Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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
397837993_logoverticaltransbluea05.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 ý Accelerated filer o Non-accelerated filer o 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, par value $0.01 per share
JBGS
New York Stock Exchange

As of May 2, 2019, JBG SMITH Properties had 134,093,995 common shares outstanding.





JBG SMITH PROPERTIES
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2019

TABLE OF CONTENTS

 
 
 
 
Item 1.
Page
 
Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2019 and December 31, 2018
 
Condensed Consolidated Statements of Operations (unaudited) for the three months
   ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three months
   ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Equity (unaudited) for the three months
   ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the three months
   ended March 31, 2019 and 2018
 
Notes to Condensed Consolidated 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)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Real estate, at cost:
 
 
 
Land and improvements
$
1,227,255

 
$
1,371,874

Buildings and improvements
3,717,906

 
3,722,930

Construction in progress, including land
751,730

 
697,930

 
5,696,891

 
5,792,734

Less accumulated depreciation
(1,075,309
)
 
(1,051,875
)
Real estate, net
4,621,582

 
4,740,859

Cash and cash equivalents
395,584

 
260,553

Restricted cash
17,877

 
138,979

Tenant and other receivables, net
49,979

 
46,568

Deferred rent receivable, net
152,323

 
143,473

Investments in and advances to unconsolidated real estate ventures
321,366

 
322,878

Other assets, net
297,525

 
264,994

Assets held for sale
168,458

 
78,981

TOTAL ASSETS
$
6,024,694

 
$
5,997,285

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgages payable, net
$
1,835,842

 
$
1,838,381

Unsecured term loans, net
297,277

 
297,129

Accounts payable and accrued expenses
134,776

 
130,960

Other liabilities, net
174,434

 
181,606

Liabilities related to assets held for sale
486

 
3,717

Total liabilities
2,442,815

 
2,451,793

Commitments and contingencies

 

Redeemable noncontrolling interests
584,763

 
558,140

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

 

Common shares, $0.01 par value - 500,000 shares authorized; 122,594 and 120,937 shares issued and outstanding as of March 31, 2019 and December 31, 2018
1,227

 
1,210

Additional paid-in capital
3,150,133

 
3,155,256

Accumulated deficit
(151,157
)
 
(176,018
)
Accumulated other comprehensive income (loss)
(3,452
)
 
6,700

Total shareholders' equity of JBG SMITH Properties
2,996,751

 
2,987,148

Noncontrolling interests in consolidated subsidiaries
365

 
204

Total equity
2,997,116

 
2,987,352

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
$
6,024,694

 
$
5,997,285



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




3




JBG SMITH PROPERTIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended March 31,
 
2019
 
2018
REVENUE
 
 
 
Property rentals
$
119,413

 
$
131,228

Third-party real estate services, including reimbursements
27,691

 
24,330

Other income
8,095

 
7,479

Total revenue
155,199

 
163,037

EXPENSES
 
 
 
Depreciation and amortization
48,719

 
49,160

Property operating
32,174

 
35,158

Real estate taxes
17,235

 
19,610

General and administrative:
 
 
 
Corporate and other
12,314

 
8,414

Third-party real estate services
28,066

 
22,609

Share-based compensation related to Formation Transaction and
special equity awards
11,131

 
9,428

Transaction and other costs
4,895

 
4,221

Total expenses
154,534

 
148,600

OTHER INCOME (EXPENSE)

 

Income (loss) from unconsolidated real estate ventures, net
3,601

 
(1,902
)
Interest and other income, net
951

 
573

Interest expense
(17,174
)
 
(19,257
)
Gain on sale of real estate
39,033

 
455

Total other income (expense)
26,411

 
(20,131
)
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE)
27,076

 
(5,694
)
Income tax benefit
1,172

 
908

NET INCOME (LOSS)
28,248

 
(4,786
)
Net (income) loss attributable to redeemable noncontrolling
interests
(3,387
)
 
594

Net loss attributable to noncontrolling interests

 
2

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
24,861

 
$
(4,190
)
EARNINGS (LOSS) PER COMMON SHARE:
 
 
 
Basic
$
0.20

 
$
(0.04
)
Diluted
$
0.20

 
$
(0.04
)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING:
 
 
 
Basic
122,573

 
117,955

Diluted
123,423

 
117,955



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



4



JBG SMITH PROPERTIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2019
 
2018
NET INCOME (LOSS)
$
28,248

 
$
(4,786
)
OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
Change in fair value of derivative financial instruments
(10,696
)
 
14,096

Reclassification of net (income) loss on derivative financial instruments from accumulated other
   comprehensive income into interest expense
(839
)
 
1,035

Other comprehensive (loss) income
(11,535
)
 
15,131

COMPREHENSIVE INCOME
16,713

 
10,345

Net (income) loss attributable to redeemable noncontrolling interests
(3,387
)
 
594

Other comprehensive (income) loss attributable to redeemable noncontrolling interests
1,383

 
(1,876
)
Net loss attributable to noncontrolling interests

 
2

COMPREHENSIVE INCOME ATTRIBUTABLE TO JBG SMITH PROPERTIES
$
14,709

 
$
9,065



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



5



JBG SMITH PROPERTIES
Condensed Consolidated Statements of Equity
(Unaudited)
(In thousands)
 
Common Shares
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests in Consolidated Subsidiaries
 
Total Equity
Shares
 
Amount
 
 
 
 
 
BALANCE AS OF JANUARY 1, 2019
120,937

 
$
1,210

 
$
3,155,256

 
$
(176,018
)
 
$
6,700

 
$
204

 
$
2,987,352

Net income attributable to common
shareholders and noncontrolling interests

 

 

 
24,861

 

 

 
24,861

Conversion of common limited partnership
units
 to common shares
1,657

 
17

 
57,089

 

 

 

 
57,106

Distributions to noncontrolling interests

 

 

 

 

 
(12
)
 
(12
)
Contributions from noncontrolling interests

 

 

 

 

 
173

 
173

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

 

 
(62,212
)
 

 
1,383

 

 
(60,829
)
Other comprehensive loss

 

 

 

 
(11,535
)
 

 
(11,535
)
BALANCE AS OF MARCH 31, 2019
122,594

 
$
1,227

 
$
3,150,133

 
$
(151,157
)
 
$
(3,452
)
 
$
365

 
$
2,997,116

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AS OF JANUARY 1, 2018
117,955

 
$
1,180

 
$
3,063,625

 
$
(95,809
)
 
$
1,612

 
$
4,206

 
$
2,974,814

Net loss attributable to common
shareholders and noncontrolling interests

 

 

 
(4,190
)
 

 
(2
)
 
(4,192
)
Distributions to noncontrolling interests

 

 

 

 


(482
)
 
(482
)
Redeemable noncontrolling interests
redemption value adjustment and other
comprehensive (income) loss allocation

 

 
17,849

 

 
(1,876
)


 
15,973

Other comprehensive income

 

 

 

 
15,131

 

 
15,131

Other

 

 
(548
)
 

 

 

 
(548
)
BALANCE AS OF MARCH 31, 2018
117,955

 
$
1,180

 
$
3,080,926

 
$
(99,999
)
 
$
14,867

 
$
3,722

 
$
3,000,696



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



6



JBG SMITH PROPERTIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2019
 
2018
 OPERATING ACTIVITIES:
 
 
 
 Net income (loss)
$
28,248

 
$
(4,786
)
 Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 Share-based compensation expense
16,589

 
13,099

 Depreciation and amortization, including amortization of debt issuance costs
49,936

 
50,173

 Deferred rent
(9,341
)
 
(3,294
)
 (Income) loss from unconsolidated real estate ventures, net
(3,601
)
 
1,902

 Amortization of above- and below-market lease intangibles, net
(132
)
 
(96
)
 Amortization of lease incentives
2,057

 
2,300

 Return on capital from unconsolidated real estate ventures
398

 
3,764

 Gain on sale of real estate
(39,033
)
 
(455
)
 Net unrealized loss (gain) on derivative financial instruments not designated as cash flow hedges
48

 
(1,119
)
 Losses on operating lease receivables
1,568

 
354

 Other non-cash items
519

 
141

 Changes in operating assets and liabilities:
 
 
 
 Tenant and other receivables
(4,185
)
 
(6,038
)
 Other assets, net
1,647

 
(4,841
)
 Accounts payable and accrued expenses
(18,943
)
 
