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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 September 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
395679487_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 every Interactive Data File required to be submitted 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 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 1, 2018, JBG SMITH Properties had 120,917,269 common shares outstanding.






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

TABLE OF CONTENTS

 
 
 
 
Item 1.
Page
 
Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2018 and
   December 31, 2017
 
Condensed Consolidated and Combined Statements of Operations (unaudited) for the three and nine months
   ended September 30, 2018 and 2017
 
Condensed Consolidated and Combined Statements of Comprehensive Income (Loss) (unaudited) for the
  three and nine months ended September 30, 2018 and 2017
 
Condensed Consolidated and Combined Statements of Equity (unaudited) for the nine months
   ended September 30, 2018 and 2017
 
Condensed Consolidated and Combined Statements of Cash Flows (unaudited) for the nine months
   ended September 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)
 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Real estate, at cost:
 
 
 
Land and improvements
$
1,366,154

 
$
1,368,294

Buildings and improvements
3,678,335

 
3,670,268

Construction in progress, including land
649,056

 
978,942

 
5,693,545

 
6,017,504

Less accumulated depreciation
(1,020,596
)
 
(1,011,330
)
Real estate, net
4,672,949

 
5,006,174

Cash and cash equivalents
253,148

 
316,676

Restricted cash
127,061

 
21,881

Tenant and other receivables, net
40,409

 
46,734

Deferred rent receivable, net
137,200

 
146,315

Investments in and advances to unconsolidated real estate ventures
361,014

 
261,811

Other assets, net
281,958

 
263,923

Assets held for sale
137,455

 
8,293

TOTAL ASSETS
$
6,011,194

 
$
6,071,807

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgages payable, net
$
1,769,938

 
$
2,025,692

Revolving credit facility

 
115,751

Unsecured term loans, net
296,981

 
46,537

Accounts payable and accrued expenses
147,211

 
138,607

Other liabilities, net
119,552

 
161,277

Liabilities related to assets held for sale
45,657

 

Total liabilities
2,379,339

 
2,487,864

Commitments and contingencies

 

Redeemable noncontrolling interests
562,318

 
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; 120,917 and 117,955 shares issued and outstanding as of September 30, 2018 and December 31, 2017
1,210

 
1,180

Additional paid-in capital
3,150,899

 
3,063,625

Accumulated deficit
(110,219
)
 
(95,809
)
Accumulated other comprehensive income
24,132

 
1,612

Total shareholders' equity of JBG SMITH Properties
3,066,022

 
2,970,608

Noncontrolling interests in consolidated subsidiaries
3,515

 
4,206

Total equity
3,069,537

 
2,974,814

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
$
6,011,194

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
REVENUE
 
 
 
 
 
 
 
Property rentals
$
123,203

 
$
116,458

 
$
375,094

 
$
316,899

Tenant reimbursements
9,744

 
9,593

 
28,651

 
27,161

Third-party real estate services, including reimbursements
23,788

 
25,141

 
72,278

 
38,881

Other income
1,708

 
1,158

 
4,904

 
3,701

Total revenue
158,443

 
152,350

 
480,927

 
386,642

EXPENSES
 
 
 
 
 
 
 
Depreciation and amortization
46,603

 
43,951

 
143,880

 
109,726

Property operating
34,167

 
29,634

 
95,462

 
77,341

Real estate taxes
16,905

 
17,194

 
54,024

 
47,978

General and administrative:
 
 
 
 
 
 
 
Corporate and other
12,415

 
10,593

 
37,759

 
35,536

Third-party real estate services
20,754

 
21,178

 
64,552

 
30,362

Share-based compensation related to Formation Transaction
8,387

 
14,445

 
26,912

 
14,445

Transaction and other costs
4,126

 
104,095

 
12,134

 
115,173

Total operating expenses
143,357

 
241,090

 
434,723

 
430,561

OPERATING INCOME (LOSS)
15,086

 
(88,740
)
 
46,204

 
(43,919
)
Income (loss) from unconsolidated real estate ventures, net
13,484

 
(1,679
)
 
15,418

 
(1,365
)
Interest and other income (loss), net
4,091

 
(379
)
 
5,177

 
1,366

Interest expense
(18,979
)
 
(15,309
)
 
(56,263
)
 
(43,813
)
Gain on sale of real estate
11,938

 

 
45,789

 

Loss on extinguishment of debt
(79
)
 
