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JBGS JBG SMITH Properties

Filed: 25 Feb 20, 4:18pm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
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JBG SMITH PROPERTIES
________________________________________________________________________________
(Exact name of Registrant as specified in its charter)
Maryland81-4307010
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
   
4747 Bethesda Avenue BethesdaMD20814
Suite 200(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 classTrading Symbol(s)Name of each exchange on which registered
Common Shares, par value $0.01 per shareJBGSNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No     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 February 20, 2020, JBG SMITH Properties had 134,882,302 common shares outstanding.
As of June 30, 2019, the aggregate market value of common stock held by non-affiliates of the Registrant was approximately $5.1 billion based on the June 30, 2019 closing share price of $39.34 per share on the New York Stock Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference information from certain portions of the registrant's definitive proxy statement for its 2020 annual meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.





JBG SMITH PROPERTIES
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2019

TABLE OF CONTENTS

  Page
PART I
Item 1.Business
Item 1A.Risk Factors
Item 1B.Unresolved Staff Comments
Item 2.Properties
Item 3.Legal Proceedings
Item 4.Mine Safety Disclosures
PART II
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
   Equity Securities
Item 6.Selected Financial Data
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 8.Financial Statements and Supplementary Data
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B.Other Information
PART III
Item 10.Directors, Executive Officers and Corporate Governance
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.Certain Relationships and Related Transactions and Director Independence
Item 14.Principal Accounting Fees and Services
PART IV
Item 15.Exhibits and Financial Statement Schedules
Item 16.Form 10-K Summary
 Signatures


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PART I

ITEM 1. BUSINESS
The Company
JBG SMITH Properties ("JBG SMITH") is a real estate investment trust ("REIT") that owns, operates, invests in, and develops a dynamic portfolio of high-growth mixed-use properties in and around Washington, D.C. Through an intense focus on placemaking, JBG SMITH cultivates vibrant, amenity-rich, walkable neighborhoods throughout the Capital region, including National Landing where it now serves as the exclusive developer for Amazon.com’s ("Amazon") new headquarters. 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 The JBG Companies ("JBG"). References to "our share" refer to our ownership percentage of consolidated and unconsolidated assets in real estate ventures.
As of December 31, 2019, our Operating Portfolio consists of 62 operating assets comprising 44 commercial assets totaling 12.7 million square feet (10.7 million square feet at our share) and 18 multifamily assets totaling 7,111 units (5,327 units at our share). Additionally, we have (i) seven assets under construction comprising four commercial assets totaling 943,000 square feet (821,000 square feet at our share) and three multifamily assets totaling 1,011 units (833 units at our share); and (ii) 40 future development assets totaling 21.9 million square feet (18.7 million square feet at our share) of estimated potential development density. We present combined portfolio operating data that aggregates assets that we consolidate in our financial statements and assets in which we own an interest, but do not consolidate in our financial results. For more information regarding our assets, see Item 2 "Properties."
We define "square feet" or "SF" as the amount of rentable square feet of a property that can be rented to tenants, defined as (i) for commercial assets, rentable square footage defined in the current lease and for vacant space the rentable square footage defined in the previous lease for that space, (ii) for multifamily assets, management’s estimate of approximate rentable square feet, (iii) for assets under construction and near-term development assets, management’s estimate of approximate rentable square feet based on current design plans as of December 31, 2019, and (iv) for future development assets, management’s estimate of developable gross square feet based on its current business plans with respect to real estate owned or controlled as of December 31, 2019. "Metro" is the public transportation network serving the Washington, D.C. metropolitan area operated by the Washington Metropolitan Area Transit Authority, and we consider "Metro-served" to be locations, submarkets or assets that are generally within walking distance of a Metro station, defined as being within 0.5 miles of an existing or planned Metro station. "Annualized rent" is defined as (i) for commercial assets, or the retail component of a mixed-use asset, the in-place monthly base rent before free rent, plus tenant reimbursements as of December 31, 2019, multiplied by 12, with triple net leases converted to a gross basis by adding estimated tenant reimbursements to monthly base rent, and (ii) for multifamily assets, or the multifamily component of a mixed-use asset, the in-place monthly base rent before free rent as of December 31, 2019, multiplied by 12. Annualized rent excludes rent from signed but not yet commenced leases.
Corporate Structure and Formation Transaction
JBG SMITH was organized as a Maryland 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, which operated as Vornado / Charles E. Smith, (the "Vornado Included Assets"). On July 18, 2017, JBG SMITH acquired the management business and certain assets and liabilities (the "JBG Assets") of JBG (the "Combination"). The Separation and the Combination are collectively referred to as the "Formation Transaction." Unless the context otherwise requires, all references to "we," "us," "our" or other similar terms refer to the Vornado Included Assets (our predecessor and accounting acquirer) for periods prior to the Separation and to JBG SMITH for periods after the Separation. 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 December 31, 2019, we, as its sole general partner, controlled JBG SMITH LP and owned 89.9% of its common limited partnership units ("OP Units").
Our Strategy
Our mission is to own and operate a high-growth portfolio of Metro-served, urban-infill office, multifamily and retail assets concentrated in leading urban infill submarkets or with proximity to downtown Washington, D.C. and to grow this portfolio through value-added development and acquisitions. We have significant expertise in office, multifamily and retail product types, our core asset classes. We believe we are known for our creative deal-making and capital allocation skills and for our development and value creation expertise across our core product types.
One of our approaches to value creation uses a series of complementary disciplines through a process we call "Placemaking." Placemaking involves strategically mixing high-quality multifamily and commercial buildings with anchor, specialty and neighborhood retail in a high density, thoughtfully planned and designed public space. Through this process, we create synergies,

