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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
399077876_logoverticaltransbluea07.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
 
Chevy Chase
MD
20815
Suite 400
(Zip Code)
(Address of Principal Executive Offices)
 
Registrant's telephone number, including area code: (240) 333-3600
_______________________________                
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
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 No

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 No

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 Accelerated filer Non-accelerated filer Smaller reporting company
Emerging growth company

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes No

As of August 1, 2019, JBG SMITH Properties had 134,127,004 common shares outstanding.





JBG SMITH PROPERTIES
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2019

TABLE OF CONTENTS

 
 
 
 
Item 1.
Page
 
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2019 and December 31, 2018
 
Condensed Consolidated Statements of Operations (unaudited) for the three and six months
   ended June 30, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the
   three and six months ended June 30, 2019 and 2018
 
Condensed Consolidated Statements of Equity (unaudited) for the three and six months
   ended June 30, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months
   ended June 30, 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)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Real estate, at cost:
 
 
 
Land and improvements
$
1,227,558

 
$
1,371,874

Buildings and improvements
3,717,356

 
3,722,930

Construction in progress, including land
859,717

 
697,930

 
5,804,631

 
5,792,734

Less accumulated depreciation
(1,093,665
)
 
(1,051,875
)
Real estate, net
4,710,966

 
4,740,859

Cash and cash equivalents
280,349

 
260,553

Restricted cash
16,429

 
138,979

Tenant and other receivables, net
51,787

 
46,568

Deferred rent receivable, net
162,641

 
143,473

Investments in unconsolidated real estate ventures
319,756

 
322,878

Other assets, net
296,916

 
264,994

Assets held for sale
168,431

 
78,981

TOTAL ASSETS
$
6,007,275

 
$
5,997,285

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgages payable, net
$
1,360,467

 
$
1,838,381

Unsecured term loans, net
296,952

 
297,129

Accounts payable and accrued expenses
140,132

 
130,960

Other liabilities, net
192,638

 
181,606

Liabilities related to assets held for sale

 
3,717

Total liabilities
1,990,189

 
2,451,793

Commitments and contingencies

 

Redeemable noncontrolling interests
574,228

 
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; 134,127 and 120,937 shares issued and outstanding as of June 30, 2019 and December 31, 2018
1,342

 
1,210

Additional paid-in capital
3,644,699

 
3,155,256

Accumulated deficit
(184,373
)
 
(176,018
)
Accumulated other comprehensive income (loss)
(19,156
)
 
6,700

Total shareholders' equity of JBG SMITH Properties
3,442,512

 
2,987,148

Noncontrolling interests in consolidated subsidiaries
346

 
204

Total equity
3,442,858

 
2,987,352

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
$
6,007,275

 
$
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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
REVENUE
 
 
 
 
 
 
 
Property rentals
$
122,326

 
$
126,591

 
$
241,739

 
$
257,819

Third-party real estate services, including reimbursements
29,487

 
24,160

 
57,178

 
48,490

Other income
8,804

 
8,696

 
16,899

 
16,175

Total revenue
160,617

 
159,447

 
315,816

 
322,484

EXPENSES
 
 
 
 
 
 
 
Depreciation and amortization
45,995

 
48,117

 
94,714

 
97,277

Property operating
32,113

 
34,464

 
64,287

 
69,622

Real estate taxes
18,266

 
17,509

 
35,501

 
37,119

General and administrative:
 
 
 
 
 
 
 
Corporate and other
11,559

 
8,603

 
23,873

 
17,017

Third-party real estate services
28,710

 
21,189

 
56,776

 
43,798

Share-based compensation related to Formation Transaction and
special equity awards
9,523

 
9,097

 
20,654

 
18,525

Transaction and other costs
2,974

 
3,787

 
7,869

 
8,008

Total expenses
149,140

 
142,766

 
303,674

 
291,366

OTHER INCOME (EXPENSE)

 

 

 

Income (loss) from unconsolidated real estate ventures, net
(1,810
)
 