(689
)
 
(4,536
)
 
(689
)
Gain (reduction of gain) on bargain purchase

 
27,771

 
(7,606
)
 
27,771

INCOME (LOSS) BEFORE INCOME TAX BENEFIT
25,541

 
(79,025
)
 
44,183

 
(60,649
)
Income tax benefit
841

 
1,034

 
1,436

 
317

NET INCOME (LOSS)
26,382

 
(77,991
)
 
45,619

 
(60,332
)
Net (income) loss attributable to redeemable noncontrolling
interests
(3,552
)
 
8,160

 
(6,532
)
 
2,481

Net loss attributable to noncontrolling interests

 

 
127

 

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
22,830

 
$
(69,831
)
 
$
39,214

 
$
(57,851
)
EARNINGS (LOSS) PER COMMON SHARE:
 
 
 
 
 
 
 
Basic
$
0.19

 
$
(0.61
)
 
$
0.33

 
$
(0.55
)
Diluted
$
0.19

 
$
(0.61
)
 
$
0.33

 
$
(0.55
)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING:
 
 
 
 
 
 
 
Basic
119,835

 
114,744

 
118,588

 
105,347

Diluted
119,835

 
114,744

 
118,588

 
105,347


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

4


JBG SMITH PROPERTIES
Condensed Consolidated and Combined Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
NET INCOME (LOSS)
$
26,382

 
$
(77,991
)
 
$
45,619

 
$
(60,332
)
OTHER COMPREHENSIVE INCOME:
 
 
 
 
 
 
 
Change in fair value of derivative financial instruments
5,142

 

 
24,453

 

Reclassification of net loss on derivative financial instruments
   from accumulated other comprehensive income into
   interest expense
24

 

 
1,473

 

Other comprehensive income
5,166

 

 
25,926

 

COMPREHENSIVE INCOME (LOSS)
31,548

 
(77,991
)
 
71,545

 
(60,332
)
Net (income) loss attributable to redeemable noncontrolling
interests
(3,552
)
 
8,160

 
(6,532
)
 
2,481

Other comprehensive income attributable to redeemable
noncontrolling interests
(696
)
 

 
(3,406
)
 

Net loss attributable to noncontrolling interests

 

 
127

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO
JBG SMITH PROPERTIES
$
27,300

 
$
(69,831
)
 
$
61,734

 
$
(57,851
)

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

 

 

 
39,214

 

 

 
(127
)
 
39,087

Conversion of common limited partnership
units
 to common shares
2,962

 
30

 
109,092

 

 

 

 

 
109,122

Dividends declared on common shares
($0.45 per common share)

 

 

 
(53,624
)
 

 

 

 
(53,624
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(814
)
 
(814
)
Contributions from noncontrolling interests

 

 

 

 

 

 
250

 
250

Redeemable noncontrolling interests
redemption value adjustment and other
comprehensive income allocation

 

 
(21,346
)
 

 
(3,406
)
 

 

 
(24,752
)
Other comprehensive income

 

 

 

 
25,926

 

 

 
25,926

Other

 

 
(472
)
 

 

 

 

 
(472
)
BALANCE AS OF SEPTEMBER 30, 2018
120,917

 
$
1,210

 
$
3,150,899

 
$
(110,219
)
 
$
24,132

 
$

 
$
3,515

 
$
3,069,537

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AS OF JANUARY 1, 2017

 
$

 
$

 
$

 
$

 
$
2,121,689

 
$
295

 
$
2,121,984

Net loss attributable to common
shareholders

 

 

 
(28,827
)
 

 
(29,024
)
 

 
(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

Redeemable noncontrolling interests
redemption value adjustment and other
comprehensive income allocation

 

 
(97,084
)
 

 

 

 

 
(97,084
)
BALANCE AS OF SEPTEMBER 30, 2017
117,957

 
$
1,180

 
$
3,099,056

 
$
(28,827
)
 
$

 
$

 
$
4,402

 
$
3,075,811


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)
 
Nine Months Ended September 30,
 
2018
 
2017
 OPERATING ACTIVITIES:
 
 
 
 Net income (loss)
$
45,619

 
$
(60,332
)
 Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 Share-based compensation expense
39,690

 
17,164

 Depreciation and amortization, including amortization of debt issuance costs
146,958

 
111,684

 Deferred rent
(7,880
)
 