(17,189
)
 Other liabilities, net
(7,867
)
 
746

 Net cash provided by operating activities
17,908

 
34,661

 INVESTING ACTIVITIES:
 
 
 
Development costs, construction in progress and real estate additions
(68,667
)
 
(84,643
)
Deposits for real estate acquisitions
(8,525
)
 

Proceeds from sale of real estate
117,676

 
2,154

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

 
(386
)
Distributions of capital from unconsolidated real estate ventures
6,555

 
1,350

Investments in and advances to unconsolidated real estate ventures
(2,851
)
 
(11,801
)
Other

 
(19
)
 Net cash provided by (used in) investing activities
44,188

 
(93,345
)
 FINANCING ACTIVITIES:
 
 
 
Acquisition of ownership interest in consolidated real estate venture

 
(548
)
Finance lease payments
(33
)
 
(26
)
Borrowings under mortgages payable

 
18,547

Borrowings under unsecured term loans

 
50,000

Repayments of mortgages payable
(3,065
)
 
(68,221
)
Dividends paid to common shareholders
(39,298
)
 
(26,540
)
Distributions to redeemable noncontrolling interests
(5,895
)
 
(4,557
)
Contributions from noncontrolling interests
124

 

Distributions to noncontrolling interests

 
(120
)
 Net cash used in financing activities
(48,167
)
 
(31,465
)
 Net increase (decrease) in cash and cash equivalents and restricted cash
13,929

 
(90,149
)
 Cash and cash equivalents and restricted cash as of the beginning of the period
399,532

 
338,557

 Cash and cash equivalents and restricted cash as of the end of the period
$
413,461

 
$
248,408

 
 
 
 

7



JBG SMITH PROPERTIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 (In thousands)
 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
   AS OF END OF THE PERIOD:
 
 
 
Cash and cash equivalents
$
395,584

 
$
221,578

Restricted cash
17,877

 
26,830

Cash and cash equivalents and restricted cash
$
413,461

 
$
248,408

 
 
 
 
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH
    INFORMATION: 
 
 
 
 Cash paid for interest (net of capitalized interest of $6,915 and $4,516 in 2019 and 2018)
$
15,489

 
$
16,584

Accrued capital expenditures included in accounts payable and accrued expenses
74,299

 
52,444

Write-off of fully depreciated assets
18,477

 
5,213

Deconsolidation of 1900 N Street

 
95,923

Conversion of common limited partnership units to common shares
57,001

 

Initial recognition of operating right-of-use assets
35,318

 

Initial recognition of lease liabilities related to operating right-of-use assets
37,922

 

Cash paid for amounts included in the measurement of lease liabilities for operating leases
1,708

 



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



8



JBG SMITH PROPERTIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


1.    Organization and Basis of Presentation
Organization

JBG SMITH Properties ("JBG SMITH") was organized as a Maryland real estate investment trust ("REIT") on October 27, 2016 for the purpose of receiving, via the spin-off on July 17, 2017 (the "Separation"), substantially all of the assets and liabilities of Vornado Realty Trust's ("Vornado") Washington, D.C. segment. 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." JBG SMITH is hereinafter referred to as "we," "us," "our" or similar terms. 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 March 31, 2019, we, as its sole general partner, controlled JBG SMITH LP and owned 89.0% of its common limited partnership units ("OP Units").
We own and operate a portfolio of high-quality commercial 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 March 31, 2019, our Operating Portfolio consists of 61 operating assets comprising 45 commercial assets totaling approximately 12.5 million square feet (10.9 million square feet at our share) and 16 multifamily assets totaling 6,315 units (4,531 units at our share). Additionally, we have (i) nine assets under construction comprising five commercial assets totaling approximately 1.2 million square feet (927,000 square feet at our share) and four multifamily assets totaling 1,476 units (1,298 units at our share); and (ii) 40 future development assets totaling approximately 22.1 million square feet (18.7 million square feet at our share) of estimated potential development density.
Our revenues are derived primarily from leases with commercial and multifamily tenants, which include fixed rents and reimbursements from tenants for certain expenses such as real estate taxes, property operating expenses, and repairs and maintenance. In addition, our third-party asset management and real estate services business provides fee-based real estate services to third parties and the legacy funds (the "JBG Legacy Funds") formerly organized by JBG.
Basis of Presentation
The accompanying unaudited condensed consolidated 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 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 months ended March 31, 2019 and 2018 are not necessarily indicative of the results that may be expected for a full year. These condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission.
The accompanying condensed consolidated 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 financial statements.
References to the financial statements refer to our condensed consolidated financial statements as of March 31, 2019 and December 31, 2018, and for the three months ended March 31, 2019 and 2018. References to the balance sheets refer to our condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018. References to the statements of operations refer to our condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018. References to the statements of cash flows refer to our condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018.

9



Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation as follows:
Reclassification of parking income totaling $6.4 million previously included in "Property rentals" for the three months ended March 31, 2018 to "Other income" in the statement of operations.
Reclassification of tenant reimbursements totaling $10.9 million for the three months ended March 31, 2018 to "Property rentals" in the statement of operations.
Reclassification of $4.3 million of expenses incurred in the operation and management of our properties that were previously included in "General and administrative expense: corporate and other" for the three months ended March 31, 2018 to "Property operating expenses" in the statement of operations.
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. 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, 2018, except as follows related to our adoption of Accounting Standards Update ("ASU") 2016-02, Leases ("Topic 842") as of January 1, 2019. Prior to the adoption of Topic 842, leases were accounted under Topic 840, Leases ("Topic 840").
Revenue Recognition
We have leases with various tenants across our portfolio of properties, which generate rental income and operating cash flows for our benefit. Through these leases, we provide tenants with the right to control the use of our real estate assets, which tenants agree to use and control. The right to control our real estate assets conveys our tenants with substantially all of the economic benefits and the right to direct how and for what purpose the real estate is used throughout the period of use, thereby meeting the definition of a lease. Leases will be classified as either operating, sales-type or direct finance leases based on the principle of whether or not the lease is structured in effect as a financed purchase.
Property rentals revenue includes base rent each tenant pays in accordance with the terms of its respective lease and is reported on a straight-line basis over the non-cancellable term of the lease, which includes the effects of periodic step-ups in rent and rent abatements under the lease. When a renewal option is included within the lease, we assess whether the option is reasonably certain of being exercised against relevant economic factors to determine whether or not the option period should be included as part of the lease term. Further, property rentals revenue includes tenant reimbursements revenue from the recovery of all or a portion of the operating expenses and real estate taxes of the respective assets, which are accrued as variable lease payments in the same periods as the related expenses are incurred. We commence rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of the leased space and when the leased space is substantially ready for its intended use. In circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of property rentals revenue on a straight-line basis over the term of the lease. Differences between rental revenue recognized and amounts due under the respective lease agreements are recorded as an increase or decrease to "Deferred rent receivable, net" on our balance sheets. Property rentals revenue also includes the amortization or accretion of acquired above-and below-market leases. We periodically evaluate the collectability of amounts due from tenants and recognize an adjustment to property rental revenue for the difference between cash received and revenue recognized for amounts deemed to be improbable of collection. Revenue recognized on leases whose collectability is not probable will be limited to cash received thereafter until such point that collection is deemed probable. Any changes to the provision for lease revenue determined to be not probable of collection is included in "Property rentals" in our statement of operations. We exercise judgment in assessing the probability of collection and consider payment history and current credit status in making this determination.
Third-party real estate services revenue, including reimbursements, is determined in accordance with the terms specific to each arrangement and may include property and asset management fees or transactional fees for leasing, acquisition, development and construction, financing, and legal services provided. These fees are determined in accordance with the terms specific to each arrangement and are recognized as the related services are performed in accordance with ASU 2014-09, Revenue from Contracts

