955

 
$
1,180

 
$
3,063,625

 
$
(95,809
)
 
$
1,612

 
$

 
$
4,206

 
$
2,974,814

Net income (loss) attributable to common shareholders and noncontrolling interests

 

 

 
16,384

 

 

 
(127
)
 
16,257

Dividends declared on common shares
($0.225 per common share)

 

 

 
(26,537
)
 

 

 

 
(26,537
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(487
)
 
(487
)
Redeemable noncontrolling interests
redemption value adjustment and other
comprehensive income allocation

 

 
(27,883
)
 

 
(2,710
)
 

 

 
(30,593
)
Other comprehensive income

 

 

 

 
20,760

 

 

 
20,760

Other

 

 
(548
)
 

 

 

 

 
(548
)
BALANCE AS OF JUNE 30, 2018
117,955

 
$
1,180

 
$
3,035,194

 
$
(105,962
)
 
$
19,662

 
$

 
$
3,592

 
$
2,953,666

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AS OF JANUARY 1, 2017
 
 
 
 
 
 
 
 
 
 
$
2,121,689

 
$
295

 
$
2,121,984

Net income attributable to former parent
 
 
 
 
 
 
 
 
 
 
17,659

 

 
17,659

Deferred compensation shares and options, net
 
 
 
 
 
 
 
 
 
 
1,294

 

 
1,294

Contributions from former parent, net
 
 
 
 
 
 
 
 
 
 
21,203

 

 
21,203

BALANCE AS OF JUNE 30, 2017
 
 
 
 
 
 
 
 
 
 
$
2,161,845

 
$
295

 
$
2,162,140


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

6


JBG SMITH PROPERTIES
Condensed Consolidated and Combined Statements of Cash Flows
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2018
 
2017
 OPERATING ACTIVITIES:
 
 
 
 Net income
$
19,237

 
$
17,659

 Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 Share-based compensation expense
27,276

 
1,294

 Depreciation and amortization, including amortization of debt issuance costs
99,312

 
66,563

 Deferred rent
(6,265
)
 
(6,829
)
 Income from unconsolidated real estate ventures, net
(1,934
)
 
(314
)
 Amortization of above- and below-market lease intangibles, net
143

 
(687
)
 Amortization of lease incentives
3,148

 
1,511

 Return on capital from unconsolidated real estate ventures
5,168

 
628

 Reduction of gain on bargain purchase
7,606

 

 Loss on extinguishment of debt
4,457

 

 Gain on sale of real estate
(33,851
)
 

 Unrealized gain on interest rate swaps and caps
(1,551
)
 

 Bad debt expense
1,565

 
692

 Other non-cash items
829

 
911

 Changes in operating assets and liabilities:
 
 
 
 Tenant and other receivables
5,877

 
4,472

 Other assets, net
(5,263
)
 
(14,868
)
 Accounts payable and accrued expenses
(30,213
)
 
359

 Other liabilities, net
(1,996
)
 
1,267

 Net cash provided by operating activities
93,545

 
72,658

 INVESTING ACTIVITIES:
 
 
 
Development costs, construction in progress and real estate additions
(165,718
)
 
(54,747
)
Proceeds from sale of real estate
232,882

 

Acquisition of interests in unconsolidated real estate ventures, net of cash acquired
(386
)
 

Distributions of capital from unconsolidated real estate ventures
1,350

 

Investments in and advances to unconsolidated real estate ventures
(16,167
)
 
(14
)
Other investments
(665
)
 
(1,396
)
 Net cash provided by (used in) investing activities
51,296

 
(56,157
)
 FINANCING ACTIVITIES:
 
 
 
Contributions from former parent, net

 
21,203

Acquisition of interest in consolidated real estate venture
(548
)
 

Proceeds from borrowings from former parent

 
4,000

Capital lease payments
(52
)
 

Borrowings under mortgages payable
41,344

 
220,000

Borrowings under revolving credit facility
35,000

 

Borrowings under unsecured term loan
50,000

 

Repayments of mortgages payable
(170,021
)
 
(6,689
)
Repayments of revolving credit facility
(115,022
)
 

Debt issuance costs

 
(2,930
)
Dividends paid to common shareholders
(53,077
)
 

Distributions to redeemable noncontrolling interests
(9,214
)
 

Distributions to noncontrolling interests
(120
)
 

 Net cash (used in) provided by financing activities
(221,710
)
 
235,584

 Net (decrease) increase in cash and cash equivalents and restricted cash
(76,869
)
 
252,085

 Cash and cash equivalents and restricted cash as of the beginning of the period
338,557

 
32,263

 Cash and cash equivalents and restricted cash as of the end of the period
$
261,688

 
$
284,348

 
 
 
 

7


JBG SMITH PROPERTIES
Consolidated and Combined Statements of Cash Flows
(Unaudited)
 (In thousands)
 
Six Months Ended June 30,
 
2018
 
2017
 
 
 
 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
   AS OF END OF THE PERIOD:
 
 
 
Cash and cash equivalents
$
239,440

 
$
280,613

Restricted cash
22,248

 
3,735

Cash and cash equivalents and restricted cash
$
261,688

 
$
284,348

 
 
 
 
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH
    INFORMATION: 
 
 
 
 Cash paid for interest (net of capitalized interest of $9,182 and $917 in 2018 and 2017)
$
31,741

 
$
22,719

Accrued capital expenditures included in accounts payable and accrued expenses
60,735

 
1,475

Write-off of fully depreciated assets
10,973

 
12,946

Deferred interest on mortgages payable (of which $1,411 is included in capitalized interest)
3,216

 

Cash payments for income taxes
49

 
706

Deconsolidation of 1900 N Street
95,923

 




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

8


JBG SMITH PROPERTIES
Notes to Condensed Consolidated and Combined Financial Statements
(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, D.C. segment, which operated as Vornado / Charles E. Smith, (the "Vornado Included Assets"). On July 18, 2017, JBG SMITH acquired the management business and certain assets and liabilities (the "JBG Assets") of The JBG Companies ("JBG") (the "Combination"). The Separation and the Combination are collectively referred to as the "Formation Transaction." Unless the context otherwise requires, all references to "we," "us," and "our," refer to the Vornado Included Assets (our predecessor and accounting acquirer) for periods prior to the Separation and to JBG SMITH for periods after the Separation. References to "our share" refers to our ownership percentage of consolidated and unconsolidated assets in real estate ventures. Substantially all of our assets are held by, and our operations are conducted through, JBG SMITH Properties LP ("JBG SMITH LP"), our operating partnership. As of June 30, 2018, we, as its sole general partner, controlled JBG SMITH LP and owned 85.6% of its common limited partnership units ("OP Units").