(9,249
)
 (Income) loss from unconsolidated real estate ventures, net
(15,418
)
 
1,365

 Amortization of above- and below-market lease intangibles, net
(58
)
 
(872
)
 Amortization of lease incentives
3,646

 
2,492

 Return on capital from unconsolidated real estate ventures
6,820

 
1,149

 Reduction of gain (gain) on bargain purchase
7,606

 
(27,771
)
 Loss on extinguishment of debt
4,536

 
689

 Gain on sale of real estate
(45,789
)
 

 Unrealized gain on interest rate swaps and caps
(1,264
)
 
(467
)
 Bad debt expense
2,591

 
1,808

 Other non-cash items
1,499

 
3,974

 Changes in operating assets and liabilities:
 
 
 
 Tenant and other receivables
2,167

 
(3,617
)
 Other assets, net
(18,637
)
 
(32,884
)
 Accounts payable and accrued expenses
(23,875
)
 
19,077

 Other liabilities, net
(11,550
)
 
(817
)
 Net cash provided by operating activities
136,661

 
23,393

 INVESTING ACTIVITIES:
 
 
 
Development costs, construction in progress and real estate additions
(260,396
)
 
(115,922
)
Cash and restricted cash received in connection with the Combination, net

 
97,402

Proceeds from sale of real estate
346,149

 

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

Distributions of capital from unconsolidated real estate ventures
2,240

 

Distribution of capital from sale of interest in an unconsolidated real estate venture
24,602

 

Investments in and advances to unconsolidated real estate ventures
(22,663
)
 
(1,441
)
Repayment of notes receivable

 
50,934

Other investments
(665
)
 
(3,531
)
Proceeds from repayment of receivable from former parent

 
75,000

 Net cash provided by investing activities
88,881

 
102,442

 FINANCING ACTIVITIES:
 
 
 
Contributions from former parent, net

 
160,203

Acquisition of interest in consolidated real estate venture
(548
)
 

Repayment of borrowings from former parent

 
(115,630
)
Proceeds from borrowings from former parent

 
4,000

Capital lease payments
(82
)
 
(17,776
)
Borrowings under mortgages payable
43,823

 
242,018

Borrowings under revolving credit facility
35,000

 
115,751

Borrowings under unsecured term loans
250,000

 
50,000

Repayments of mortgages payable
(267,285
)
 
(192,681
)
Repayments of revolving credit facility
(150,751
)
 

Debt issuance costs
(372
)
 
(18,686
)
Dividends paid to common shareholders
(80,166
)
 

Distributions to redeemable noncontrolling interests
(13,320
)
 

Contributions from noncontrolling interests
250

 
134

Distributions to noncontrolling interests
(439
)
 
(14
)
 Net cash (used in) provided by financing activities
(183,890
)
 
227,319

 Net increase in cash and cash equivalents and restricted cash
41,652

 
353,154

 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
$
380,209

 
$
385,417

 
 
 
 

7


JBG SMITH PROPERTIES
Consolidated and Combined Statements of Cash Flows
(Unaudited)
 (In thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
 
 
 
 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
   AS OF END OF THE PERIOD:
 
 
 
Cash and cash equivalents
$
253,148

 
$
367,896

Restricted cash
127,061

 
17,521

Cash and cash equivalents and restricted cash
$
380,209

 
$
385,417

 
 
 
 
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH
    INFORMATION: 
 
 
 
 Cash paid for interest (net of capitalized interest of $14,863 and $2,285 in 2018 and 2017)
$
48,835

 
$
45,354

Accrued capital expenditures included in accounts payable and accrued expenses
78,910

 
17,633

Write-off of fully depreciated assets
23,049

 
24,909

Deferred interest on mortgages payable
3,216

 

Cash receipts from (payments for) income taxes
114

 
(3,681
)
Deconsolidation of 1900 N Street
95,923

 

Conversion of common limited partnership units to common shares
109,208

 

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

Contribution from former parent in connection with the Separation

 
174,639




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 September 30, 2018, we, as its sole general partner, controlled JBG SMITH LP and owned 87.8% 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 September 30, 2018, our Operating Portfolio consists of 65 operating assets comprising 46 office assets totaling approximately 13.0 million square feet (11.5 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 806,000 square feet (352,000 square feet at our share). Additionally, we have (i) seven assets under construction comprising three office assets totaling approximately 778,000 square feet (546,000 square feet at our share) and four multifamily assets totaling 1,476 units (1,284 units at our share); and (ii) 43 future development assets totaling approximately 22.4 million square feet (19.0 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 nine months ended September 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.
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