10



with Customers, ("Topic 606"). Development and construction fees earned from providing services to our unconsolidated real estate ventures are recorded on a percentage of completion basis.
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 in assessing impairment and (ii) the determination of useful lives for tangible and intangible assets. Actual results could differ from these estimates.
Recent Accounting Pronouncements
Adoption of Topic 842
We enter into various lease agreements to make our properties available for use by third parties in exchange for cash consideration or to obtain the right to use properties owned by third parties to administer our business operations. We account for these leases under Topic 842, which we adopted as of January 1, 2019 using a modified retrospective approach and by applying the several transitional practical expedients including the Comparatives Under 840 expedient, the Relief Package for existing leases and the Easement expedient for existing easements, but we did not elect the Hindsight expedient. The Comparatives Under 840 expedient allows us to not recast our comparative periods in the period of adoption, and the Relief Package and Easement expedients allow us to maintain our historical accounting conclusions on current leases as of the date of adoption with respect to whether a contract contains a lease, what a lease’s classification should be, what initial direct costs are capitalizable and whether a land easement constituted a lease. We made a policy election to forgo recording right-of-use assets and the related lease liabilities for leases with initial terms of 12 months or less.
The adoption of Topic 842 did not result in a material change to our recognition of property rental revenue and did not impact our opening accumulated deficit balance, but did result in (i) a change in the presentation of property rentals, as of January 1, 2019, whereby tenant reimbursements revenue is included in “Property rentals” in our statement of operations and (ii) the recognition, as of January 1, 2019, of right-of-use assets totaling $35.3 million in “Other assets, net” and lease liabilities totaling $37.9 million in “Other liabilities, net” in our accompanying balance sheet, associated with our corporate office lease and various ground leases for which we are the lessee. The initial right-of-use assets comprised: (i) lease liabilities, (ii) $3.5 million of ground lease deferred rent payable reclassified from “Other liabilities, net" and (iii) $767,000 of identified net intangible assets and $140,000 of prepaid expenses both reclassified from “Other assets, net.” Further, effective January 1, 2019, any change to our assessment of whether previously recognized revenue is improbable of collection will be recognized as a deduction to revenue. Such amounts were recognized within “Property operating expense” prior to the adoption of Topic 842. Additionally, initial direct costs for both lessees and lessors is now limited to 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 no longer capitalize internal leasing costs, which are now expensed as incurred within “Corporate and other - general and administrative costs.”
Lessor Accounting
Leases in which we are the lessor provide for the payment of fixed base rents payable monthly as well as reimbursements of real estate taxes, insurance and maintenance costs. We have elected a practical expedient which allows us to combine certain lease and non-lease components of our operating leases. Our non-lease components, which are not predominant within the contract, primarily relate to the reimbursement by our tenants of real estate taxes, insurance and maintenance costs, which vary each period, and are recognized together with fixed base rent in “Property rentals”, as variable lease income in the same periods as the related expenses are incurred. Certain commercial leases may also provide for the payment by the lessee of additional rents based on a percentage of sales, which are recorded as variable lease income in the period the additional rents are earned.
The following is a summary of revenue from our non-cancellable leases included in the statements of operations:
 
Three Months Ended March 31,
 
2019
 
(In thousands)
Property rentals:
 
Fixed
$
113,590

Variable
5,823

Total
$
119,413



11



As of March 31, 2019, the undiscounted cash flows to be received from lease payments under our operating leases on an annual basis for the next five years and thereafter are as follows:
Year ending December 31,
 
Amount
 
 
(In thousands)
2019 (1)
 
$
278,850

2020
 
323,967

2021
 
288,677

2022
 
258,016

2023
 
217,002

2024
 
194,847

Thereafter
 
1,048,678

______________
(1) 
Amount is for the remainder of 2019.
As of December 31, 2018, under Topic 840, future base rental revenue under our non-cancellable operating leases is as follows:
Year ending December 31,
 
Amount
 
 
(In thousands)
2019
 
$
377,427

2020
 
321,205

2021
 
287,463

2022
 
256,352

2023
 
215,203

Thereafter
 
1,188,767

Lessee Accounting
We are obligated under non-cancellable operating leases, including ground leases on certain of our properties through 2106 and our office leases. When a renewal option is included within the lease, we assess whether the option is reasonably certain of being exercised against relevant economic factors to determine whether or not the option period should be included as part of the lease term. Lease payments associated with renewal periods that we are reasonably certain will be exercised are included in the measurement of the corresponding lease liability and right-of-use asset. Rent expense for our operating leases is recognized on a straight-line basis over the expected lease term and is included in our statements of operations in either “Property operating expense” or “General and administrative expense: corporate and other” depending on the nature of the lease. Further, we are also obligated under a non-cancellable ground lease, which we classify as a finance lease. Since ownership of the land associated with our finance lease is reasonably certain to transfer to us upon the conclusion of the lease, we recorded $16.0 million to “Land and improvements” on our balance sheet when the lease commenced in 2017.
Certain lease agreements include variable lease payments that, in the future, will vary based on changes in inflationary measures, market rates or our share of expenditures of the leased premises. We have elected the practical expedient not to separate lease and non-lease components for our ground and office leases. Our non-lease components primarily relate to property operating expenses associated with our office leases, which vary each period, and are recognized in rent expense when incurred.
We discount our future lease payments for each lease to calculate the related lease liability using an estimated incremental borrowing rate computed based on observable corporate borrowing rates reflective of the general economic environment, taking into consideration our creditworthiness and various financing and asset specific considerations, adjusted to approximate a secured borrowing for the lease term.
As of March 31, 2019, the weighted average discount rate used in calculating lease liabilities for our active operating and finance leases were 5.2% and 5.8%, which have weighted average remaining lease terms of 20.1 and 7.8 years.


12



As of March 31, 2019, future minimum lease payments under our non-cancellable operating and finance leases are as follows:
Year ending December 31,
Operating
 
Finance
 
(In thousands)
2019 (1)
$
4,789

 
$
791

2020
6,272

 
1,073

2021
6,201

 
1,095

2022
5,257

 
1,117

2023
2,000

 
1,139

2024
2,061

 
1,162

Thereafter
36,514

 
15,977

Total future minimum lease payments
63,094

 
22,354

Imputed interest
(26,228
)
 
(6,683
)
Total (2)
$
36,866

 
$
15,671

______________
(1) 
Amounts are for the remainder of 2019.
(2) 
The total for operating leases of $36.9 million corresponds to lease liabilities related to operating right-of-use assets and the total for finance leases of $15.7 million represents our finance lease liability, both of which are included in "Other liabilities, net" as of March 31, 2019. See Note 8 for additional information.
As of December 31, 2018, under Topic 840, future minimum rental payments under our non-cancellable operating leases, capital leases and lease assumption liabilities are as follows:
Year ending December 31,
 
Amount
 
 
(In thousands)
2019
 
$
13,991

2020
 
13,710

2021
 
13,395

2022
 
12,554

2023
 
9,489

Thereafter
 
55,780

Total
 
$
118,919

For the three months ended March 31, 2019, we incurred $663,000 of fixed operating and finance lease costs and $473,000 of variable operating lease costs.
3.    Acquisition, Disposition and Assets Held for Sale
Acquisition
In February 2019, we entered into a contract to purchase a stabilized multifamily asset located in Washington, D.C., which we intend to use as a replacement property in a 1031 like-kind exchange for the expected proceeds from the sale of the Mets 6, 7 and 8 land parcels to Amazon.com, Inc.

13



Disposition
The following is a summary of disposition activity for the three months ended March 31, 2019:
Date Disposed
 
Assets
 
Segment
 
Location
 
Total Square Feet
 
Gross Sales Price
 
Cash Proceeds from Sale
 
Gain on Sale of Real Estate
 
 
 
 
 
 
 
 
 
 
(In thousands)
February 4, 2019
 
Commerce Executive / Commerce Metro Land (1) (2)
 
Commercial / Other
 
Reston, Virginia
 
388,562

 
$
114,950

 
$
117,676

 
$
39,033

______________
(1) 
The sale also included approximately 894,000 square feet of estimated potential development density. The sale was part of a reverse 1031 like-kind exchange. See Note 5 for additional information.
(2) 
Cash proceeds include the reimbursement of $4.0 million of tenant improvement costs and leasing commissions paid by us prior to the closing.