3,836

 
1,791

 
1,934

Interest and other income, net
2,052

 
513

 
3,003

 
1,086

Interest expense
(13,107
)
 
(18,027
)
 
(30,281
)
 
(37,284
)
Gain on sale of real estate

 
33,396

 
39,033

 
33,851

Loss on extinguishment of debt
(1,889
)
 
(4,457
)
 
(1,889
)
 
(4,457
)
Reduction of gain on bargain purchase

 
(7,606
)
 

 
(7,606
)
Total other income (expense)
(14,754
)
 
7,655

 
11,657

 
(12,476
)
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT
(3,277
)
 
24,336

 
23,799

 
18,642

Income tax (expense) benefit
(51
)
 
(313
)
 
1,121

 
595

NET INCOME (LOSS)
(3,328
)
 
24,023

 
24,920

 
19,237

Net (income) loss attributable to redeemable noncontrolling
interests
288

 
(3,574
)
 
(3,099
)
 
(2,980
)
Net loss attributable to noncontrolling interests

 
125

 

 
127

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
(3,040
)
 
$
20,574

 
$
21,821

 
$
16,384

EARNINGS (LOSS) PER COMMON SHARE:
 
 
 
 
 
 
 
Basic
$
(0.03
)
 
$
0.17

 
$
0.16

 
$
0.14

Diluted
$
(0.03
)
 
$
0.17

 
$
0.16

 
$
0.14

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING:
 
 
 
 
 
 
 
Basic
131,754

 
117,955

 
127,189

 
117,955

Diluted
131,754

 
117,955

 
127,189

 
117,955



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



4



JBG SMITH PROPERTIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
NET INCOME (LOSS)
$
(3,328
)
 
$
24,023

 
$
24,920

 
$
19,237

OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Change in fair value of derivative financial instruments
(16,256
)
 
5,215

 
(26,952
)
 
19,311

Reclassification of net (income) loss on derivative financial
   instruments from accumulated other comprehensive income into
   interest expense
(951
)
 
414

 
(1,790
)
 
1,449

Other comprehensive income (loss)
(17,207
)
 
5,629

 
(28,742
)
 
20,760

COMPREHENSIVE INCOME (LOSS)
(20,535
)
 
29,652

 
(3,822
)
 
39,997

Net (income) loss attributable to redeemable noncontrolling interests
288

 
(3,574
)
 
(3,099
)
 
(2,980
)
Other comprehensive (income) loss attributable to redeemable
   noncontrolling interests
1,503

 
(834
)
 
2,886

 
(2,710
)
Net loss attributable to noncontrolling interests

 
125

 

 
127

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO
   JBG SMITH PROPERTIES
$
(18,744
)
 
$
25,369

 
$
(4,035
)
 
$
34,434



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 APRIL 1, 2019
122,594

 
$
1,227

 
$
3,150,133

 
$
(151,157
)
 
$
(3,452
)
 
$
365

 
$
2,997,116

Net loss attributable to common
shareholders and noncontrolling interests

 

 

 
(3,040
)
 

 

 
(3,040
)
Common shares issued
11,500

 
115

 
472,665

 

 

 

 
472,780

Conversion of common limited partnership
units
 to common shares
7

 

 
316

 

 

 

 
316

Common shares issued pursuant to
   Employee Share Purchase Plan ("ESPP")
26

 

 
834

 

 

 

 
834

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

 

 

 
(30,176
)
 

 

 
(30,176
)
Distributions to noncontrolling interests

 

 

 

 

 
(19
)
 
(19
)
Redeemable noncontrolling interests
redemption value adjustment and other
comprehensive (income) loss allocation

 

 
20,751

 

 
1,503

 

 
22,254

Other comprehensive loss

 

 

 

 
(17,207
)
 

 
(17,207
)
BALANCE AS OF JUNE 30, 2019
134,127

 
$
1,342

 
$
3,644,699

 
$
(184,373
)
 