Prior to the Separation from Vornado, JBG SMITH was a wholly owned subsidiary of Vornado and had no material assets or operations. Our operations are presented as if the transfer of the Vornado Included Assets had been consummated prior to all historical periods presented in the accompanying consolidated and combined financial statements at the carrying amounts of such assets and liabilities reflected in Vornado’s books and records. The assets and liabilities of the JBG Assets and subsequent results of operations and cash flows are reflected in our consolidated and combined financial statements beginning on the date of the Combination.
We own and operate a portfolio of high-quality office and multifamily assets, many of which are amenitized with ancillary retail. Our portfolio reflects our longstanding strategy of owning and operating assets within Metro-served submarkets in the Washington, D.C. metropolitan area that have high barriers to entry and key urban amenities, including being within walking distance of a Metro station. 
As of June 30, 2018, our Operating Portfolio consists of 67 operating assets comprising 48 office assets totaling over 13.7 million square feet (11.8 million square feet at our share), 15 multifamily assets totaling 6,307 units (4,523 units at our share) and four other assets totaling approximately 765,000 square feet (348,000 square feet at our share). Additionally, we have (i) eight assets under construction comprising three office assets totaling approximately 774,000 square feet (542,000 square feet at our share), four multifamily assets totaling 1,476 units (1,282 units at our share) and one other asset totaling approximately 41,100 square feet (4,100 square feet at our share); and (ii) 42 future development assets totaling approximately 20.7 million square feet (17.2 million square feet at our share) of estimated potential development density.
Our revenues are derived primarily from leases with office and multifamily tenants, including fixed rents and reimbursements from tenants for certain expenses such as real estate taxes, property operating expenses, and repairs and maintenance. In addition, we have a third-party real estate services business that provides fee-based real estate services to the legacy funds (the "JBG Legacy Funds") formerly organized by JBG and other third parties.
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 six months ended June 30, 2018 and 2017 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 Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission.

9



The accompanying condensed consolidated and combined financial statements include the accounts of JBG SMITH and our wholly owned subsidiaries and those other entities, including JBG SMITH LP, in which we have a controlling financial interest, including where we have been determined to be the primary beneficiary of a variable interest entity ("VIE"). See Note 5 for additional information on our VIEs. The portions of the equity and net income of consolidated subsidiaries that are not attributable to JBG SMITH are presented separately as amounts attributable to noncontrolling interests in our condensed consolidated and combined financial statements.
References to the financial statements refer to our condensed consolidated and combined financial statements as of June 30, 2018 and December 31, 2017, and for the three and six months ended June 30, 2018 and 2017. References to the balance sheets refer to our condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017. References to the statements of operations refer to our condensed consolidated and combined statements of operations for the three and six months ended June 30, 2018 and 2017. References to the statements of cash flows refer to our condensed consolidated and combined statements of cash flows for the six months ended June 30, 2018 and 2017.
Formation Transaction
JBG SMITH and the Vornado Included Assets were under common control of Vornado for all periods prior to the Separation. The transfer of the Vornado Included Assets from Vornado to JBG SMITH was completed prior to the Separation, at net book values (historical carrying amounts) carved out from Vornado’s books and records. For purposes of the formation of JBG SMITH, the Vornado Included Assets were designated as the predecessor and the accounting acquirer of the JBG Assets. Consequently, the financial statements of JBG SMITH, as set forth herein, represent a continuation of the financial information of the Vornado Included Assets as the predecessor and accounting acquirer such that the historical financial information included herein as of any date or for any periods on or prior to the completion of the Combination represents the pre-Combination financial information of the Vornado Included Assets. The financial statements reflect the common shares as of the date of the Separation as outstanding for all periods prior to July 17, 2017. The acquisition of the JBG Assets completed subsequently by JBG SMITH was accounted for as a business combination using the acquisition method whereby identifiable assets acquired and liabilities assumed are recorded at acquisition-date fair values and income and cash flows from the operations were consolidated into the financial statements of JBG SMITH commencing July 18, 2017. Consequently, the financial statements for the periods before and after the Formation Transaction are not directly comparable.
The accompanying financial statements as of June 30, 2018 and December 31, 2017 and for the three and six months ended June 30, 2018 include our consolidated accounts. The accompanying financial statements for the three and six months ended June 30, 2017 include the Vornado Included Assets. Therefore, our results of operations, cash flows and financial condition set forth in this report for the three and six months ended June 30, 2017 are not necessarily indicative of our future results of operations, cash flows or financial condition as an independent, publicly traded company.
The historical financial results for the Vornado Included Assets reflect charges for certain corporate costs allocated by the former parent, which were based on either actual costs incurred or a proportion of costs estimated to be applicable, to the Vornado Included Assets based on an analysis of key metrics, including total revenues. Such costs do not necessarily reflect what the actual costs would have been if JBG SMITH had been operating as a separate standalone public company. See Note 16 for additional information.
The total revenue and net loss of the JBG Assets for the three months ended June 30, 2018 included in our statements of operations was $45.4 million and $22.6 million. The total revenue and net loss of the JBG Assets for the six months ended June 30, 2018 included in our statements of operations was $93.6 million and $39.3 million.
The following pro forma information for the three and six months ended June 30, 2017 is presented as if the Formation Transaction had occurred on January 1, 2017. This pro forma information is based upon historical financial statements, adjusted for certain factually supported items directly related to the Formation Transaction. This 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 pro forma information was adjusted to exclude transaction and other costs of $5.2 million and $11.1 million for the three and six months ended June 30, 2017