9



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 September 30, 2018 and December 31, 2017, and for the three and nine months ended September 30, 2018 and 2017. References to the balance sheets refer to our condensed consolidated balance sheets as of September 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 nine months ended September 30, 2018 and 2017. References to the statements of cash flows refer to our condensed consolidated and combined statements of cash flows for the nine months ended September 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 September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 include our consolidated accounts. 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. Therefore, our results of operations, cash flows and financial condition set forth in this report for the three and nine months ended September 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 following pro forma information for the three and nine months ended September 30, 2017 is presented as if the Formation Transaction had occurred on January 1, 2016. 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 $104.1 million and $115.2 million for the three and nine months ended September 30, 2017
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
(In thousands)
Pro forma information:
 
 
 
Total revenue
$
160,428

 
$
481,314

Net income (loss) attributable to common shareholders
2,283

 
(13,741
)

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 from 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.


10



The Combination resulted in a gain on bargain purchase of $27.8 million for the three and nine months ended September 30, 2017 because the fair value of the identifiable net assets acquired exceeded the purchase consideration. During the fourth quarter of 2017, this gain was reduced by $3.4 million. As a result of finalizing our fair value estimates used in the purchase price allocation related to the Combination, during the three months ended June 30, 2018, 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 the gain on bargain purchase of $7.6 million for the nine months ended September 30, 2018.
Income Taxes
We have elected 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.

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 nine months ended September 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Standards 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 September 30, 2018, future ground lease payments totaled $573.9 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 will no longer be able to capitalize internal leasing costs and instead will be required to expense these costs as incurred. Capitalized internal leasing costs were $1.5 million and $1.0 million for the three months ended September 30, 2018 and 2017, and $4.3 million and $1.8 million for the nine months ended September 30, 2018 and 2017. We will apply the modified retrospective approach of adoption and anticipate electing the package of practical expedients that allows an entity to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classifications for any expired or existing leases and (iii) initial direct costs for any expired or existing leases.
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.

13


3.    Dispositions and Assets Held for Sale
Dispositions
The following is a summary of disposition activity for the nine months ended September 30, 2018:
Date Disposed
 
Assets
 
Segment
 
Location
 
Total Square Feet
 
Gross Sales Price
 
Cash Proceeds from Sale (1)
 
Gain on Sale
 
 
 
 
 
 
 
 
 
 
(In thousands)
February 13, 2018
 
Summit - MWAA
 
Other
 
Reston, Virginia
 

 
$
2,154

 
$
2,154

 
$
455

April 3, 2018
 
Summit I and II / Summit Land (2)
 
Office
 
Reston, Virginia
 
284,118

 
95,000

 
35,240

 
6,189

May 1, 2018
 
Bowen Building (3)
 
Office
 
Washington, D.C.
 
231,402

 
140,000

 
136,488

 
27,207

September 21, 2018
 
Executive Tower (4)
 
Office
 
Washington, D.C.
 
129,831

 
121,445

 
113,267

 
11,938

Total
 
 
 
 
 
 
 
645,351

 
$
358,599

 
$
287,149

 
$
45,789

______________
(1) 
Net of related mortgage loan payments.
(2) 
Total square feet included 700,000 square feet of estimated potential development density. In connection with the sale, we repaid the related $59.0 million mortgage loan.
(3) 
In connection with the sale, we repaid $115.0 million of the then outstanding balance on our revolving credit facility.
(4) 
Proceeds from the sale were held in escrow and classified as "Restricted cash" on our balance sheet as of September 30, 2018.

In August 2018, JP Morgan, our partner in the real estate venture that owned the Investment Building, a 401,000 square foot office building located in Washington, D.C., acquired our 5.0% interest in the venture. See Note 4 for additional information.

Assets Held for Sale

We have certain real estate properties that are expected to be sold to third parties within a one-year period that meet the criteria to be classified as held for sale as of September 30, 2018. The amounts included in "Assets held for sale" in our balance sheets primarily represent real estate investment balances. The amounts included in "Liabilities related to assets held for sale" in our balance sheets primarily represent mortgage payable balances for these properties. The following is a summary of assets held for sale as of September 30, 2018:
Assets
 
Segment
 
Location
 
Total Square Feet
 
Assets Held for Sale
 
Liabilities Related to Assets Held for Sale
 
 
 
 
 
 
 
 
(In thousands)
1233 20th Street (1)
 
Office
 
Washington, D.C.
 