$
(19,156
)
 
$
346

 
$
3,442,858

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AS OF APRIL 1, 2018
117,955

 
$
1,180

 
$
3,080,926

 
$
(99,999
)
 
$
14,867

 
$
3,722

 
$
3,000,696

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

 

 

 
20,574

 

 
(125
)
 
20,449

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

 

 

 
(26,537
)
 

 

 
(26,537
)
Distributions to noncontrolling interests

 

 

 

 


(5
)
 
(5
)
Redeemable noncontrolling interests
redemption value adjustment and other
comprehensive (income) loss allocation

 

 
(45,732
)
 

 
(834
)


 
(46,566
)
Other comprehensive income

 

 

 

 
5,629

 

 
5,629

BALANCE AS OF JUNE 30, 2018
117,955

 
$
1,180

 
$
3,035,194

 
$
(105,962
)
 
$
19,662

 
$
3,592

 
$
2,953,666

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AS OF JANUARY 1, 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

 

 

 
21,821

 

 

 
21,821

Common shares issued
11,500

 
115

 
472,665

 

 

 

 
472,780

Conversion of common limited partnership
units
 to common shares
1,664

 
17

 
57,301

 

 

 

 
57,318

Common shares issued pursuant to ESPP
26

 

 
938

 

 

 

 
938

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

 

 

 
(30,176
)
 

 

 
(30,176
)
Distributions to noncontrolling interests

 

 

 

 

 
(31
)
 
(31
)
Contributions from noncontrolling interests

 

 

 

 

 
173

 
173

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

 

 
(41,461
)
 

 
2,886

 

 
(38,575
)
Other comprehensive loss

 

 

 

 
(28,742
)
 

 
(28,742
)
BALANCE AS OF JUNE 30, 2019
134,127

 
$
1,342

 
$
3,644,699

 
$
(184,373
)
 
$
(19,156
)
 
$
346

 
$
3,442,858

 
 
 
 
 
 
 
 
 
 
 
 
 
 

6



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, 2018
117,955

 
$
1,180

 
$
3,063,625

 
$
(95,809
)
 
$
1,612

 
$
4,206

 
$
2,974,814

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

 

 

 
16,384

 

 
(127
)
 
16,257

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

 

 

 
(26,537
)
 

 

 
(26,537
)
Distributions to noncontrolling interests

 

 

 

 


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

 

 
(27,883
)
 

 
(2,710
)


 
(30,593
)
Other comprehensive income

 

 

 

 
20,760

 

 
20,760

Other

 

 
(548
)
 

 

 

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

 
$
1,180

 
$
3,035,194

 
$
(105,962
)
 
$
19,662

 
$
3,592

 
$
2,953,666


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

7



JBG SMITH PROPERTIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2019
 
2018
 OPERATING ACTIVITIES:
 
 
 
 Net income
$
24,920

 
$
19,237

 Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 Share-based compensation expense
32,114

 
27,276

 Depreciation and amortization, including amortization of debt issuance costs
97,053

 
99,312

 Deferred rent
(18,342
)
 
(6,265
)
 Income from unconsolidated real estate ventures, net
(1,791
)
 
(1,934
)
 Amortization of above- and below-market lease intangibles, net
(272
)
 
143

 Amortization of lease incentives
3,789

 
3,148

 Reduction of gain on bargain purchase

 
7,606

 Loss on extinguishment of debt
1,889

 
4,457

 Gain on sale of real estate
(39,033
)
 
(33,851
)
 Net unrealized loss (gain) on derivative financial instruments not designated as cash flow hedges
48

 
(1,551
)
 Losses on operating lease receivables
497

 
1,565

 Return on capital from unconsolidated real estate ventures
1,493

 
5,168

 Other non-cash items
271

 
829

 Changes in operating assets and liabilities:
 
 
 
 Tenant and other receivables
(6,232
)
 
5,877

 Other assets, net
(2,940
)
 