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and thus value, across those varied uses and create unique, amenity-rich, walkable neighborhoods that are desirable and enhance significant tenant and investor demand. We believe that our Placemaking approach will increase occupancy and rental rates in our portfolio, particularly with respect to our concentrated and extensive land and building holdings in National Landing, the newly defined interconnected and walkable neighborhood that encompasses Crystal City, the eastern portion of Pentagon City and the northern portion of Potomac Yard. National Landing is situated across the Potomac River from Washington, D.C., and we believe it is one of the region’s best-located urban mixed-use communities. It is defined by its central and easily accessible location, its adjacency to Reagan National Airport, and its base of existing offices, apartments and hotels.

Since mid-2017, we have been focused on a comprehensive plan to reposition our holdings in National Landing through a broad array of Placemaking strategies. Our Placemaking strategies include the delivery of new multifamily and office developments, locally sourced amenity retail and thoughtful improvements to the streetscape, sidewalks, parks and other outdoor gathering spaces. In keeping with our dedication to Placemaking, each new project is intended to contribute to authentic and distinct neighborhoods by creating a vibrant street environment with a robust offering of amenity retail and improved public spaces.
In November 2018, Amazon announced it had selected sites that we own in National Landing in Northern Virginia as the location of an additional headquarters. To date, Amazon has executed leases totaling approximately 857,000 square feet at five office buildings in our National Landing portfolio. In March 2019, we executed three initial leases with Amazon totaling approximately 537,000 square feet at three of our office buildings in National Landing. These three initial 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. Amazon began moving into 241 18th Street South and 1800 South Bell in 2019, and we expect Amazon to begin moving into 1770 Crystal Drive by the end of 2020. In April 2019, we executed a lease with Amazon for an additional approximately 48,000 square feet of office space at 2345 Crystal Drive in National Landing. Amazon moved its first employees into 2345 Crystal Drive during the second quarter of 2019. In December 2019, we executed a lease with Amazon for an additional approximately 272,000 square feet of office space at 2100 Crystal Drive in National Landing. We expect Amazon to begin occupying space at 2100 Crystal Drive in late 2020.