149,684

 
$
59,602

 
$
43,802

Falkland Chase-North (2)
 
Multifamily
 
Downtown Silver Spring, Maryland
 
13,284

 
2,218

 

Commerce Executive (3)
 
Office / Other
 
Reston, Virginia
 
388,450

 
75,635

 
1,855

 
 
 
 
 
 
551,418

 
$
137,455

 
$
45,657

_______________
(1) 
Liabilities related to assets held for sale includes a mortgage loan of $42.0 million as of September 30, 2018. In October 2018, we sold 1233 20th Street for a gross sales price of $65.0 million. In connection with the sale, we repaid the related mortgage loan.
(2) 
In October 2018, we sold the out-of-service portion of Falkland Chase-North for a gross sales price of $3.8 million.
(3) 
In July 2018, the buyer’s deposit related to the contract to sell Commerce Executive for $115.0 million became non-refundable. The sale is expected to close in early 2019.


14


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)
 
September 30, 2018
 
December 31, 2017
 
 
 
(In thousands)
Canadian Pension Plan Investment Board ("CPPIB")
 
55.0% - 79.2%
 
$
136,877

 
$
36,317

Landmark
 
1.8% - 49.0%
 
86,561

 
95,368

CBREI Venture
 
5.0% - 64.0%
 
75,713

 
79,062

Berkshire Group
 
50.0%
 
38,124

 
27,761

Brandywine
 
30.0%
 
13,858

 
13,741

CIM Group ("CIM") and Pacific Life Insurance Company
   ("PacLife")
 
16.7%
 
9,664

 

JP Morgan
 
—%
 

 
9,296

Other
 
 
 
137

 
246

Total investments in unconsolidated real estate ventures
 
 
 
360,934

 
261,791

Advances to unconsolidated real estate ventures
 
 
 
80

 
20

Total investments in and advances to unconsolidated real
   estate ventures
 
 
 
$
361,014

 
$
261,811

_______________
(1) 
Ownership interests as of September 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 no longer guarantee the obligations of the venture or 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 nine months ended September 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. For the three and nine months ended September 30, 2018, we recognized income of $890,000 related to a distribution from 1101 17th Street, which is included in “Income from unconsolidated real estate ventures, net” in our statement of operations.
In August 2018, JP Morgan, our partner in the real estate venture that owned the Investment Building, a 401,000 square foot office building located in Washington, D.C., acquired our 5.0% interest in the venture for $24.6 million, resulting in a gain of $15.5 million, which is included in "Income from unconsolidated real estate ventures, net” in our statements of operations for the three and nine months ended September 30, 2018.


15


The following is a summary of the debt of our unconsolidated real estate ventures:
 
 
Weighted Average Effective
Interest Rate
(1)
 
September 30, 2018
 
December 31, 2017
 
 
 
 
(In thousands)
Variable rate (2)
 
4.96%
 
$
536,950

 
$
534,500

Fixed rate (3)
 
3.95%
 
852,674

 
657,701

Unconsolidated real estate ventures - mortgages payable
 
 
 
1,389,624

 
1,192,201

Unamortized deferred financing costs
 
 
 
(2,555
)
 
(2,000
)
Unconsolidated real estate ventures - mortgages payable,
   net (4)
 
 
 
$
1,387,069

 
$
1,190,201

______________
(1) 
Weighted average effective interest rate as of September 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:
 
 
September 30, 2018
 
December 31, 2017
Combined balance sheet information:
 
(In thousands)
Real estate, net
 
$
2,425,633

 
$
2,106,670

Other assets, net
 
307,105

 
264,731

Total assets
 
$
2,732,738

 
$
2,371,401

 
 
 
 
 
Mortgages payable, net
 
$
1,387,069

 
$
1,190,201

Other liabilities, net
 
100,104

 
76,416

Total liabilities
 
1,487,173

 
1,266,617

Total equity
 
1,245,565

 
1,104,784

Total liabilities and equity
 
$
2,732,738

 
$
2,371,401

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Combined income statement information:
(In thousands)
Total revenue
$
76,247