(5,263
)
 Accounts payable and accrued expenses
(28,513
)
 
(30,213
)
 Other liabilities, net
(12,168
)
 
(1,996
)
 Net cash provided by operating activities
52,783

 
93,545

 INVESTING ACTIVITIES:
 
 
 
Development costs, construction in progress and real estate additions
(181,007
)
 
(165,718
)
Deposits for real estate acquisitions
(8,525
)
 

Proceeds from sale of real estate
117,676

 
232,882

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

 
(386
)
Distributions of capital from unconsolidated real estate ventures
7,557

 
1,350

Investments in unconsolidated real estate ventures
(4,409
)
 
(16,167
)
Other

 
(665
)
 Net cash (used in) provided by investing activities
(68,708
)
 
51,296

 FINANCING ACTIVITIES:
 
 
 
Acquisition of ownership interest in consolidated real estate venture

 
(548
)
Finance lease payments
(66
)
 
(52
)
Borrowings under mortgages payable

 
41,344

Borrowings under revolving credit facility

 
35,000

Borrowings under unsecured term loans

 
50,000

Repayments of mortgages payable
(480,674
)
 
(170,021
)
Repayments of revolving credit facility

 
(115,022
)
Debt issuance costs
(515
)
 

Proceeds from the issuance of common stock, net of issuance costs
473,527

 

Dividends paid to common shareholders
(69,473
)
 
(53,077
)
Distributions to redeemable noncontrolling interests
(9,734
)
 
(9,214
)
Contributions from noncontrolling interests
125

 

Distributions to noncontrolling interests
(19
)
 
(120
)
 Net cash used in financing activities
(86,829
)
 
(221,710
)
 Net decrease in cash and cash equivalents and restricted cash
(102,754
)
 
(76,869
)
 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
$
296,778

 
$
261,688

 
 
 
 

8



JBG SMITH PROPERTIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 (In thousands)
 
Six Months Ended June 30,
 
2019
 
2018
 
 
 
 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AS OF END OF THE PERIOD:
 
 
 
Cash and cash equivalents
$
280,349

 
$
239,440

Restricted cash
16,429

 
22,248

Cash and cash equivalents and restricted cash
$
296,778

 
$
261,688

 
 
 
 
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION: 
 
 
 
 Cash paid for interest (net of capitalized interest of $14,953 and $9,182 in 2019 and 2018)
$
29,179

 
$
31,741

Accrued capital expenditures included in accounts payable and accrued expenses
89,048

 
60,735

Write-off of fully depreciated assets
26,974

 
10,973

Deconsolidation of 1900 N Street

 
95,923

Conversion of common limited partnership units to common shares
57,318

 

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
3,068

 



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



9



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 June 30, 2019, we, as its sole general partner, controlled JBG SMITH LP and owned 89.8% 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 June 30, 2019, our Operating Portfolio consists of 62 operating assets comprising 46 commercial assets totaling approximately 12.8 million square feet (11.1 million square feet at our share) and 16 multifamily assets totaling 6,321 units (4,537 units at our share). Additionally, we have (i) eight assets under construction comprising four commercial assets totaling approximately 943,000 square feet (821,000 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 21.9 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 and six months ended June 30, 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 June 30, 2019 and December 31, 2018, and for the three and six months ended June 30, 2019 and 2018. References to the balance sheets refer to our condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018. References to the statements of operations refer to our condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018. References to the statements of comprehensive income (loss) refer to our condensed consolidated statements of comprehensive income (loss)

10



for the three and six months ended June 30, 2019 and 2018. References to the statements of cash flows refer to our condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation as follows:
Reclassification of parking income totaling $6.6 million and $13.0 million previously included in "Property rentals" for the three and six months ended June 30, 2018 to "Other income" in the statements of operations.
Reclassification of tenant reimbursements totaling $8.0 million and $18.9 million for the three and six months ended June 30, 2018 to "Property rentals" in the statements of operations.
Reclassification of $4.0 million and $8.3 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 and six months ended June 30, 2018 to "Property operating expenses" in the statements 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, which tenants agree to use and control. The right to control our real estate conveys to our tenants 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 whether 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 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 estimated losses resulting from the inability of tenants to make required payments under lease agreements. Any changes to the provision for lease revenue determined to be not probable of collection are included in "Property rentals" in our statements 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 includes property and asset management fees and transactional fees for leasing, acquisition, development and