Assets Held for Sale

As of March 31, 2019 and December 31, 2018, we had certain real estate properties that were classified as held for sale. The amounts included in "Assets held for sale" in our balance sheets primarily represent real estate investment balances. The following is a summary of assets held for sale:
Assets
 
Segment
 
Location
 
Total Square Feet
 
Assets Held for Sale
 
Liabilities Related to Assets Held for Sale
 
 
 
 
 
 
 
(In thousands)
March 31, 2019
 
 
 
 
 
 
 
 
 
 
Pen Place (1)
 
Other
 
National Landing, Virginia
 

 
$
73,949

 
$
205

Mets 6, 7 and 8 (1)
 
Other
 
National Landing, Virginia
 

 
94,509

 
281

 
 
 
 
 
 

 
$
168,458

 
$
486

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Commerce Executive /
Commerce Metro Land (2)
 
Commercial
 
Reston, Virginia
 
388,562

 
$
78,981

 
$
3,717

_______________
(1) 
In March 2019, we entered into agreements for the sale of Pen Place and Mets 6, 7 and 8, future development assets having an aggregate estimated potential development density of up to approximately 4.1 million square feet, for approximately $293.9 million, subject to customary closing conditions.
(2) 
As noted above, we sold Commerce Executive/Commerce Metro Land in February 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)
 
March 31, 2019
 
December 31, 2018
 
 
 
(In thousands)
CPPIB
 
55.0% - 63.7%
 
$
98,292

 
$
97,521

Landmark
 
1.8% - 49.0%
 
82,149

 
84,320

CBREI Venture
 
5.0% - 64.0%
 
72,689

 
73,776

Berkshire Group
 
50.0%
 
45,227

 
43,937

Brandywine
 
30.0%
 
13,880

 
13,777

CIM Group and Pacific Life Insurance Company
 
16.7%
 
8,829

 
9,339

Other
 
 
 
220

 
128

Total investments in unconsolidated real estate ventures
 
 
 
321,286

 
322,798

Advances to unconsolidated real estate ventures
 
 
 
80

 
80

Total investments in and advances to unconsolidated real
   estate ventures
 
$
321,366

 
$
322,878

_______________
(1) 
Ownership interests as of March 31, 2019. We have multiple investments with certain venture partners with varying ownership interests.
In February 2018, we entered into a real estate venture with CPPIB to develop and own 1900 N Street, an under construction commercial 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 $101.3 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.
As of March 31, 2019 and December 31, 2018, we have a zero investment balance in the real estate venture that owns 1101 17th Street and have suspended the equity method of accounting. 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. During the three months ended March 31, 2019, we recognized income of $6.4 million related to net distributions from this venture, which is included in "Income from unconsolidated real estate ventures, net" in our statement of operations.
The following is a summary of the debt of our unconsolidated real estate ventures:
 
 
Weighted Average Effective
Interest Rate
(1)
 
March 31, 2019
 
December 31, 2018
 
 
 
 
(In thousands)
Variable rate (2)
 
5.00%
 
$
616,938

 
$
461,704

Fixed rate (3)
 
3.93%
 
522,794

 
665,662

Unconsolidated real estate ventures - mortgages payable
 
 
 
1,139,732

 
1,127,366

Unamortized deferred financing costs
 
 
 
(1,858
)
 
(1,998
)
Unconsolidated real estate ventures - mortgages payable, net (4)
 
 
 
$
1,137,874

 
$
1,125,368

______________
(1) 
Weighted average effective interest rate as of March 31, 2019.
(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.

15




The following is a summary of the financial information for our unconsolidated real estate ventures:
 
March 31, 2019
 
December 31, 2018
Combined balance sheet information:
(In thousands)
Real estate, net
$
2,074,762

 
$
2,050,985

Other assets, net (1)
191,210

 
169,264

Total assets
$
2,265,972

 
$
2,220,249

 
 
 
 
Borrowings, net
$
1,137,874

 
$
1,125,368

Other liabilities, net (1)
137,414

 
94,845

Total liabilities
1,275,288

 
1,220,213

Total equity
990,684

 
1,000,036

Total liabilities and equity
$
2,265,972

 
$
2,220,249

______________
(1) 
On January 1, 2019, our unconsolidated real estate ventures adopted Topic 842, which required us to record operating right-of-use assets totaling $52.4 million and related lease liabilities totaling $44.1 million.
 
Three Months Ended March 31,
 
2019
 
2018
Combined income statement information:
(In thousands)
Total revenue
$
59,991

 
$
73,173

Operating (loss) income
(433
)
 
4,374

Net loss
(15,227
)
 
(4,675
)

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 after 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 March 31, 2019 and December 31, 2018, 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. As of March 31, 2019 and December 31, 2018, the net carrying amounts of our investment in these entities were $224.7 million and $232.8 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

16



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.
In conjunction with the acquisition of Potomac Yard Land Bay H located in Alexandria, Virginia in December 2018, we entered into a reverse Code Section 1031 like-kind exchange agreement with a third party intermediary. Until the earlier of the termination of the exchange agreement or 180 days after the acquisition date, the third party intermediary was the legal owner of the entity that owned this property. The agreement that governed the operations of this entity provided us with the power to direct the activities that most significantly impacted the entity's economic performance. This entity was deemed a VIE as of December 31, 2018 primarily because it may not have had sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. We determined we were the primary beneficiary of the VIE as a result of having the power to direct the activities that most significantly impact its economic performance and the obligation to absorb losses, as well as the right to receive benefits, that could be potentially significant to the VIE. Accordingly, we consolidated the property and its operations as of the acquisition date. Legal ownership of this entity was transferred to us by the third-party intermediary after the sale of Commerce Executive/Commerce Metro Land in February 2019.

We consolidate 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 March 31, 2019, excluding the operating partnership, we consolidated one VIE with total assets and liabilities of $74.2 million and $11.9 million. As of December 31, 2018, excluding the operating partnership, we consolidated two VIEs with total assets and liabilities of $94.8 million and $43.4 million.
6.    Other Assets, Net
The following is a summary of other assets, net:
 
 
March 31, 2019
 
December 31, 2018
 
 
(In thousands)
Deferred leasing costs
 
$
210,565

 
$
202,066

Accumulated amortization
 
(74,217
)
 
(72,465
)
Deferred leasing costs, net
 
136,348

 
129,601

Other identified intangible assets, net
 
53,650

 
55,469

Lease intangible assets, net
 
31,319

 
34,390

Operating right-of-use assets, net (1)
 
34,151

 

Prepaid expenses
 
5,386

 
6,482

Deferred financing costs on credit facility, net
 
4,316

 
4,806

Deposits
 
11,109

 
3,633

Derivative agreements, at fair value
 
1,894

 
10,383

Other
 
19,352

 
20,230

Total other assets, net
 
$
297,525

 
$
264,994

______________
(1) 
Related to our adoption of Topic 842 on January 1, 2019. See Note 2 for additional information.



17



7.    Debt
Mortgages Payable
The following is a summary of mortgages payable:
 
 
Weighted Average
Effective
Interest Rate
(1)
 
March 31, 2019
 
December 31, 2018
 
 
 
 
(In thousands)
Variable rate (2)
 
4.22%
 
$
415,898

 
$
308,918

Fixed rate (3)
 
3.92%
 
1,425,688

 
1,535,734

Mortgages payable
 
 
 
1,841,586

 
1,844,652

Unamortized deferred financing costs and premium/
  discount, net
 
 
 
(5,744
)
 
(6,271
)
Mortgages payable, net
 
 
 
$
1,835,842

 
$
1,838,381

__________________________ 
(1) 
Weighted average effective interest rate as of March 31, 2019.
(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 March 31, 2019 and December 31, 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.
As of March 31, 2019 and December 31, 2018, we had various interest rate swap and cap agreements with an aggregate notional value of $1.2 billion and $1.3 billion on certain of our mortgages payable, which mature on various dates concurrent with the maturity of the related mortgages payable.
Credit Facility
We have a $1.4 billion credit facility, consisting of a $1.0 billion revolving credit facility maturing in July 2021, with two six-month extension options, a delayed draw $200.0 million unsecured term loan ("Tranche A-1 Term Loan") maturing in January 2023, and a delayed draw $200.0 million unsecured term loan ("Tranche A-2 Term Loan") maturing in July 2024.
As of March 31, 2019 and December 31, 2018, we had interest rate swaps with an aggregate notional value of $100.0 million, which effectively convert the variable interest rate applicable to our Tranche A-1 Term Loan to a fixed interest rate. The interest rate swaps mature in January 2023, concurrent with the maturity of our Tranche A-1 Term Loan. As of March 31, 2019, we had an interest rate swap with a notional value of $64.0 million, which effectively converts the variable interest rate applicable to a portion of the outstanding balance of our Tranche A-2 Term Loan to a fixed interest rate. The interest rate swap matures in September 2020.
The following is a summary of amounts outstanding under the credit facility:
 
 
Interest Rate (1)
 
March 31, 2019
 
December 31, 2018
 
 
 
 
(In thousands)
Revolving credit facility (2) (3) (4)
 
3.59%
 
$

 
$

 
 
 
 
 
 
 
Tranche A-1 Term Loan (5)
 
3.32%
 
$
100,000

 
$
100,000

Tranche A-2 Term Loan (5)
 
4.39%
 
200,000

 
200,000

Unsecured term loans
 
 
 
300,000

 
300,000

Unamortized deferred financing costs, net
 
 
 
(2,723
)
 
(2,871
)
Unsecured term loans, net
 
 
 
$
297,277

 
$
297,129

__________________________ 
(1) 
Interest rate as of March 31, 2019.
(2) 
As of March 31, 2019 and December 31, 2018, letters of credit with an aggregate face amount of $5.8 million and $5.7 million were provided under our revolving credit facility.