 
$
46,830

 
$
236,938

 
$
83,387

Operating income
6,861

 
3,237

 
23,719

 
14,576

Net loss
(6,970
)
 
(5,191
)
 
(12,159
)
 
(414
)
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 September 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

16



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, 2018 and December 31, 2017, the net carrying amounts of our investment in these entities were $269.1 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 September 30, 2018, we consolidated two VIEs with total assets and liabilities, excluding the operating partnership, of $188.4 million and $22.8 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:
 
 
September 30, 2018
 
December 31, 2017
 
 
(In thousands)
Deferred leasing costs
 
$
189,959

 
$
171,153

Accumulated amortization
 
(72,217
)
 
(67,180
)
Deferred leasing costs, net
 
117,742

 
103,973

Prepaid expenses
 
14,623

 
9,038

Identified intangible assets, net
 
94,221

 
126,467

Deferred financing costs on credit facility, net
 
5,292

 
6,654

Deposits
 
3,592

 
6,317

Derivative agreements, at fair value
 
28,356

 
2,141

Other
 
18,132

 
9,333

Total other assets, net
 
$
281,958

 
$
263,923



17


7.    Debt
Mortgages Payable
The following is a summary of mortgages payable:
 
 
Weighted Average
Effective
Interest Rate
(1)
 
September 30, 2018
 
December 31, 2017
 
 
 
 
(In thousands)
Variable rate (2)
 
4.16%
 
$
182,996

 
$
498,253

Fixed rate (3) (4)
 
4.19%
 
1,590,983

 
1,537,706

Mortgages payable
 
 
 
1,773,979

 
2,035,959

Unamortized deferred financing costs and premium/
  discount, net
 
 
 
(4,041
)
 
(10,267
)
Mortgages payable, net
 
 
 
$
1,769,938

 
$
2,025,692

__________________________ 
(1) 
Weighted average effective interest rate as of September 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) 
Excludes the mortgage payable of $42.0 million related to 1233 20th Street, which is included in "Liabilities related to assets held for sale" in our balance sheet as of September 30, 2018. This mortgage was repaid in October 2018 concurrent with the closing of the sale. See Note 3 for additional information.
As of September 30, 2018, the net carrying value of real estate collateralizing our mortgages payable, excluding assets held for sale, totaled $2.3 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 nine months ended September 30, 2018, aggregate borrowings related to construction draws under mortgages payable totaled $43.8 million. We repaid mortgages payable with an aggregate principal balance of $251.1 million and recognized losses on the extinguishment of debt in conjunction with these repayments of $79,000 and $4.5 million for the three and nine months ended September 30, 2018.
As of September 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 nine months ended September 30, 2018, we entered into various interest rate swap and cap agreements on certain of our mortgages payable with an aggregate notional value of $381.3 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 September 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.
In July 2018, we drew $200.0 million under the Tranche A-2 Term Loan, in accordance with the delayed draw provisions of the credit facility.

18


The following is a summary of amounts outstanding under the credit facility:
 
 
Interest Rate (1)
 
September 30, 2018
 
December 31, 2017
 
 
 
 
(In thousands)
Revolving credit facility (2) (3) (4) (5)
 
3.36%
 
$

 
$
115,751

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

 
$
50,000

Tranche A-2 Term Loan
 
3.81%
 
200,000

 

Unsecured term loans
 
 
 
300,000

 
50,000

Unamortized deferred financing costs, net
 
 
 
(3,019
)
 
(3,463
)
Unsecured term loans, net
 
 
 
$
296,981

 
$
46,537

__________________________ 
(1) 
Interest rate as of September 30, 2018.
(2) 
As of September 30, 2018 and December 31, 2017, letters of credit with an aggregate face amount of $5.7 million were provided under our revolving credit facility.
(3) 
As of September 30, 2018 and December 31, 2017, net deferred financing costs related to our revolving credit facility totaling $5.3 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.
(5) 
The interest rate for the revolving credit facility excludes a 0.15% facility fee.