10



 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
(In thousands, except per share data)
Pro forma information:
 
 
 
Total revenue
$
162,593

 
$
321,672

Net loss attributable to common shareholders
$
(10,074
)
 
$
(19,156
)
Loss per common share:
 
 
 
Basic
$
(0.09
)
 
$
(0.16
)
Diluted
$
(0.09
)
 
$
(0.16
)
As a result of finalizing our fair value estimates used in the purchase price allocation related to the Combination, we adjusted the fair value of certain assets acquired and liabilities assumed consisting of a decrease of $468,000 to investments in and advances to unconsolidated real estate ventures, an increase of $4.7 million to lease assumption liabilities and an increase of $2.4 million to other liabilities acquired, resulting in a reduction of gain on bargain purchase of $7.6 million for the three and six months ended June 30, 2018.
Income Taxes
We intend to elect to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). Under those sections, a REIT which distributes at least 90% of its REIT taxable income as dividends to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Prior to the Separation, Vornado operated as a REIT and distributed 100% of taxable income to its shareholders, accordingly, no provision for federal income taxes has been made in the accompanying financial statements for the periods prior to the Separation. We intend to adhere to these requirements and maintain our REIT status in future periods. We also participate in the activities conducted by subsidiary entities which have elected to be treated as taxable REIT subsidiaries under the Code. As such, we are subject to federal, state, and local taxes on the income from these activities.
Reclassifications
For the three and six months ended June 30, 2017, we reclassified $4.5 million and $9.2 million of expenses to "General and administrative: third-party real estate services" from "Property operating expenses" and "General and administrative: corporate and other" as it relates to expenses incurred to provide third-party real estate services. Additionally, we reclassified $1.8 million and $3.8 million of revenue for the three and six months ended June 30, 2017 to "Third-party real estate services, including reimbursements" from "Other income" as it relates to revenue earned from providing third-party real estate services.

2.    Summary of Significant Accounting Policies
Significant Accounting Policies
There were no material changes to our significant accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant of these estimates include: (i) the underlying cash flows used to establish the fair values recorded in connection with the Combination and used in assessing impairment and (ii) the determination of useful lives for tangible and intangible assets. Actual results could differ from these estimates.

11


Recent Accounting Pronouncements
In connection with the adoption of Accounting Standards Update ("ASU") ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, we revised the presentation of restricted cash in the statement of cash flows for the six months ended June 30, 2017.
The following table provides a brief description of recent accounting pronouncements by the Financial Accounting Standards Board ("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 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.
 
January 2018
 
We utilized the modified retrospective method of adoption. The standard excludes from its scope the areas of accounting that most significantly affect our revenue recognition, including accounting for leases and financial instruments. Our evaluation determined there were no required changes to our recognition of revenue related to our third-party real estate services, tenant reimbursements, property and asset management fees, or transactional/management fees for leasing, development and construction. Our evaluation also determined there were no required changes to our recognition of promote fees and dispositions of real estate properties as we did not have any deferred gains due to continuing involvement at the time of adoption. Therefore, the adoption of this standard did not have a material impact on our financial statements. We adopted the practical expedient of this standard to only assess the recognition of revenue for open contracts at the date of adoption and there was no adjustment to the opening balance of our accumulated deficit at January 1, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for that period.

 


12


Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other
Significant Matters
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Standard not yet adopted
ASU 2016-02, Leases (Topic 842), as clarified and amended by ASU 2018-01, ASU 2018-10 and ASU 2018-11
 
This standard establishes 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. The ASU also clarifies that an assessment of whether a land easement meets the definition of a lease under the new lease standard is required. The provisions of this standard are effective for fiscal years beginning after December 15, 2018 and should be applied through a modified retrospective transition, which includes optional practical expedients related to leases that commenced before the effective date and allows the new requirements to be applied on the date of adoption rather than the beginning of the earliest comparative period presented.
 
January 2019
 
We are currently evaluating the overall impact of the adoption of ASU 2016-02 on our financial statements. 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. As of June 30, 2018, future ground lease payments totaled $574.4 million to which we would apply a discount rate. We are in the process of determining an appropriate discount rate. 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. Capitalized internal leasing costs were $1.5 million and $269,000 for the three months ended June 30, 2018 and 2017, and $2.8 million and $800,000 for the six months ended June 30, 2018 and 2017.
ASU 2018-09, Codification Improvements
 
These amendments provide clarifications and corrections to certain ASC subtopics including the following: 220-10 (Income Statement - Reporting Comprehensive Income - Overall), 470-50 (Debt - Modifications and Extinguishments), 480-10 (Distinguishing Liabilities from Equity - Overall), 718-740 (Compensation - Stock Compensation - Income Taxes), 805-740 (Business Combinations - Income Taxes), 815-10 (Derivatives and Hedging - Overall), and 820-10 (Fair Value Measurement - Overall).
 
January 2019

 
The updates related to Subtopics 470-50 and 820-10 were effective immediately and their adoption did not have an impact on our financial statements. We are currently evaluating the remaining guidance to determine the impact it may have on our financial statements.
3.    Dispositions
In April 2018, we sold Summit I and II, two office assets located in Reston, Virginia including 700,000 square feet of estimated potential development density, for an aggregate gross sales price of $95.0 million, resulting in a gain on the sale of $6.2 million. In connection with the sale, we repaid the related $59.0 million mortgage payable outstanding. In February 2018, we sold a land parcel and temporary easements associated with the Summit site for $2.2 million, resulting in a gain on the sale of $455,000.
In May 2018, we sold the Bowen Building, an office building located in Washington, D.C., for a gross sales price of $140.0 million, resulting in a gain on the sale of $27.2 million. In connection with the sale, we repaid $115.0 million of the then outstanding balance on our revolving credit facility.