In March 2019, we also executed purchase and sale agreements with Amazon for two of our National Landing development sites, Metropolitan Park and Pen Place, 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 contracted to acquire these two development sites for an estimated aggregate $293.9 million, or $72.00 per square foot based on their combined estimated potential development density of up to approximately 4.1 million square feet. In May 2019, Amazon submitted its plans to Arlington County for approval of two new office buildings, totaling 2.1 million square feet, inclusive of over 50,000 square feet of street-level retail with new shops and restaurants, on the Metropolitan Park land sites. In January 2020, we sold the Metropolitan Park land sites to Amazon for $155.0 million, which represents an $11.0 million increase over the previously estimated contract value resulting from an increase in the approved development density on the sites. We expect the sale of the Pen Place land site to Amazon to be completed in 2021. We are the developer, property manager and retail leasing agent for Amazon’s new headquarters at National Landing.

In February 2019, the Commonwealth of Virginia enacted an incentives bill, 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.
Our primary business objectives are to maximize cash flow and generate strong risk-adjusted returns for our shareholders. We intend to pursue these objectives through the following strategies:
Focus on High-Growth Mixed-Use Assets in Metro-Served Submarkets in the Washington, D.C. Metropolitan Area. We intend to continue our longstanding strategy of owning and operating assets within urban-infill, Metro-served submarkets in the Washington, D.C. metropolitan area with high barriers to entry and key urban amenities, including being within walking distance of the Metro. These submarkets, which include the District of Columbia; National Landing, the Rosslyn-Ballston Corridor, Reston and Alexandria in Virginia; and Bethesda, Silver Spring and the Rockville Pike Corridor in Maryland, generally feature strong economic and demographic attributes, as well as superior transportation infrastructure that caters to the preferences of our office, multifamily and retail tenants. We believe these positive attributes will allow our assets located in these submarkets to outperform the Washington, D.C. metropolitan area as a whole.
Realize Contractual Embedded Growth. We believe there are substantial near-term growth opportunities embedded in our existing Operating Portfolio, many of which are contractual in nature, including the burn-off of free rent, contractual rent escalators in our non-GSA office and retail leases based on increases in the Consumer Price Index or a fixed percentage, and the commencement of signed but not yet commenced leases. "GSA" refers to the General Services Administration, which is the independent federal government agency that manages real estate procurement for the federal government and federal agencies.