8.    Other Liabilities, Net
The following is a summary of other liabilities, net:
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Lease intangible liabilities
$
40,179

 
$
44,917

Accumulated amortization
(25,523
)
 
(26,950
)
Lease intangible liabilities, net
14,656

 
17,967

Prepaid rent
15,030

 
15,751

Lease assumption liabilities and accrued tenant incentives
49,510

 
50,866

Capital lease obligation
15,736

 
15,819

Security deposits
13,009

 
13,618

Ground lease deferred rent payable
3,498

 
3,730

Net deferred tax liability
6,446

 
8,202

Dividends payable (1)

 
31,097

Other
1,667

 
4,227

Total other liabilities, net
$
119,552

 
$
161,277

________________________________________
(1) 
Dividends declared in December 2017 were paid in January 2018.
9.    Redeemable Noncontrolling Interests
JBG SMITH LP
In July 2017, JBG SMITH LP issued 19.8 million OP Units to persons other than JBG SMITH that became redeemable for cash or, at our election, our common shares beginning on August 1, 2018, subject to certain limitations. During the three and nine months ended September 30, 2018, unitholders redeemed 3.0 million OP units, which we elected to redeem for an equivalent number of our common shares. As of September 30, 2018, outstanding OP Units totaled 16.8 million, representing a 12.2% interest in JBG SMITH LP. 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 of our common shares at the end of the period multiplied by the number of vested OP units outstanding.

19



Consolidated Real Estate Venture
In November 2017, we became 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 September 30, 2018, we held an 85.4% ownership interest.
Below is a summary of the activity of redeemable noncontrolling interests:
 
Nine Months Ended September 30,
 
2018
 
2017
 
JBG SMITH LP
 
Consolidated Real Estate Venture
 
Total
 
JBG SMITH LP
 
Consolidated Real Estate Venture
 
Total
 
(In thousands)
Balance as of beginning of period
$
603,717

 
$
5,412

 
$
609,129

 
$

 
$

 
$

Fair value of OP Unit redemptions
(109,208
)
 

 
(109,208
)
 

 

 

OP Units issued at the Separation

 

 

 
96,632

 

 
96,632

OP Units issued in connection with
   the Combination (1)

 

 

 
359,967

 

 
359,967

Net income (loss) attributable to
  redeemable noncontrolling interests
6,537

 
(5
)
 
6,532

 
(2,481
)
 

 
(2,481
)
Other comprehensive income
3,406

 

 
3,406

 

 

 

Contributions (distributions)
(8,763
)
 
500

 
(8,263
)
 

 

 

Share-based compensation expense
39,376

 

 
39,376

 
15,799

 

 
15,799

Adjustment to redemption value
21,346

 

 
21,346

 
97,084

 

 
97,084

Balance as of end of period
$
556,411

 
$
5,907

 
$
562,318

 
$
567,001

 
$

 
$
567,001


(1) 
Excludes certain OP Units issued as part of the Combination which had an estimated fair value of $110.6 million, the vesting of which is subject to post-combination employment.

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. 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% one year after the performance period ends, subject to continued employment. Compensation expense is being recognized over a four-year period.
LTIP Units

In May 2018, as part of their annual compensation, 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.

20



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.
    
Share-Based Compensation Expense

Share-based compensation expense is summarized as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Time-Based LTIP Units
$
2,520

 
$
885

 
$
7,772

 
$
885

Performance-Based LTIP Units
1,391

 
469

 
3,898

 
469

LTIP Units

 

 
794

 

Other equity awards
989

 
232

 
2,693

 
1,526

Share-based compensation expense - other 
4,900

 
1,586

 
15,157

 
2,880

Formation Awards
1,375

 
3,963

 
4,192

 
3,963

LTIP and OP Units (1)
7,012

 
10,482

 
22,720

 
10,482

 Share-based compensation related to Formation
   Transaction (2)
8,387

 
14,445

 
26,912

 
14,445

Total share-based compensation expense
13,287

 
16,031

 
42,069

 
17,325

Less amount capitalized
(873
)
 
(161
)
 
(2,379
)
 
(161
)
Share-based compensation expense
$
12,414

 
$
15,870

 
$
39,690

 
$
17,164


______________________________________________ 
(1) 
Represents share-based compensation expense for LTIP Units 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 September 30, 2018, we had $107.2 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 2.6 years.
11.     Interest Expense

The following is a summary of interest expense included in the statements of operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Interest expense
$
23,465

 
$
16,378

 
$
69,024

 
$
45,011

Amortization of deferred financing costs
1,043

 
739

 
3,501

 
1,527

Net loss (gain) on derivative financial instruments
not designated as cash flow hedges:
 
 
 
 
 
 
 