13


4.    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:
Real Estate Venture Partners
 
Ownership
Interest (1)
 
June 30, 2018
 
December 31, 2017
 
 
 
(In thousands)
Canadian Pension Plan Investment Board ("CPPIB")
 
55.0% - 87.3%
 
$
135,801

 
$
36,317

Landmark
 
1.8% - 49.0%
 
88,494

 
95,368

CBREI Venture
 
5.0% - 64.0%
 
77,062

 
79,062

Berkshire Group
 
50.0%
 
33,424

 
27,761

Brandywine
 
30.0%
 
13,732

 
13,741

CIM Group ("CIM") and Pacific Life Insurance Company
   ("PacLife")
 
16.7%
 
10,289

 

JP Morgan
 
5.0%
 
9,185

 
9,296

Other
 
 
 
241

 
246

Total investments in unconsolidated real estate ventures
 
 
 
368,228

 
261,791

Advances to unconsolidated real estate ventures
 
 
 
80

 
20

Total investments in and advances to unconsolidated real
   estate ventures
 
 
 
$
368,308

 
$
261,811

_______________
(1) 
Ownership interests as of June 30, 2018. We have multiple investments with certain venture partners with varying ownership interests.
In January 2018, we invested $10.1 million for a 16.67% interest in a real estate venture with CIM and PacLife, which purchased the 1,152-key Wardman Park hotel, located adjacent to the Woodley Park Metro Station in northwest Washington, D.C. Prior to the acquisition by this venture, the JBG Legacy Funds owned a 47.64% interest in the Wardman Park hotel. The JBG Legacy Funds did not receive any proceeds from the sale, as the net proceeds were used to satisfy the prior mortgage debt. A third-party asset manager oversees the hotel operations on behalf of the venture and our involvement will increase only to the extent the land development opportunity becomes the primary business plan for the asset.
In February 2018, we entered into a real estate venture with CPPIB to develop and own 1900 N Street, an under-construction office asset in Washington, D.C. We contributed 1900 N Street, valued at $95.9 million, to the real estate venture, and CPPIB has committed to contribute approximately $101.0 million to the venture for a 45.0% interest, which will reduce our ownership interest from 100.0% at the real estate venture's formation to 55.0% as contributions are funded.
In June 2018, the real estate venture with CPPIB that owns 1101 17th Street, a 216,000 square foot office building located in Washington, D.C., in which we have a 55.0% ownership interest, refinanced a mortgage loan payable that was collateralized by the property. The terms of the new mortgage loan eliminated the principal guaranty provisions that had been included in the prior loan. Distributions and our share of the cumulative earnings of the venture exceeded our investment in the venture by $5.4 million, which resulted in a negative investment balance. After the elimination of the principal guaranty provisions in the prior mortgage loan, we have not guaranteed the obligations of the venture or otherwise committed to provide further financial support to the venture. Accordingly, we recognized the $5.4 million negative investment balance as income within “Income from unconsolidated real estate ventures, net” in our statements of operations for the three and six months ended June 30, 2018. We have also suspended the equity method accounting for this real estate venture. We will recognize as income any future distributions from the venture until our share of unrecorded earnings and contributions exceed the cumulative excess distributions previously recognized in income.



14


The following is a summary of the debt of our unconsolidated real estate ventures:
 
 
Weighted Average Effective
Interest Rate
(1)
 
June 30, 2018
 
December 31, 2017
 
 
 
 
(In thousands)
Variable rate (2)
 
4.83%
 
$
530,258

 
$
534,500

Fixed rate (3)
 
3.95%
 
854,619

 
657,701

Unconsolidated real estate ventures - mortgages payable
 
 
 
1,384,877

 
1,192,201

Unamortized deferred financing costs
 
 
 
(2,734
)
 
(2,000
)
Unconsolidated real estate ventures - mortgages payable,
   net (4)
 
 
 
$
1,382,143

 
$
1,190,201

______________
(1) 
Weighted average effective interest rate as of June 30, 2018.
(2) 
Includes variable rate mortgages payable with interest rate cap agreements.
(3) 
Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements.
(4) 
See Note 15 for additional information on guarantees of the debt of certain of our unconsolidated real estate ventures.

The following is a summary of the financial information for our unconsolidated real estate ventures:
 
 
June 30, 2018
 
December 31, 2017
Combined balance sheet information:
 
(In thousands)
Real estate, net
 
$
2,397,644

 
$
2,106,670

Other assets, net
 
332,400

 
264,731

Total assets
 
$
2,730,044

 
$
2,371,401

 
 
 
 
 
Mortgages payable, net
 
$
1,382,143

 
$
1,190,201

Other liabilities, net
 
103,283

 
76,416

Total liabilities
 
1,485,426

 
1,266,617

Total equity
 
1,244,618

 
1,104,784

Total liabilities and equity
 
$
2,730,044

 
$
2,371,401

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Combined income statement information:
(In thousands)
Total revenue
$
87,518

 
$
18,318

 
$
160,691

 
$
36,557

Operating income
12,484

 
6,213

 
16,858

 
11,835

Net income (loss)
(514
)
 
3,570

 
(5,189
)
 
5,993

5.    Variable Interest Entities

We hold various interests in entities deemed to be VIEs, which we evaluate at acquisition, formation, after a change in the ownership agreement or a change in the real estate venture's economics to determine if the VIEs should be consolidated in our financial statements or should no longer be considered a VIE. Certain criteria we assess in determining whether the VIEs should be consolidated relate to our at-risk equity, our control over significant business activities, our voting rights, the noncontrolling interest kick-out rights and whether we are the primary beneficiary of the VIE.  