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Drive Incremental Growth Through Lease-up of Our Assets. We believe that we are well-positioned to achieve significant internal growth through lease-up of the vacant space in our Operating Portfolio, including certain recently developed assets, given our leasing capabilities and the tenant demand for high-quality space in our submarkets. As of December 31, 2019, we had 44 operating commercial assets totaling 12.7 million square feet (10.7 million square feet at our share), which were 91.4% leased at our share, resulting in 893,000 square feet available for lease.
Deliver Our Assets Under Construction. As of December 31, 2019, we had seven high-quality assets under construction in which we expect to make an estimated incremental investment of $196.9 million at our share. Our assets under construction consist of four commercial assets totaling 943,000 square feet (821,000 square feet at our share) and three multifamily assets totaling 1,011 units (833 units at our share), all of which are Metro-served. We believe these projects provide significant potential for value creation. As of December 31, 2019, 85.1% (86.8% at our share) of our commercial assets under construction were pre-leased. We define "estimated incremental investment" to mean management’s estimate of the remaining cost to be incurred in connection with the development of an asset as of December 31, 2019, including all remaining acquisition costs, hard costs, soft costs, tenant improvements (excluding free rent converted to tenant improvement allowances), leasing costs and other similar costs to develop and stabilize the asset but excluding any financing costs and ground rent expenses.
Develop Our Significant Future Development Pipeline. We have a significant pipeline of opportunities for value creation through ground-up development, with the goal of producing favorable risk-adjusted returns on invested capital. We expect to be active in developing these opportunities while maintaining prudent leverage levels. Our future development pipeline consists of 40 assets. We estimate our future development pipeline can support over 21.9 million square feet (18.7 million square feet at our share), including the approximately 4.1 million square feet under contract for sale to Amazon as of December 31, 2019, of estimated potential development density, with 96.7% of this potential development density being Metro-served based on our share of estimated potential development density. The estimated potential development densities and uses reflect our current business plans as of December 31, 2019 and are subject to change based on market conditions. We characterize our future development pipeline as our assets that are development opportunities on which we do not intend to commence construction within 18 months of December 31, 2019 where we (i) own land or control the land through a ground lease or (ii) are under a long-term conditional contract to purchase or enter into a leasehold interest with respect to land.
Our future development pipeline includes six parcels attached to assets in our Operating Portfolio that would require a redevelopment of 413,000 office and/or retail square feet (315,000 square feet at our share) and 324 multifamily units (185 units at our share), which generated $5.1 million of annualized net operating income ("NOI") at our share for the year ended December 31, 2019, to access 3.7 million square feet (2.5 million square feet at our share) of total estimated potential development density.
Redevelop and Reposition Our Assets. We evaluate our portfolio on an ongoing basis to identify value-creating redevelopment and renovation opportunities, including the addition of amenities, unit renovations and building and landscaping enhancements. We intend to seek to increase occupancy and rents, improve tenant quality and enhance cash flow and value by completing the redevelopment and repositioning of certain of our assets, including the use of our Placemaking process. This approach is facilitated by our extensive proprietary research platform and deep understanding of submarket dynamics. We believe there are significant opportunities to apply our Placemaking process across our portfolio.
Rigorous Approach to Capital Allocation. An important component of maximizing long-term net asset value ("NAV") per share is prudent capital allocation. We evaluate development, acquisition and disposition decisions based on how they impact long-term NAV per share. Because distinct segments of our market present substantial downside risk while others offer attractive upside, our pursuit of long-term NAV growth takes many forms, some of which sit on opposite ends of the risk-taking spectrum. Where we see elevated asset pricing, potential excess supply, and/or limited prospects for future growth, we will likely sell assets. Given the attractive pricing of office assets and our long-term objective of shifting our portfolio toward a 50:50 mix of office and multifamily, we are currently targeting dispositions primarily of office assets in submarkets where we have less concentration and where we anticipate lower growth rates going forward relative to other opportunities within our portfolio. We are also focused on opportunities to turn land assets into income streams or retained capital.
The acquisitions market in the Washington, D.C. area continues to be competitive, and we remain cautious. We expect near-term acquisition activity to be focused on assets with redevelopment potential in emerging growth neighborhoods, as well as assets adjacent to our existing holdings where the combination of sites can add unique value to any new investment. Where there are opportunities to trade out of higher risk assets with extensive capital needs or those outside of our geographic footprint, we will consider like-kind exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code").

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Third-Party Services Business
Our third-party asset management and real estate services platform provides fee-based real estate services to third parties, the JBG Legacy Funds and the Washington Housing Initiative ("WHI"), which intends to pursue a transformational approach to producing affordable workforce housing and creating sustainable, mixed-income communities in the Washington, D.C. region. Although a significant portion of the assets and interests in assets formerly owned by certain of the JBG Legacy Funds were contributed to us in the Combination, the JBG Legacy Funds retained certain assets that are not consistent with our long-term business strategy. With respect to the JBG Legacy Funds and for most assets that we hold through real estate ventures, we continue to provide the same asset management, property management, construction management, leasing and other services that were provided prior to the Combination by the management business that we acquired in the Combination. Other than the WHI, we do not intend to raise any future investment funds, and the JBG Legacy Funds will be managed and liquidated over time. We expect to continue to earn fees from these funds as they are wound down, as well as from any real estate venture arrangements currently in place and any new real estate venture and/or development arrangements entered into in the future, including with Amazon. We expect the fees from retaining management and leasing of sold assets, Amazon-related fees that we expect to receive and other third-party fee income streams to offset the wind down of the JBG Legacy Fund business over time. Certain individual members of our management team own direct equity co-investment and promote interests in the JBG Legacy Funds that were not contributed to us. As the JBG Legacy Funds are wound down over time, these economic interests will decrease and will be eventually eliminated.
We believe that the fees we earn in connection with providing these services will enhance our overall returns, provide additional scale and efficiency in our operating, development and acquisition businesses and generate capital which we can use to absorb overhead and other administrative costs of the platform. This scale provides competitive advantages, including market knowledge, buying power and operating efficiencies across all product types. We also believe that our existing relationships arising out of our third-party asset management and real estate services business will continue to provide potential capital and new investment opportunities.
Competition