18



(3) 
As of March 31, 2019 and December 31, 2018, net deferred financing costs related to our revolving credit facility totaling $4.3 million and $4.8 million were included in "Other assets, net."
(4) 
The interest rate for the revolving credit facility excludes a 0.15% facility fee.
(5) 
The interest rate includes the impact of interest rate swap agreements.

8.    Other Liabilities, Net
The following is a summary of other liabilities, net:
 
March 31, 2019
 
December 31, 2018
 
(In thousands)
Lease intangible liabilities
$
40,179

 
$
40,179

Accumulated amortization
(26,628
)
 
(26,081
)
Lease intangible liabilities, net
13,551

 
14,098

Prepaid rent
20,345

 
21,998

Lease assumption liabilities
24,771

 
23,105

Lease incentive liabilities
17,528

 
9,317

Lease liabilities related to operating right-of-use assets (1)
36,866

 

Finance lease liability
15,671

 
15,704

Security deposits
17,505

 
17,696

Environmental liabilities
17,898

 
17,898

Ground lease deferred rent payable (2)

 
3,510

Net deferred tax liability
6,012

 
6,878

Dividends payable

 
45,193

Other
4,287

 
6,209

Total other liabilities, net
$
174,434

 
$
181,606

__________________________ 
(1) 
Related to our adoption of Topic 842 on January 1, 2019. See Note 2 for additional information.
(2) 
In connection with our adoption of Topic 842 on January 1, 2019, the ground lease deferred rent payable balance as of December 31, 2018 was included in the initial determination of the operating right-of-use assets. See Note 2 for additional information.

9.    Redeemable Noncontrolling Interests
JBG SMITH LP
A portion of the OP Units held by persons other than JBG SMITH became redeemable for cash or, at our election, our common shares beginning on August 1, 2018, subject to certain limitations. During the three months ended March 31, 2019, unitholders redeemed 1.7 million OP Units, which we elected to redeem for an equivalent number of our common shares. As of March 31, 2019, outstanding OP Units totaled 15.2 million, representing an 11.0% ownership 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.
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 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 March 31, 2019, we held a 90.2% ownership interest in the real estate venture.

19



Below is a summary of the activity of redeemable noncontrolling interests:
 
Three Months Ended March 31,
 
2019
 
2018
 
JBG SMITH LP
 
Consolidated Real Estate Venture
 
Total
 
JBG SMITH LP
 
Consolidated Real Estate Venture
 
Total
 
(In thousands)
Balance as of beginning of period
$
552,159

 
$
5,981

 
$
558,140

 
$
603,717

 
$
5,412

 
$
609,129

OP Unit redemptions
(57,001
)
 

 
(57,001
)
 

 

 

Long-term incentive partnership
   units ("LTIP Units") issued in lieu
   of cash bonuses (1)
3,135

 

 
3,135

 

 

 

Net income (loss) attributable to
  redeemable noncontrolling
  interests
3,386

 
1

 
3,387

 
(592
)
 
(2
)
 
(594
)
Other comprehensive income
(1,383
)
 

 
(1,383
)
 
1,876

 

 
1,876

Share-based compensation expense
16,273

 

 
16,273

 
12,942

 

 
12,942

Adjustment to redemption value
62,212

 

 
62,212

 
(17,849
)
 

 
(17,849
)
Balance as of end of period
$
578,781

 
$
5,982

 
$
584,763

 
$
600,094

 
$
5,410

 
$
605,504

__________________________ 
(1) 
See Note 10 for additional information.

10.     Share-Based Payments and Employee Benefits

LTIP and Time-Based LTIP Units
During the three months ended March 31, 2019, we granted 350,759 LTIP Units with time-based vesting requirements ("Time-Based LTIP Units") to management and other employees with a weighted average grant-date fair value of $34.24 per unit that vest primarily over four years, 25.0% per year, subject to continued employment. Compensation expense for these units is being recognized primarily over a four-year period. The aggregate grant-date fair value of these Time-Based LTIP Units granted during the three months ended March 31, 2019 was $12.0 million valued using Monte Carlo simulations.
Additionally, during the three months ended March 31, 2019, we granted 91,636 of fully vested LTIP Units, with a grant-date fair value of $34.21 per unit, to certain executives who elected to receive all or a portion of any cash bonus paid in 2019, related to 2018 service, as LTIP Units. Compensation expense totaling $3.1 million for these LTIP Units was recognized in 2018.

The significant assumptions used to value LTIP and Time-Based LTIP Units included:
Expected volatility
22.0% to 24.0%

Risk-free interest rate
2.6
%
Post-grant restriction periods
2 years

Performance-Based LTIP Units
During the three months ended March 31, 2019, we granted 477,640 LTIP Units with performance-based vesting requirements ("Performance-Based LTIP Units") to management and other employees with a weighted average grant-date fair value of $19.49 per unit. Our Performance-Based LTIP Units have a three-year performance period. 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.
The aggregate grant-date fair value of the Performance-Based LTIP Units granted during the three months ended March 31, 2019 was $9.3 million valued using Monte Carlo simulations. Compensation expense for the Performance-Based LTIP Units is being recognized over a four-year period. The significant assumptions used to value the Performance-Based LTIP Units included:

20



 
 
Expected volatility
22.0% to 23.0%
Dividend yield
2.4% to 2.5%
Risk-free interest rate
2.5% to 2.6%

Share-Based Compensation Expense

Share-based compensation expense is summarized as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In thousands)
Time-Based LTIP Units
$
2,934

 
$
2,357

Performance-Based LTIP Units
2,208

 
1,157

Other equity awards (1)
1,059

 
784

Share-based compensation expense - other 
6,201

 
4,298

Formation Awards
1,660

 
1,578

OP Units (2)
7,931

 
7,781

LTIP Units (2)
108

 
69

Special Performance-Based LTIP Units
644

 

Special Time-Based LTIP Units
788

 

 Share-based compensation related to Formation Transaction and
   special equity awards (3)
11,131

 
9,428

Total share-based compensation expense
17,332

 
13,726

Less amount capitalized
(743
)
 
(627
)
Share-based compensation expense
$
16,589

 
$
13,099


______________________________________________ 
(1) 
Includes compensation expense for certain executives who have elected to receive all or a portion of any cash bonus that may be paid in future periods related to past service in the form of fully vested LTIP Units and expense related to our employee share purchase plan.
(2) 
Represents share-based compensation expense for LTIP Units and OP Units subject to post-Combination employment obligations.
(3) 
Included in "General and administrative expense: Share-based compensation related to Formation Transaction and special equity awards" in the accompanying statements of operations.

As of March 31, 2019, we had $123.6 million of total unrecognized compensation expense related to unvested share-based payment arrangements (unvested OP Units, Formation Awards, Time-Based LTIP Units, Special Time-Based LTIP Units, Performance-Based LTIP Units and Special Performance-Based LTIP Units). This expense is expected to be recognized over a weighted average period of 2.7 years.