11



construction, financing, and legal services. 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 with Customers, ("Topic 606").
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 not the Hindsight expedient. The Comparatives Under 840 expedient allows us not to 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 resulted in:
(i) the inclusion of tenant reimbursements in "Property rentals" in our statements of operations. Such amounts were previously separately presented as "Tenant reimbursements" in the statements of operations;
(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 $37.9 million of lease liabilities, $3.5 million of ground lease deferred rent payable reclassified from "Other liabilities, net" and $767,000 of identified net intangible assets and $140,000 of prepaid expenses both reclassified from "Other assets, net;"
(iii) the inclusion as a deduction to revenue, as of January 1, 2019, of the impact of previously recognized revenue deemed improbable of collection. Such amounts were previously recognized within "Property operating expense" in the statements of operations; and
(iv) the change, as of January 1, 2019, in our capitalization policy for direct leasing costs to include only incremental costs associated with successful leasing arrangements, which would not have been incurred if the leasing arrangements 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" in the statements of operations.
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. The reimbursement of real estate taxes, insurance and maintenance costs, which vary each period, are non-lease components that are not the predominant activity within the contract. We have elected a practical expedient which allows us to combine certain lease and non-lease components of our operating leases. Non-lease components 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.

12



The following is a summary of revenue from our non-cancellable leases included in the statements of operations:
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
(In thousands)
Property rentals:
 
 
 
Fixed
$
114,140

 
$
227,730

Variable
8,186

 
14,009

Total
$
122,326

 
$
241,739



As of June 30, 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)
 
$
186,405

2020
 
346,437

2021
 
300,307

2022
 
269,999

2023
 
229,962

2024
 
202,124

Thereafter
 
1,065,130


______________
(1) 
Amount is for the remainder of 2019.
As of December 31, 2018, future base rental revenue under our non-cancellable operating leases, as determined under Topic 840, were 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 2061 and our corporate office leases. When a renewal option is included within a lease, we assess whether the option is reasonably certain of being exercised against relevant economic factors to determine whether 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. Because 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.

13



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. Such variable payments are recognized in rent expense in the period in which the variability is determined. Certain lease agreements may also include various non-lease components that primarily relate to property operating expenses associated with our office leases, which also vary each period. We have elected the practical expedient which allows us not to separate lease and non-lease components for our ground and office leases and recognize variable non-lease components 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 June 30, 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 20.4 years and 7.5 years.
As of June 30, 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)
$
3,134

 
$
530

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
36,579

 
15,977

Total future minimum lease payments
61,504

 
22,093

Imputed interest
(25,839
)
 
(6,455
)
Total (2)
$
35,665

 
$
15,638

______________
(1) 
Amounts are for the remainder of 2019.
(2) 
The total for operating leases of $35.7 million corresponds to lease liabilities related to operating right-of-use assets and the total for finance leases of $15.6 million represents our finance lease liability, both of which are included in "Other liabilities, net" as of June 30, 2019. See Note 8 for additional information.
As of December 31, 2018, future minimum rental payments under our non-cancellable operating leases, capital leases and lease assumption liabilities, as determined under Topic 840, were 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 and six months ended June 30, 2019, we incurred $565,000 and $1.2 million of fixed operating and finance lease costs and $436,000 and $910,000 of variable operating lease costs.

14



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 other planned dispositions.
Disposition
The following is a summary of disposition activity for the six months ended June 30, 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 June 30, 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 the carrying value of real estate. The following is a summary of assets held for sale:
Assets
 
Segment
 
Location