The commercial real estate markets in which we operate are highly competitive. We compete with numerous acquirers, developers, owners and operators of commercial real estate including other REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships and individual investors, many of which own or may seek to acquire or develop assets similar to ours in the same markets in which our assets are located. These competitors may have greater financial resources or access to capital than we do or be willing to acquire assets in transactions which are more highly leveraged or are less attractive from a financial viewpoint than we are willing to pursue. Leasing is a major component of our business and is highly competitive. The principal means of competition in leasing are lease terms (including rent charged and tenant improvement allowances), location, services provided and the nature and condition of the asset to be leased. If our competitors offer space at rental rates below current market rates, below the rental rates we currently charge our tenants, in better locations within our markets, in higher quality assets or offer better services, we may lose potential tenants and we may be pressured to reduce our rental rates below those we currently charge to retain tenants when our tenants’ leases expire.
Seasonality
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.
Segment Data
We operate in the following business segments: commercial, multifamily and third-party asset management and real estate services. Financial information related to these business segments for each of the three years in the period ended December 31, 2019 is set forth in Note 18 to our consolidated and combined financial statements included herein.
Tax Status
We have elected to be taxed as a REIT under Sections 856-860 of the Code. Under those sections, a REIT which distributes at least 90% of its REIT taxable income as dividends to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Prior to the Separation, Vornado operated as a REIT and distributed 100% of its REIT taxable income to its shareholders; accordingly, no provision for federal income taxes has been made in the accompanying financial statements for the periods prior to the Separation. We currently adhere and intend to continue to adhere to these requirements and to maintain our REIT status in future periods.


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As a REIT, we can reduce our taxable income by distributing all or a portion of such taxable income to shareholders. Future distributions will be declared and paid at the discretion of our Board of Trustees and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual dividend requirements under the REIT provisions of the Code and such other factors as our Board of Trustees deems relevant.
We also participate in the activities conducted by our subsidiary entities that have elected to be treated as taxable REIT subsidiaries ("TRS") under the Code. As such, we are subject to federal, state, and local taxes on the income from these activities. Income taxes attributable to our TRSs are accounted for under the asset and liability method. Under the asset and liability method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future.
Significant Tenants
Only the U.S. federal government accounted for 10% or more of our rental revenue, which consists of property rentals and other property revenue, as follows:
 Year Ended December 31,
(Dollars in thousands)2019 2018 2017
Rental revenue from the U.S. federal government$86,644
 $94,822
 $92,192
Percentage of commercial segment rental revenue21.2% 22.0% 24.0%
Percentage of total rental revenue16.7% 17.6% 19.4%
Sustainable Business Strategy
Our business values integrate environmental sustainability, social responsibility and strong governance practices throughout our organization, which includes the design and construction of our new developments and the operation of our existing buildings. We believe that by understanding the social and environmental impacts of our business, we are better able to protect asset value, reduce risk and advance initiatives that result in positive social and environmental outcomes creating shared value. Our business model prioritizes maximizing long-term NAV per share. By investing in urban infill and transit-oriented development and strategically mixing high-quality multifamily and commercial buildings with public areas, retail spaces, and walkable streets, we are working to define neighborhoods that deliver benefits to the environment and our community, as well as long-term value to our shareholders.
We remain committed to transparent reporting of environmental, social and governance ("ESG") financial and non-financial indicators. We publish an annual sustainability report that is aligned with the Global Reporting Initiative ("GRI") reporting framework, Sustainable Development Goals, Sustainability Accounting Standards Board (SASB) standards and recommendations set forth by the Task Force on Climate-related Financial Disclosures. More detailed sustainability information, including our strategy, key performance indicators, annual absolute and like-for-like comparisons, achievements and historical environmental, social, governance reports are available on our website at https://www.JBGSMITH.com/About/Sustainability.
We focus on operating efficiency, responding to evolving environmental and social trends, and delivering on the needs of our tenants and communities. We have demonstrated the results of this focus by:
Achieving a 4-star rating in the Global Real Estate Sustainability Benchmark (GRESB) Real Estate Assessment and 2019 Global Sector Leader - Diversified - Office/Residential Sector
Maintaining oversight of environmental and social matters by the Board of Trustees' Corporate Governance & Nominating Committee
Surpassing $104 million in investor commitments to the WHI Impact Pool, which is the social impact investment vehicle of the WHI (the "Impact Pool"), and closing its first investment, a $15.1 million mezzanine loan for the purchase of a residential community in Alexandria, Virginia. We launched the WHI in partnership with the Federal City Council to preserve or build between 2,000 and 3,000 units of affordable workforce housing in the Washington, D.C. region over the next decade.