11.     Interest Expense

The following is a summary of interest expense included in the statements of operations:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In thousands)
Interest expense
$
22,877

 
$
23,675

Amortization of deferred financing costs
1,164

 
1,217

Net unrealized loss (gain) on derivative financial instruments
not designated as cash flow hedges
48

 
(1,119
)
Capitalized interest
(6,915
)
 
(4,516
)
Interest expense
$
17,174

 
$
19,257


21




12.     Earnings (Loss) Per Common Share
The following summarizes the calculation of basic and diluted earnings (loss) per common share and provides a reconciliation of the amounts of net income (loss) attributable to common shareholders used in calculating basic and diluted earnings (loss) per common share:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In thousands, except per share amounts)
Net income (loss)
$
28,248

 
$
(4,786
)
Net (income) loss attributable to redeemable noncontrolling
interests
(3,387
)
 
594

Net loss attributable to noncontrolling interests

 
2

Net income (loss) attributable to common shareholders
$
24,861

 
$
(4,190
)
 
 
 
 
Weighted average number of common shares outstanding — basic
122,573

 
117,955

Effect of dilutive securities
850

 

Weighted average number of common shares outstanding — diluted
123,423

 
117,955

 
 
 
 
Earnings (loss) per common share:
 
 
 
Basic
$
0.20

 
$
(0.04
)
Diluted
$
0.20

 
$
(0.04
)

The effect of the redemption of OP Units and Time-Based LTIP Units that were outstanding as of March 31, 2019 and 2018 is excluded in the computation of 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 OP Units and Time-Based LTIP Units, which are held by noncontrolling interests, are attributed gains and losses at an identical proportion to the common shareholders, the gains attributable and their equivalent weighted average OP Unit and Time-Based LTIP Unit impact are excluded from net income (loss) available to common shareholders and from the weighted average number of common shares outstanding in calculating diluted earnings per common share. Performance-Based LTIP Units, Special Performance-Based LTIP Units and Formation Awards, which totaled 3.9 million and 3.8 million for the three months ended March 31, 2019 and 2018, 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 March 31, 2019 and December 31, 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 (loss) gain on our derivative financial instruments designated as cash flow hedges was $(3.2) million and $8.3 million as of March 31, 2019 and December 31, 2018 and was recorded in "Accumulated other comprehensive income" in the balance sheet, of which a portion was reclassified to "Redeemable noncontrolling interests" as of March 31, 2019 and December 31, 2018. Within the next 12 months, we expect to reclassify $1.8 million as a decrease to interest expense. The net unrealized (loss) gain on our derivative financial instruments not designated as cash flow hedges was $(48,000) and $1.1 million for the three months ended March 31, 2019 and 2018 and is recorded in "Interest expense" in our statements of operations and "Net unrealized gain on derivative financial instruments not designated as cash flow hedges" in our statements of cash flows.

22



Topic 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
March 31, 2019
(In thousands)
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
 
 
Classified as assets in "Other assets, net"
$
1,892

 
$

 
$
1,892

 
$

Classified as liabilities in "Other liabilities, net"
4,099

 

 
4,099

 

Derivative financial instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
Classified as assets in "Other assets, net"
2

 

 
2

 

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
 
 
Classified as assets in "Other assets, net"
$
7,913

 
$

 
$
7,913

 
$

Classified as liabilities in "Other liabilities, net"
1,723

 

 
1,723

 

Derivative financial instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
Classified as assets in "Other assets, net"
2,470

 

 
2,470

 

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 March 31, 2019 and December 31, 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 March 31, 2019 and December 31, 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 March 31, 2019 and December 31, 2018, 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:
 
March 31, 2019
 
December 31, 2018
 
     Carrying
      Amount (1)
 
Fair Value
 
     Carrying
      Amount (1)
 
Fair Value
 
(In thousands)
Financial liabilities:
 
 
 
 
 
 
 
Mortgages payable
$
1,841,586

 
$
1,873,323

 
$
1,844,652

 
$
1,870,078

Unsecured term loans
300,000

 
304,583

 
300,000

 
300,727


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

The fair value of the mortgages payable 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. As of December 31, 2018, we redefined our reportable segments to be aligned with our new 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 (commercial, multifamily, and third-party asset management and real estate services) based on the economic characteristics and nature of our assets and services. To conform to the current period presentation, we have reclassified the prior period segment financial data for certain properties that had been classified as part of other to the commercial and multifamily segments and the elimination of intersegment activity has been included as part of other for the three months ended March 31, 2018. The commercial segment was previously referred to as the office segment.

The CODM measures and evaluates the performance of our operating segments, with the exception of the third-party asset management and real estate services business, based on the net operating income ("NOI") of properties within each segment. NOI includes property rental revenue and other property operating income, and deducts property operating expenses and real estate taxes.

With respect to the third-party asset management and 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 $36.8 million and $38.6 million and are classified in "Other assets, net" in the balance sheets as of March 31, 2019 and December 31, 2018. Consistent with internal reporting presented to our CODM and our definition of NOI, the third-party asset management and 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 March 31,
 
2019
 
2018
 
(In thousands)
Net income (loss) attributable to common shareholders
$
24,861

 
$
(4,190
)
Add:
 
 
 
Depreciation and amortization expense
48,719

 
49,160

General and administrative expense:
 
 
 
Corporate and other
12,314

 
8,414

Third-party real estate services
28,066

 
22,609

Share-based compensation related to Formation Transaction and
special equity awards
11,131

 
9,428

Transaction and other costs
4,895

 
4,221

Interest expense
17,174

 
19,257

Income tax benefit
(1,172
)
 
(908
)
Net income (loss) attributable to redeemable noncontrolling interests
3,387

 
(594
)
Less:
 
 
 
Third-party real estate services, including reimbursements
27,691

 
24,330

Other income (excluding parking income of $6,455 and $6,363 in 2019 and 2018)
1,640

 
1,116

Income (loss) from unconsolidated real estate ventures, net
3,601

 
(1,902
)
Interest and other income, net
951

 
573

Gain on sale of real estate
39,033

 
455

Net loss attributable to noncontrolling interests

 
2

Consolidated NOI
$
76,459

 
$
82,823

 
Below is a summary of NOI by segment. Items classified in the Other column include future development assets, corporate entities and the elimination of intersegment activity.
 
Three Months Ended March 31, 2019
 
Commercial
 
Multifamily
 
Other
 
Total
 
(In thousands)
Property rentals revenue
$
96,247

 
$
28,249

 
$
(5,083
)
 
$
119,413

Other property operating income
6,375

 
80

 

 
6,455

Total property revenue
102,622

 
28,329

 
(5,083
)
 
125,868

Property expense:
 
 
 
 
 

 
Property operating
30,481

 
7,967

 
(6,274
)
 
32,174

Real estate taxes
12,513

 
3,548

 
1,174

 
17,235

Total property expense
42,994

 
11,515

 
(5,100
)
 
49,409

Consolidated NOI
$
59,628

 
$
16,814

 
$
17

 
$
76,459



25



 
Three Months Ended March 31, 2018
 
Commercial
 
Multifamily
 
Other
 
Total
 
(In thousands)
Property rentals revenue
$
105,564

 
$
25,837

 
$
(173
)
 
$
131,228

Other property operating income
6,244

 
90

 
29

 
6,363

Total property revenue
111,808

 
25,927

 
(144
)
 
137,591

Property expense:
 
 
 
 
 
 
 
Property operating
25,837

 
7,287

 
2,034

 
35,158

Real estate taxes
14,781

 
3,547

 
1,282

 
19,610

Total property expense
40,618

 
10,834

 
3,316

 
54,768

Consolidated NOI
$
71,190

 
$
15,093

 
$
(3,460
)
 
$
82,823

The following is a summary of certain balance sheet data by segment:
 
Commercial
 
Multifamily
 
Other
 
Total
March 31, 2019
(In thousands)
Real estate, at cost
$
3,650,134

 
$
1,702,845

 
$
343,912

 
$
5,696,891

Investments in and advances to unconsolidated real
  estate ventures
175,511

 
109,850

 
36,005

 
321,366

Total assets (1)
3,695,905

 
1,571,388

 
757,401

 
6,024,694

December 31, 2018
 
 
 
 
 
 
 
Real estate, at cost
$
3,634,472

 
$
1,656,974

 
$
501,288

 
$
5,792,734

Investments in and advances to unconsolidated real
  estate ventures
177,173

 
109,232

 
36,473

 
322,878

Total assets (1)
3,707,255

 
1,528,177

 
761,853

 
5,997,285

__________________________ 
(1) 
Includes assets held for sale. See Note 3 for additional information.

15.    Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $200.0 million per occurrence and in the aggregate, and property and rental value insurance coverage with limits of $2.0 billion per occurrence, with sub-limits for certain perils such as floods and earthquakes on each of our properties. We also maintain coverage, through our wholly owned captive insurance subsidiary, for both terrorist acts and for nuclear, biological, chemical or radiological terrorism events with limits of $2.0 billion per occurrence. These policies are partially reinsured by third-party insurance providers.
We will continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. We cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for deductibles and losses in excess of the insurance coverage, which could be material.
Our debt, consisting of mortgage loans secured by our properties, revolving credit facility and unsecured term loans contain customary covenants requiring adequate insurance coverage. Although we believe that we currently have adequate insurance coverage, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. If lenders insist on greater coverage than we are able to obtain, it could adversely affect the ability to finance or refinance our properties.
Construction Commitments
As of March 31, 2019, we have construction in progress that will require an additional $456.9 million to complete ($385.9 million related to our consolidated entities and $71.1 million related to our unconsolidated real estate ventures at our share), based on our current plans and estimates, which we anticipate will be primarily expended over the next two to three years. These capital expenditures are generally due as the work is performed, and we expect to finance them with debt proceeds, proceeds from asset recapitalizations and sales, issuance and sale of equity securities and available cash.