Unconsolidated VIEs
As of June 30, 2018 and December 31, 2017, we have interests in entities deemed to be VIEs that are in the development stage and do not hold sufficient equity at risk or conduct substantially all their operations on behalf of an 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.

15



As of June 30, 2018 and December 31, 2017, the net carrying amounts of our investment in these entities were $226.5 million and $163.5 million, which are included in "Investments in and advances to unconsolidated real estate ventures" in our balance sheets. Our equity in the income of unconsolidated VIEs is included in "Income from unconsolidated real estate ventures, net" in our statements of operations. Our maximum exposure to loss in these entities is limited to our investments, construction commitments and debt guarantees. See Note 15 for additional information.

Consolidated VIEs

JBG SMITH LP is our most significant consolidated VIE. We hold the majority membership interest in the operating partnership, act as the general partner and exercise full responsibility, discretion and control over its day-to-day management.
The noncontrolling interests of the operating partnership do not have substantive liquidation rights, 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 in which we control the most significant business activities. These entities are VIEs because they are in the development stage and do not hold sufficient equity at risk. We are the primary beneficiaries of these VIEs because the noncontrolling interest holders do not have substantive kick-out or participating rights and we control all of the significant business activities. As of June 30, 2018, we consolidated two VIEs with total assets and liabilities, excluding the operating partnership, of $155.2 million and $13.2 million. As of December 31, 2017, we consolidated two VIEs with total assets and liabilities, excluding the operating partnership, of $111.0 million and $8.8 million.
6.    Other Assets, Net
The following is a summary of other assets, net:
 
 
June 30, 2018
 
December 31, 2017
 
 
(In thousands)
Deferred leasing costs
 
$
190,308

 
$
171,153

Accumulated amortization
 
(71,674
)
 
(67,180
)
Deferred leasing costs, net
 
118,634

 
103,973

Prepaid expenses
 
5,961

 
9,038

Identified intangible assets, net
 
104,073

 
126,467

Deferred financing costs on credit facility, net
 
5,781

 
6,654

Deposits
 
4,020

 
6,317

Derivative agreements, at fair value
 
23,977

 
2,141

Other
 
11,276

 
9,333

Total other assets, net
 
$
273,722

 
$
263,923



16


7.    Debt
Mortgages Payable
The following is a summary of mortgages payable:
 
 
Weighted Average
Effective
Interest Rate
(1)
 
June 30, 2018
 
December 31, 2017
 
 
 
 
(In thousands)
Variable rate (2)
 
3.94%
 
$
266,615

 
$
498,253

Fixed rate (3)
 
4.15%
 
1,644,111

 
1,537,706

Mortgages payable
 
 
 
1,910,726

 
2,035,959

Unamortized deferred financing costs and premium/
  discount, net
 
 
 
(4,324
)
 
(10,267
)
Mortgages payable, net
 
 
 
$
1,906,402

 
$
2,025,692

__________________________ 
(1) 
Weighted average effective interest rate as of June 30, 2018.
(2) 
Includes variable rate mortgages payable with interest rate cap agreements.
(3) 
Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements.
As of June 30, 2018, the net carrying value of real estate collateralizing our mortgages payable totaled $2.5 billion. Our mortgage loans contain covenants that limit our ability to incur additional indebtedness on these properties and in certain circumstances, require lender approval of tenant leases and/or yield maintenance upon repayment prior to maturity. Certain of our mortgage loans are recourse to us.
During the six months ended June 30, 2018, aggregate borrowings under mortgages payable totaled $41.3 million related to construction draws. We repaid mortgages payable with an aggregate principal balance of $162.5 million and recognized losses on the extinguishment of debt in conjunction with these repayments of $4.5 million for the three and six months ended June 30, 2018.
As of June 30, 2018 and December 31, 2017, we had various interest rate swap and cap agreements with an aggregate notional value of $1.3 billion and $1.4 billion on certain of our mortgages payable, which mature on various dates concurrent with the maturity of the related mortgages payable. During the six months ended June 30, 2018, we entered into various interest rate swap and cap agreements on certain of our mortgages payable with an aggregate notional value of $374.2 million. See Note 13 for additional information.
Credit Facility
Our $1.4 billion credit facility, consists 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.
In January 2018, we drew $50.0 million under the Tranche A-1 Term Loan in accordance with the delayed draw provisions of the credit facility, bringing the outstanding borrowings under the term loan facility to $100.0 million. Concurrent with the draw, we entered into an interest rate swap agreement to convert the variable interest rate to a fixed interest rate. As of June 30, 2018 and December 31, 2017, we had interest rate swaps with an aggregate notional value of $100.0 million and $50.0 million to convert the variable interest rate applicable to our Tranche A-1 Term Loan to a fixed interest rate, providing weighted average base interest rates under the facility agreement of 2.12% and 1.97% per annum. The interest rate swaps mature in January 2023, concurrent with the maturity of our Tranche A-1 Term Loan.

17


The following is a summary of amounts outstanding under the credit facility:
 
 
Interest Rate (1)
 
June 30, 2018
 
December 31, 2017
 
 
 
 
(In thousands)
Revolving credit facility (2) (3) (4)
 
3.19%
 
$
35,729

 
$
115,751

 
 
 
 
 
 
 
Tranche A-1 Term Loan
 
3.32%
 
$
100,000

 
$
50,000

Unamortized deferred financing costs, net
 
 
 
(3,167
)
 
(3,463
)
Unsecured term loan, net
 
 
 
$
96,833

 
$
46,537

__________________________ 
(1) 
Interest rate as of June 30, 2018.
(2) 
As of June 30, 2018 and December 31, 2017, letters of credit with an aggregate face amount of $5.7 million for both periods were provided under our revolving credit facility.
(3) 
As of June 30, 2018 and December 31, 2017, net deferred financing costs related to our revolving credit facility totaling $5.8 million and $6.7 million were included in "Other assets, net."
(4) 
In May 2018, in connection with the sale of the Bowen Building, we repaid $115.0 million of the then outstanding balance on our revolving credit facility. See Note 3 for additional information.