Our sustainability team works directly with our business units to integrate our ESG principles throughout our operations and investment process. The sustainability team includes our Vice President of Sustainability and a Sustainability Associate. The Vice President reports directly to our Chief Operating Officer. The team is responsible for annual ESG reporting, maintaining building certifications, betterment program design and implementation and coordinating with industry and community partners.


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To ensure that our ESG principles are fully integrated into our business practices, Steering Committees, including members of our management team, provide top-down support for the implementation of ESG initiatives. The ESG team provides our Board of Trustees' Corporate Governance & Nominating Committee with periodic updates on ESG strategy.

Energy and Water Management
We believe that the efficient use of resources will result in sustainable long-term growth. We use green building certifications as a verification tool across our portfolio. These certifications demonstrate our commitment to sustainable design and performance. At a minimum we strive to benchmark our assets to help inform capital improvement projects. As of December 31, 2019:
69% of all operating assets, based on square footage, have earned at least one green certification:
7.3 million square feet of LEED Certified Commercial Space (69%)
1.6 million square feet of LEED Certified Multifamily Space (37%)
4.4 million square feet of ENERGY STAR Certified Commercial Space (41%)
1.9 million square feet of ENERGY STAR Certified Multi-family Space (42%)
84% of our operational assets' energy and water use are benchmarked

Our long-term strategy to reduce energy and water consumption includes operational and capital improvements that align with our business plan and contribute to our sustainability goals. Asset teams review historical performance, conduct energy audits and regularly assess opportunities to achieve efficiency targets. Capital investment planning considers the useful life of equipment, energy and water efficiency, occupant health impacts and maintenance requirements.

We have committed to improve the energy efficiency of our commercial Operating Portfolio by at least 20% over the next 10 years through the Department of Energy Better Buildings Challenge. Our data demonstrates improved energy performance by an average of 2.9% each year since 2014, which is consistent with a cumulative improvement of 10%, and is on track to meet or exceed the improvement goal by 2024. We achieve this through real time energy use monitoring.

Tenant Sustainability Impacts
Customer service is an integral component of real estate management. Our mission includes creating a unique experience at all of our properties where our tenants’ needs are our highest priority. We believe in sustainability as a service — by integrating efficiency and conservation into standard operating practices, we engage on topics that are most impactful to our tenants. We are committed to providing a healthy living and working environment for building occupants. We accomplish this goal through monitoring and improving indoor air quality, eliminating toxic chemicals, providing access to nature and daylight, and encouraging nutrition and fitness.

We are a Green Lease Leader established by the Institute for Market Transformation (IMT) and the U.S. Department of Energy’s (DOE) Better Buildings Alliance. Green Lease Leaders recognizes companies who utilize the leasing process to achieve better collaboration between landlords and tenants with the goal of reducing building energy consumption and operating costs. Our standard lease contains a cost recovery clause for resource efficiency-related capital improvements and requires tenants to provide data for measuring, managing, and reporting sustainability performance. This language covers 100% of our new leases.
Climate Change Adaptation
We take climate change, and the risks associated with climate change, seriously, and we are committed to aligning our investment strategy with science. We stand with our communities, tenants, and fellow shareholders in supporting meaningful solutions that address this global challenge. To develop a more informed view of future climate conditions and further our understanding of the direct physical risks to our properties, we have conducted a climate risk assessment, which includes our operating assets and land holdings in our future development pipeline. The results of this assessment will be presented to senior management, and we expect it will inform our asset management planning and design of our new developments moving forward.