26



Environmental Matters
Each of our properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination that we believe would have a material adverse effect on our overall business, financial condition or results of operations, or that have not been anticipated and remediated during site redevelopment as required by law. Nevertheless, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites or changes in cleanup requirements would not result in significant cost to us. Environmental liabilities total $17.9 million as of March 31, 2019 and December 31, 2018, and primarily relate to a liability to remediate pre-existing environmental matters at Potomac Yard Land Bay H, which was acquired in December 2018.
Other
There are various legal actions against us in the ordinary course of business. In our opinion, the outcome of such matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
From time to time, we (or ventures in which we have an ownership interest) have agreed, and may in the future agree with respect to unconsolidated real estate ventures, to (1) guarantee portions of the principal, interest and other amounts in connection with their borrowings, (2) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) in connection with their borrowings and (3) provide guarantees to lenders and other third parties for the completion of development projects. We customarily have agreements with our outside partners whereby the partners agree to reimburse the real estate venture or us for their share of any payments made under certain of these guarantees. Amounts that may be required to be paid in future periods in relation to budget overruns or operating losses that are also included in some of our guarantees are not estimable. Guarantees (excluding environmental) terminate either upon the satisfaction of specified circumstances or repayment of the underlying debt. At times, we have agreements with our outside partners whereby we agree to reimburse our partner for their share of any payments made by them under certain guarantees. As of March 31, 2019, we had no principal payment guarantees for our unconsolidated real estate ventures.
We also may guarantee portions of the principal, interest and other amounts in connection with the borrowings of our consolidated entities. As of March 31, 2019, the aggregate amount of principal payment guarantees was $8.3 million for our consolidated entities.
As of March 31, 2019, we expect to fund additional capital to certain of our unconsolidated investments totaling approximately $48.6 million.
In connection with the Formation Transaction, we have an agreement with Vornado regarding tax matters (the "Tax Matters Agreement") that provides special rules that allocate tax liabilities if the distribution of JBG SMITH shares by Vornado, together with certain related transactions, is not tax-free. Under the Tax Matters Agreement, we may be required to indemnify Vornado against any taxes and related amounts and costs resulting from a violation by us of the Tax Matters Agreement, or from the taking of certain restricted actions by us.
16.
Transactions with Vornado and Related Parties
Transactions with Vornado
In connection with the Formation Transaction, we entered into an agreement with Vornado under which Vornado provided operational support for an initial period of up to two years. Such support services have been substantially completed. These services included information technology, financial reporting and payroll services. The charges for these services were based on an hourly or per transaction fee arrangement including reimbursement for overhead and out-of-pocket expenses totaling $1.2 million for the three months ended March 31, 2018.
Pursuant to agreements, we are providing Vornado with leasing and property management services for certain of its assets that were not part of the Separation. The total revenue related to these services for the three months ended March 31, 2019 and 2018 were $488,000 and $600,000. We believe that the terms of these agreements are comparable to those that would have been negotiated based on market rates.
We have agreements that are terminable on the second anniversary of the Combination with Building Maintenance Services ("BMS"), a wholly owned subsidiary of Vornado, to supervise cleaning, engineering and security services at our properties. We paid BMS $5.2 million and $4.0 million during the three months ended March 31, 2019 and 2018, which are included in "Property operating expenses" in our statements of operations.

27



In connection with the Formation Transaction, we have a Tax Matters Agreement with Vornado. See Note 15 for additional information.
We entered into a consulting agreement with Mitchell Schear, a member of our Board of Trustees and formerly the president of Vornado’s Washington, D.C. segment. The consulting agreement expired on December 31, 2017 and provided for the payment of consulting fees and expenses at the rate of $169,400 per month for the 24 months following the Separation, including after the expiration of the consulting agreement. The amount due under this consulting agreement of $4.1 million was expensed in connection with the Combination. As of March 31, 2019, the remaining liability is $432,000.
Transactions with JBG Legacy Funds
Our third-party asset management and real estate services business provides fee-based real estate services to third parties and the JBG Legacy Funds. We provide services for the benefit of the JBG Legacy Funds that own interests in the assets retained by the JBG Legacy Funds. In connection with the contribution of the JBG Assets to us, it was determined that the general partner and managing member interests in the JBG Legacy Funds that were held by former JBG executives (and who became members of our management team and/or Board of Trustees) would not be transferred to us and remain under the control of these individuals. In addition, certain members of our senior management and Board of Trustees have an ownership interest in the JBG Legacy Funds and own carried interests in each fund and in certain of our real estate ventures that entitles them to receive additional compensation if the fund or real estate venture achieves certain return thresholds. This third-party real estate services revenue, including reimbursements, from these JBG Legacy Funds for the three months ended March 31, 2019 and 2018 was $8.4 million and $8.6 million. As of March 31, 2019 and December 31, 2018, we had receivables from the JBG Legacy Funds totaling $3.9 million and $3.6 million for such services.
We rent our corporate offices from an unconsolidated real estate venture and incurred expenses totaling $1.2 million during the three months ended March 31, 2019 and 2018, which is recorded in "General and administrative expense: Corporate and other" in our statements of operations.

17.
Subsequent Event

In April 2019, we closed an underwritten public offering of 11.5 million common shares (including 1.5 million common shares related to the exercise of the underwriters' option to cover overallotments) at $42.00 per share, which generated net proceeds, after deducting the underwriting discounts and commissions and other estimated offering expenses, of approximately $472.3 million. We intend to use the net proceeds to fund development opportunities and for general corporate purposes.

In April 2019, we repaid the mortgage debt totaling approximately $293.6 million at The Bartlett and Fort Totten Square.
In May 2019, our Board of Trustees declared a quarterly dividend of $0.225 per common share, payable on May 24, 2019 to shareholders of record on May 13, 2019.





28


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as "approximates," "believes," "expects," "anticipates," "estimates," "intends," "plans," "would," "may" or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Organization and Basis of Presentation

JBG SMITH Properties ("JBG SMITH") was organized as a Maryland real estate investment trust ("REIT") on October 27, 2016 for the purpose of receiving, via the spin-off on July 17, 2017 (the "Separation"), substantially all of the assets and liabilities of Vornado Realty Trust's ("Vornado") Washington, D.C. segment. 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." JBG SMITH is hereinafter referred to as "we," "us," "our" or similar terms. 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.
References to the financial statements refer to our condensed consolidated financial statements as of March 31, 2019 and December 31, 2018, and for the three months ended March 31, 2019 and 2018. References to the balance sheets refer to our condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018. References to the statements of operations refer to our condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018. References to the statements of cash flows refer to our condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018.
The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). 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 periods. Actual results could differ from these estimates.
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. 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.
We aggregate our operating segments into three reportable segments (commercial, multifamily, and third-party asset management and real estate services) based on the economic characteristics and nature of our assets and services.
Our revenues and expenses are, to some extent, subject to seasonality during the year, which impacts quarterly net earnings, cash flows and funds from operations that affects the sequential comparison of our results in individual quarters over time. We have historically experienced higher utility costs in the first and third quarters of the year.
We compete with a large number of property owners and developers. Our success depends upon, among other factors, trends affecting national and local economies, the financial condition and operating results of current and prospective tenants, the availability and cost of capital, interest rates, construction and renovation costs, taxes, governmental regulations and legislation,

29


population trends, zoning laws, and our ability to lease, sublease or sell our assets at profitable levels. Our success is also subject to our ability to refinance existing debt on acceptable terms as it comes due.
Overview
We own and operate a portfolio of high-quality commercial 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.
Amazon.com, Inc. ("Amazon") has selected sites that we own in National Landing in North Virginia as the location of an additional headquarters. Amazon executed three initial leases totaling 537,000 square feet at three of our existing office buildings in National Landing. The leases encompass approximately 88,000 square feet at 241 18th Street South, approximately 191,000 square feet at 1800 South Bell Street, and approximately 258,000 square feet at 1770 Crystal Drive. We expect Amazon to begin moving into 241 18th Street South and 1800 South Bell in 2019, and 1770 Crystal Drive by the end of 2020. In April 2019, we executed an agreement with Amazon to lease an additional approximately 48,000 square feet of office space at 2345 Crystal Drive in National Landing.