8.    Other Liabilities, Net
The following is a summary of other liabilities, net:
 
June 30, 2018
 
December 31, 2017
 
(In thousands)
Lease intangible liabilities
$
41,875

 
$
44,917

Accumulated amortization
(25,635
)
 
(26,950
)
Lease intangible liabilities, net
16,240

 
17,967

Prepaid rent
19,571

 
15,751

Lease assumption liabilities and accrued tenant incentives
49,016

 
50,866

Capital lease obligation
15,766

 
15,819

Security deposits
13,864

 
13,618

Ground lease deferred rent payable
3,249

 
3,730

Net deferred tax liability
6,962

 
8,202

Dividends payable (1)

 
31,097

Other
1,597

 
4,227

Total other liabilities, net
$
126,265

 
$
161,277

___________________________________________
(1) 
Dividends declared in December 2017 were paid in January 2018.

9.    Redeemable Noncontrolling Interests
JBG SMITH LP
JBG SMITH LP has issued 19.8 million OP Units to persons other than JBG SMITH that are redeemable for cash or, at our election, 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 June 30, 2018. During the third quarter of 2018, unitholders gave notice to redeem 3.0 million OP units, which we have elected to redeem for an equivalent number of our common shares. On our balance sheets, our redeemable noncontrolling interests are presented at the higher of their redemption value at the end of each reporting period or their carrying value, with such adjustments recognized in "Additional paid-in capital." Redemption value is equivalent to the market value of one our common shares at the end of the period multiplied by the number of vested OP units outstanding.

18



Consolidated Real Estate Venture
We are a partner in a real estate venture that owns an under construction multifamily asset located at 965 Florida Avenue in Washington, D.C. Pursuant to the terms of the 965 Florida Avenue real estate venture agreement, we will fund all capital contributions until our ownership interest reaches a maximum of 97.0%. Our partner can redeem its interest for cash two years after delivery, but no later than seven years subsequent to delivery. As of June 30, 2018, we held an 81.5% ownership interest.
Below is a summary of the activity of redeemable noncontrolling interests:
 
JBG SMITH LP
 
Consolidated Real Estate Venture
 
Total
 
(In thousands)
Balance as of January 1, 2018
$
603,717

 
$
5,412

 
$
609,129

Net income (loss) attributable to redeemable noncontrolling interests
2,985

 
(5
)
 
2,980

Other comprehensive income
2,710

 

 
2,710

Contributions (distributions)
(4,657
)
 
500

 
(4,157
)
Share-based compensation expense
27,078

 

 
27,078

Adjustment to redemption value
27,883

 

 
27,883

Balance as of June 30, 2018
$
659,716

 
$
5,907

 
$
665,623



10.     Share-Based Payments

Time-Based LTIP Units

In February 2018, we granted 357,759 long-term incentive partnership units ("LTIP Units") with time-based vesting requirements ("Time-Based LTIP Units") to management and other employees with a grant-date fair value of $11.2 million or $31.38 per unit valued based on the post-vesting restriction periods. The significant assumptions used to value the Time-Based LTIP Units included expected volatility (20.0%), risk-free interest rate (2.1%) and post-grant restriction periods (2 years). The Time-Based LTIP units vest in four equal installments in January of each year, subject to continued employment. Compensation expense is being recognized over a four-year period.
Performance-Based LTIP Units

In February 2018, we granted 553,489 LTIP Units with performance-based vesting requirements ("Performance-Based LTIP Units") to management and other employees with a grant-date fair value of $9.4 million or $17.04 per unit valued using Monte Carlo simulations. The significant assumptions used to value the Performance-Based LTIP Units included expected volatility (19.9%), dividend yield (2.7%) and risk-free interest rates (2.3%). Fifty percent of any Performance-Based LTIP Units that are earned vest at the end of the three-year performance period and the remaining 50% on the fourth anniversary of the date of grant, subject to continued employment. Compensation expense is being recognized over a four-year period.
LTIP Units

In May 2018, we granted a total of 25,770 fully vested LTIP Units to certain of our trustees with an aggregate grant-date fair value of $794,000.
Other Equity Awards

Certain executives have elected to receive all or a portion of any cash bonus that may be paid in 2019, related to 2018 service, in the form of fully vested LTIP Units.
    

19



Share-Based Compensation Expense

Share-based compensation expense is summarized as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Time-Based LTIP Units
$
2,895

 
$

 
$
5,252

 
$

Performance-Based LTIP Units
1,350

 

 
2,507

 

LTIP Units
794

 

 
794

 

Other equity awards
920

 
603

 
1,704

 
1,294

Share-based compensation expense - other 
5,959

 
603

 
10,257

 
1,294

Formation Awards
1,239

 

 
2,817

 

LTIP and OP Units (1)
7,858

 

 
15,708

 

 Share-based compensation related to Formation
   Transaction (2)
9,097

 

 
18,525

 

Total share-based compensation expense
15,056

 
603

 
28,782

 
1,294

Less amount capitalized
(879
)
 

 
(1,506
)
 

Share-based compensation expense
$
14,177

 
$
603

 
$
27,276

 
$
1,294


______________________________________________ 
(1) 
Represents share-based compensation expense for LTIP and OP Units subject to post-Combination employment obligations.
(2) 
Included in "General and administrative expense: Share-based compensation related to Formation Transaction" in the accompanying statements of operations.
As of June 30, 2018, we had $119.5 million of total unrecognized compensation expense related to unvested share-based payment arrangements (unvested OP Units, Formation Awards, Time-Based LTIP Units and Performance-Based LTIP Units). This expense is expected to be recognized over a weighted average period of 2.8 years.
11.     Interest Expense