Net unrealized
287

 
(467
)
 
(1,264
)
 
(467
)
Net realized
(135
)
 
27

 
(135
)
 
27

Capitalized interest
(5,681
)
 
(1,368
)
 
(14,863
)
 
(2,285
)
Interest expense
$
18,979

 
$
15,309

 
$
56,263

 
$
43,813



21



12.     Earnings (Loss) 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 (loss) available to common shareholders used in calculating basic and diluted earnings per common share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share amounts)
Net income (loss)
$
26,382

 
$
(77,991
)
 
$
45,619

 
$
(60,332
)
Net (income) loss attributable to redeemable noncontrolling
interests
(3,552
)
 
8,160

 
(6,532
)
 
2,481

Net loss attributable to noncontrolling interests

 

 
127

 

Net income (loss) attributable to common shareholders
22,830

 
(69,831
)
 
39,214

 
(57,851
)
Distributions to participating securities
(153
)
 

 
(527
)
 

Net income (loss) available to common shareholders
  — basic and diluted
$
22,677

 
$
(69,831
)
 
$
38,687

 
$
(57,851
)
 
 
 
 
 
 
 
 
Weighted average number of common shares
   outstanding — basic and diluted (1)
119,835

 
114,744

 
118,588

 
105,347

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.19

 
$
(0.61
)
 
$
0.33

 
$
(0.55
)
Diluted
$
0.19

 
$
(0.61
)
 
$
0.33

 
$
(0.55
)
______________
(1) 
For the three and nine months ended September 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 September 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 (loss) available to common shareholders and from the weighted average number of common shares outstanding in calculating basic and diluted earnings per common share. Performance-Based LTIP Units and Formation Awards, which totaled 3.9 million and 3.8 million for the three and nine months ended September 30, 2018 and 2.6 million and 900,000 for the three and nine months ended September 30, 2017, were excluded from the calculation of diluted earnings per common share as they were antidilutive, but potentially could be dilutive in the future.

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 September 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 $27.8 million as of September 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 $4.6 million as a decrease to interest expense. The net unrealized (loss) gain on our derivative financial instruments not designated as cash flow hedges was $(287,000) and $1.3 million for the three and nine months ended September 30, 2018 and is recorded in "Interest expense" in our statements of operations. 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 our statements of operations.

22


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;
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
September 30, 2018
(In thousands)
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
 
 
Classified as assets in "Other assets, net"
$
21,119

 
$

 
$
21,119

 
$

Classified as liabilities in "Other liabilities, net"
954

 

 
954

 

Derivative financial instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
Classified as assets in "Other assets, net"
7,237

 

 
7,237

 

 
 
 
 
 
 
 
 
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 September 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 September 30, 2018, none of which were reported in the statements of operations because they were documented and qualified as hedging instruments.


23


Financial Assets and Liabilities Not Measured at Fair Value
As of September 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:
 
September 30, 2018
 
December 31, 2017
 
     Carrying
      Amount (1)
 
Fair Value
 
     Carrying
      Amount (1)
 
Fair Value
 
(In thousands)
Financial liabilities:
 
 
 
 
 
 
 
Mortgages payable
$
1,773,979

 
$
1,785,978

 
$
2,035,959

 
$
2,060,899

Revolving credit facility

 

 
115,751

 
115,768

Unsecured term loans
300,000

 
300,307

 
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 profiles based on market sources. The fair value of the mortgages payable was determined using Level 2 inputs of the fair value hierarchy.

The fair value of our revolving credit facility and unsecured term loans 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 loans 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. Our reportable segments are 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.

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 $40.4 million and $45.7 million and classified in "Other assets, net" in the balance sheets as of September 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.


24



The following table reflects the reconciliation of net income (loss) attributable to common shareholders to consolidated NOI:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income (loss) attributable to common shareholders
$
22,830

 
$
(69,831
)
 
$
39,214

 
$
(57,851
)
Add:
 
 
 
 
 
 
 
Depreciation and amortization expense
46,603

 
43,951

 
143,880

 
109,726

General and administrative expense:
 
 
 
 
 
 
 
Corporate and other
12,415

 
10,593

 
37,759

 
35,536

Third-party real estate services
20,754

 
21,178

 
64,552

 
30,362

Share-based compensation related to Formation Transaction
8,387

 
14,445

 
26,912

 
14,445

Transaction and other costs
4,126