We have also executed purchase and sale agreements with Amazon for two of our National Landing development sites, Pen Place and Mets 6, 7, and 8, which will serve as the initial phase of new construction associated with Amazon’s new headquarters at National Landing. Subject to customary closing conditions, Amazon is expected to pay approximately $293.9 million for the sites, or $72.00 per square foot based on their combined estimated potential development density of up to approximately 4.1 million square feet. We expect to close on the Mets land sale as early as 2019 and on Pen Place as early as 2020.

In February 2019, the Commonwealth of Virginia enacted an incentives bill (the “Virginia Government Incentive Package”), which provides tax incentives to Amazon if it creates up to 37,850 full-time jobs with average salaries of $150,000 or higher in National Landing. As part of the incentive package, we expect $1.8 billion in infrastructure and education investments led by state and local governments.
During 2018, we sold or recapitalized approximately $875.0 million of assets that were identified for sale because of their relatively low expected return potential and their high tax basis, enabling better capital retention. The assets sold generated approximately $30.0 million of net operating income ("NOI") in 2018. Subject to market conditions, we have set a goal to sell or recapitalize $400.0 million of assets during 2019. Also, consistent with our approach to capital recycling, in the competitive Washington, D.C. office leasing market, we are focused on retaining tenants and avoiding the costly concessions associated with backfilling vacancy. We believe this approach produces a higher comparable return while better positioning assets for potential sale or recapitalization, and simultaneously de-risking them at a time of greater supply and cyclical downturn risk. We expect the lease renewals we executed in 2017 and 2018 will further reduce our NOI in 2019, primarily due to free rent associated with these early renewals. As the free rent in these leases burns off, and our under construction assets deliver, we expect our NOI to grow and surpass 2018 levels by the second half of 2020.
As of March 31, 2019, our Operating Portfolio consists of 61 operating assets comprising 45 commercial assets totaling approximately 12.5 million square feet (10.9 million square feet at our share) and 16 multifamily assets totaling 6,315 units (4,531 units at our share). Additionally, we have (i) nine assets under construction comprising five commercial assets totaling approximately 1.2 million square feet (927,000 square feet at our share) and four multifamily assets totaling 1,476 units (1,298 units at our share); and (ii) 40 future development assets totaling approximately 22.1 million square feet (18.7 million square feet at our share) of estimated potential development density.
Key highlights of operating results for the three months ended March 31, 2019 included:
net income attributable to common shareholders of $24.9 million, or $0.20 per diluted common share, for the three months ended March 31, 2019 as compared to a net loss of $4.2 million, or $0.04 per diluted common share, for the three months ended March 31, 2018. Net income attributable to common shareholders for the three months ended March 31, 2019 included a gain on sale of real estate of $39.0 million;
operating commercial portfolio leased and occupied percentages at our share of 90.2% and 85.6% as of March 31, 2019 compared to 89.6% and 85.5% as of December 31, 2018 and 87.9% and 87.0% as of March 31, 2018;
operating multifamily portfolio leased and occupied percentages at our share of 97.0% and 94.8% as of March 31, 2019 compared to 95.7% and 93.9% as of December 31, 2018 and 96.1% and 94.2% as of March 31, 2018;
the leasing of approximately 807,000 square feet, or 785,000 square feet at our share, at an initial rent (1) of $44.97 per square foot and a GAAP-basis weighted average rent per square foot (2) of $45.91 for the three months ended March 31, 2019; and

30



a decrease in same store (3) net operating income of 10.1% to $73.6 million for the three months ended March 31, 2019 as compared to $81.9 million for the three months ended March 31, 2018.
_________________
(1) 
Represents the cash basis weighted average starting rent per square foot, which excludes free rent and fixed escalations.
(2) 
Represents the weighted average rent per square foot that is recognized over the term of the respective leases, including the effect of free rent and fixed escalations.
(3) 
Includes the results of the properties that are owned, operated and in service for the entirety of both periods being compared except for properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
Additionally, investing and financing activity during the three months ended March 31, 2019 included:
the sale of Commerce Executive/Commerce Metro Land, a commercial asset located in Reston, Virginia, for the gross sales price of $115.0 million;
the execution of agreements for the sale of Pen Place and Mets 6, 7 and 8, development assets having an estimated aggregate potential development density of up to approximately 4.1 million square feet, with Amazon for its additional headquarters, for $293.9 million;
the execution of a contract to purchase a stabilized multifamily asset located in Washington, D.C., which we intend to use as a replacement property in a 1031 like-kind exchange for the expected proceeds from the sale of the Mets 6, 7 and 8 land parcels to Amazon, which is expected to close later this year;
the redemption of 1.7 million common limited partnership units ("OP Units") for an equivalent number of our common shares;
the payment of $39.3 million in dividends that were declared in December 2018; and
the investment of $68.7 million in development costs, construction in progress and real estate additions.
Activity subsequent to March 31, 2019 included:
the closing of an underwritten public offering of 11.5 million common shares (including 1.5 million common shares related to the exercise of the underwriters' option to cover overallotments) at $42.00 per share, which generated net proceeds, after deducting the underwriting discounts and commissions and other estimated offering expenses, of approximately $472.3 million. We intend to use the net proceeds to fund development opportunities and for general corporate purposes;
the repayment of mortgage debt totaling approximately $293.6 million at The Bartlett and Fort Totten Square; and
the declaration of a quarterly dividend of $0.225 per common share, payable on May 24, 2019 to shareholders of record on May 13, 2019.

Critical Accounting Policies and Estimates

Our Annual Report on Form 10-K for the year ended December 31, 2018 contains a description of our critical accounting policies, including business combinations, real estate, investments in and advances to real estate ventures, revenue recognition and share-based compensation. There have been no significant changes to our policies during 2019, except as discussed in Note 2 to the financial statements related to our adoption of Accounting Standards Update 2016-02, Leases ("Topic 842") as of January 1, 2019.

Recent Accounting Pronouncements

See Note 2 to the financial statements for a description of recent accounting pronouncements.

31


Results of Operations
Comparison of the Three Months Ended March 31, 2019 to 2018
The following summarizes certain line items from our statements of operations that we believe are important in understanding our operations and/or those items which significantly changed in the three months ended March 31, 2019 as compared to the same period in 2018:
 
Three Months Ended March 31,
 
2019
 
2018
 
% Change
 
(In thousands)
 
 
Property rentals revenue
$
119,413

 
$
131,228

 
(9.0
)%
Third-party real estate services revenue, including reimbursements
27,691

 
24,330

 
13.8
 %
Depreciation and amortization expense
48,719

 
49,160

 
(0.9
)%
Property operating expense
32,174

 
35,158

 
(8.5
)%
Real estate taxes expense
17,235

 
19,610

 
(12.1
)%
General and administrative expense:
 
 
 
 
 
Corporate and other
12,314

 
8,414

 
46.4
 %
Third-party real estate services
28,066

 
22,609

 
24.1
 %
Share-based compensation related to Formation Transaction and
special equity awards
11,131

 
9,428

 
18.1
 %
Transaction and other costs
4,895

 
4,221

 
16.0
 %
Income (loss) from unconsolidated real estate ventures, net
3,601

 
(1,902
)
 
(289.3