The following is a summary of interest expense included in the statements of operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Interest expense
$
21,884

 
$
14,672

 
$
45,559

 
$
28,633

Amortization of deferred financing costs
1,241

 
376

 
2,458

 
788

Net unrealized gain on derivative financial instruments
not designated as cash flow hedges
(432
)
 

 
(1,551
)
 

Capitalized interest
(4,666
)
 
(462
)
 
(9,182
)
 
(917
)
Interest expense
$
18,027

 
$
14,586

 
$
37,284

 
$
28,504



20



12.     Earnings Per Common Share
The following summarizes the calculation of basic and diluted earnings per common share and provides a reconciliation of the amounts of net income available to common shareholders used in calculating basic and diluted earnings per common share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share amounts)
Net income
$
24,023

 
$
11,341

 
$
19,237

 
$
17,659

Net income attributable to redeemable noncontrolling interests
(3,574
)
 

 
(2,980
)
 

Net loss attributable to noncontrolling interests
125

 

 
127

 

Net income attributable to common shareholders
20,574

 
11,341

 
16,384

 
17,659

Distributions to participating securities
(218
)
 

 
(361
)
 

Net income available to common shareholders
  — basic and diluted
$
20,356

 
$
11,341

 
$
16,023

 
$
17,659

 
 
 
 
 
 
 
 
Weighted average number of common shares
   outstanding — basic and diluted (1)
117,955

 
100,571

 
117,955

 
100,571

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.11

 
$
0.14

 
$
0.18

Diluted
$
0.17

 
$
0.11

 
$
0.14

 
$
0.18

______________
(1) 
For the three and six months ended June 30, 2017, reflects the weighted average common shares attributable to the Vornado Included Assets at the date of the Separation.

The effect of the redemption of OP Units that were outstanding as of June 30, 2018 is excluded in the computation of basic and diluted earnings per common share, as the assumed exchange of such units for common shares on a one-for-one basis was antidilutive (the assumed redemption of these units would have no impact on the determination of diluted earnings per share). Since vested and outstanding OP Units, which are held by noncontrolling interests, are attributed gains and losses at an identical proportion to the common shareholders, the gains and losses attributable and their equivalent weighted average OP Unit impact are excluded from net income available to common shareholders and from the weighted average number of common shares outstanding in calculating basic and diluted earnings per common share. For both the three and six months ended June 30, 2018, the number of additional securities excluded from the calculation of diluted earnings per common share as they were antidilutive, but potentially could be dilutive in the future was 21.7 million. There were no additional potentially dilutive securities for the three and six months ended June 30, 2017.

13.    Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
To manage or hedge our exposure to interest rate risk, we follow established risk management policies and procedures, including the use of a variety of derivative financial instruments. We do not enter into derivative financial instruments for speculative purposes.
As of June 30, 2018, we had various derivative financial instruments consisting of interest rate swap and cap agreements that are measured at fair value on a recurring basis. The net unrealized gain on our derivative financial instruments designated as cash flow hedges was $22.6 million as of June 30, 2018 and was recorded in "Accumulated other comprehensive income" in the balance sheet, of which a portion was reclassified to "Redeemable noncontrolling interests." Within the next 12 months, we expect to reclassify $2.3 million as a decrease to interest expense. The net unrealized gain on our derivative financial instruments not designated as cash flow hedges was $432,000 and $1.6 million for the three and six months ended June 30, 2018 and is recorded in "Interest expense" in our statements of operations.
ASC 820, Fair Value Measurement and Disclosures, 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;

21


Level 2 — observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and
Level 3 — unobservable inputs that are used when little or no market data is available.
The fair values of the derivative financial instruments are based on the estimated amounts we would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and observable inputs. The derivative financial instruments are classified within Level 2 of the valuation hierarchy.
The following are assets and liabilities measured at fair value on a recurring basis:
 
Fair Value Measurements
 
Total
 
Level 1
 
Level 2
 
Level 3
June 30, 2018
(In thousands)
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
 
 
Classified as assets in "Other assets, net"
$
17,609

 
$

 
$
17,609

 
$

Classified as liabilities in "Other liabilities, net"
1,331

 

 
1,331

 

Derivative financial instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
Classified as assets in "Other assets, net"
6,367

 

 
6,367

 

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
 
 
Classified as assets in "Other assets, net"
$
1,506

 
$

 
$
1,506

 
$

Classified as liabilities in "Other liabilities, net"
2,640

 

 
2,640

 

Derivative financial instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
Classified as assets in "Other assets, net"
635

 

 
635

 

Classified as liabilities in "Other liabilities, net"
22

 

 
22

 

The fair values of our derivative financial instruments were determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the derivative financial instrument. This analysis reflected the contractual terms of the derivative, including the period to maturity, and used observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While it was determined that the majority of the inputs used to value the derivatives fall within Level 2 of the fair value hierarchy under authoritative accounting guidance, the credit valuation adjustments associated with the derivatives also utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of June 30, 2018, the significance of the impact of the credit valuation adjustments on the overall valuation of the derivative financial instruments was assessed and it was determined that these adjustments were not significant to the overall valuation of the derivative financial instruments. As a result, it was determined that the derivative financial instruments in their entirety should be classified in Level 2 of the fair value hierarchy. The net unrealized gain included in "Other comprehensive income'' was primarily attributable to the net change in unrealized gains or losses related to the interest rate swaps that were outstanding as of June 30, 2018, none of which were reported in the statements of operations because they were documented and qualified as hedging instruments.


22


Financial Assets and Liabilities Not Measured at Fair Value
As of June 30, 2018 and December 31, 2017, 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:
 
June 30, 2018
 
December 31, 2017
 
     Carrying
      Amount (1)
 
Fair Value
 
     Carrying
      Amount (1)
 
Fair Value
 
(In thousands)
Financial liabilities:
 
 
 
 
 
 
 
Mortgages payable
$
1,910,726

 
$
1,921,116

 
$
2,035,959

 
$
2,060,899

Revolving credit facility
35,729

 
35,742

 
115,751

 
115,768

Unsecured term loan
100,000

 
100,096

 
50,000

 
50,029

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

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

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

14.    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 $42.1 million and $45.7 million and classified in "Other assets, net" in the balance sheets as of June 30, 2018 and December 31, 2017. Consistent with internal reporting presented to our CODM and our definition of NOI, the third-party real estate services operating results are excluded from the NOI data below.


23



The following table reflects the reconciliation of net income attributable to common shareholders to consolidated NOI:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income attributable to common shareholders
$
20,574

 
$
11,341

 
$
16,384

 
$
17,659

Add:
 
 
 
 
 
 
 
Depreciation and amortization expense
48,117

 
31,993

 
97,277

 
65,775

General and administrative expense:
 
 
 
 
 
 
 
Corporate and other
12,651

 
11,552

 
25,362

 
24,944

Third-party real estate services
21,189

 
4,486

 
43,798

 
9,184

Share-based compensation related to Formation Transaction
9,097

 

 
18,525

 

Transaction and other costs
3,787

 
5,237

 
8,008

 
11,078

Interest expense
18,027

 
14,586

 
37,284

 
28,504

Loss on extinguishment of debt
4,457

 

 
4,457

 

Reduction of gain on bargain purchase
7,606

 

 
7,606

 

Income tax expense (benefit)
313

 
363

 
(595
)
 
717

Net income attributable to redeemable noncontrolling interests
3,574

 

 
2,980

 

Less:
 
 
 
 
 
 
 
Third-party real estate services, including reimbursements
24,160

 
6,794

 
48,490

 
13,919

Other income
2,080

 
1,532

 
3,196

 
3,114

Income from unconsolidated real estate ventures, net
3,836

 
105

 
1,934

 
314

Interest and other income, net
513

 
970

 
1,086

 
1,745

Gain on sale of real estate
33,396

 

 
33,851

 

Net loss attributable to noncontrolling interests
125

 

 
127

 

Consolidated NOI
$
85,282

 
$
70,157

 
$
172,402

 
$
138,769


Below is a summary of NOI by segment:

 
Three Months Ended June 30, 2018
 
Office
 
Multifamily
 
Other
 
Elimination of Intersegment Activity
 
Total
 
(In thousands)
Rental revenue:
 
 
 
 
 
 
 
 
 
Property rentals
$
97,485

 
$
25,410

 
$
2,604

 
$
(259
)
 
$
125,240

Tenant reimbursements
6,370

 
1,491

 
106

 

 
7,967

Total rental revenue
103,855

 
26,901

 
2,710

 
(259
)
 
133,207

Rental expense:
 
 
 
 
 

 
 
 
Property operating
26,414

 
7,588

 
1,887

 
(5,473
)
 
30,416

Real estate taxes
12,201

 
3,557

 
1,751

 

 
17,509

Total rental expense
38,615

 
11,145

 
3,638

 
(5,473
)
 
47,925

Consolidated NOI
$
65,240

 
$
15,756

 
$
(928
)
 
$
5,214

 
$
85,282



24



 
Three Months Ended June 30, 2017
 
Office
 
Multifamily
 
Other
 
Elimination of Intersegment Activity
 
Total
 
(In thousands)
Rental revenue:
 
 
 
 
 
 
 
 
 
Property rentals
$
78,624

 
$
19,974

 
$
2,975

 
$
(826
)
 
$
100,747

Tenant reimbursements
7,562

 
1,133

 
252

 

 
8,947

Total rental revenue
86,186

 
21,107

 
3,227

 
(826
)
 
109,694

Rental expense:
 
 
 
 
 
 
 
 
 
Property operating
22,022

 
4,868

 
482

 
(3,417
)
 
23,955

Real estate taxes
12,273

 
2,528

 
781

 

 
15,582

Total rental expense
34,295

 
7,396

 
1,263

 
(3,417
)
 
39,537

Consolidated NOI
$
51,891

 
$
13,711

 
$
1,964

 
$
2,591

 
$
70,157


 
Six Months Ended June 30, 2018
 
Office
 
Multifamily
 
Other
 
Elimination of Intersegment Activity
 
Total
 
(In thousands)
Rental revenue:
 
 
 
 
 
 
 
 
 
Property rentals
$
198,800

 
$
49,477

 
$
4,112

 
$
(498
)
 
$
251,891

Tenant reimbursements
15,444

 
3,215

 
248

 

 
18,907

Total rental revenue
214,244

 
52,692

 
4,360

 
(498
)
 
270,798

Rental expense:
 
 
 
 
 

 
 
 
Property operating
54,580

 
14,682

 
2,743

 
(10,728
)
 
61,277

Real estate taxes
26,966

 
7,055

 
3,098

 

 
37,119

Total rental expense
81,546

 
21,737

 
5,841

 
(10,728
)
 
98,396

Consolidated NOI
$
132,698

 
$
30,955

 
$
(1,481
)
 
$
10,230

 
$
172,402


 
Six Months Ended June 30, 2017
 
Office
 
Multifamily
 
Other
 
Elimination of Intersegment Activity
 
Total
 
(In thousands)
Rental revenue:
 
 
 
 
 
 
 
 
 
Property rentals
$
157,920

 
$
38,633

 
$
4,880

 
$
(1,662
)
 
$
199,771

Tenant reimbursements
14,821

 
2,223

 
444

 

 
17,488

Total rental revenue
172,741

 
40,856

 
5,324

 
(1,662
)
 
217,259

Rental expense:
 
 
 
 
 

 
 
 
Property operating
43,409

 
9,921

 
1,150

 
(6,744
)
 
47,736

Real estate taxes
24,120

 
5,021

 
1,613