Social Responsibility
We believe the strength of our entire community is central to sustaining the long-term value of our portfolio. We are committed to the economic development of the Washington region through continued investment in our projects and local communities. We recognize, however that new development also fosters challenging growth dynamics, with issues of social equity at the forefront. We strive to work alongside community members, leaders, and local and federal governments to appropriately respond to these challenges. The most recent example of our commitment is the WHI, which we launched in partnership with the Federal City Council. To date, we have committed to invest $10.2 million in the Impact Pool component of the WHI and our Executive Vice President of Social Impact Investing manages this effort.

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The WHI is a transformational market-driven approach to producing affordable workforce housing and creating sustainable, mixed-income communities. The WHI is a scalable, market-driven model funded by a unique relationship between philanthropy and private investment. The WHI’s Impact Pool has surpassed $104 million in investor commitments and closed its first investment, a $15.1 million mezzanine loan for the purchase of a residential community in Alexandria, Virginia. The initiatives’ goals include:
Preserving or building between 2,000 and 3,000 units of affordable workforce housing in the Washington, D.C. region over the next decade; and
Delivering triple bottom line results consisting of environmental and social objectives in addition to financial returns.

We recognize that diversity in our workforce brings valuable perspectives, views and ideas to our organization. We pride ourselves on our strong, collaborative culture, and we strive to create an inclusive and healthy work environment for our employees, which allows us to continue to attract innovative thinkers to our organization. Our workforce comprises 38% females and 55% minorities, and our senior leadership has 41% female representation. Our Board of Trustees comprises 17% females. Our Board of Trustees has made a long‑term commitment to evolve in a direction that reflects the strength and diversity of our national labor force and establish an equal balance between men and women and one that reflects the diversity of our country.

To learn more about our ESG initiatives, please visit JBGSMITH.com/about/sustainability and download our Sustainability Report. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on such real estate. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of remediation or removal of such substances may be substantial and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of our assets, we may be potentially liable for such costs. The operations of current and former tenants at our assets have involved, or may have involved, the use of hazardous materials or generated hazardous wastes. The release of such hazardous materials and wastes could result in us incurring liabilities to remediate any resulting contamination. The presence of contamination or the failure to remediate contamination at our properties may (1) expose us to third-party liability (e.g., for cleanup costs, natural resource damages, bodily injury or property damage), (2) subject our properties to liens in favor of the government for damages and costs the government incurs in connection with the contamination, (3) impose restrictions on the manner in which a property may be used or businesses may be operated, or (4) materially adversely affect our ability to sell, lease or develop the real estate or to borrow using the real estate as collateral. In addition, our assets are exposed to the risk of contamination originating from other sources. While a property owner may not be responsible for remediating contamination that has migrated onsite from an identifiable and viable offsite source, the contaminant’s presence can have adverse effects on operations and the redevelopment of our assets. To the extent we send contaminated materials to other locations for treatment or disposal, we may be liable for the cleanup of those sites if they become contaminated.
Most of our assets have been subject, at some point, to environmental assessments that are intended to evaluate the environmental condition of the subject and surrounding assets. These environmental assessments generally have included a historical review, a public records review, a visual inspection of the site and surrounding assets, visual or historical evidence of underground storage tanks, and the preparation and issuance of a written report. Soil and/or groundwater subsurface testing is conducted at our assets, when necessary, to further investigate any issues raised by the initial assessment that could reasonably be expected to pose a material concern to the property or result in us incurring material environmental liabilities as a result of redevelopment. They may not, however, have included extensive sampling or subsurface investigations. In each case where the environmental assessments have identified conditions requiring remedial actions required by law, we have initiated appropriate actions. 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.
Employees
Our headquarters are located at 4747 Bethesda Avenue, Suite 200, Bethesda, MD 20814. As of December 31, 2019, we had 1,017 employees.

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Available Information
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through our website (www.JBGSMITH.com) as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC"). Also available on our website are copies of our Audit Committee Charter, Compensation Committee Charter, Corporate Governance and Nominating Committee Charter, Code of Business Conduct and Ethics and Corporate Governance Guidelines. In the event of any changes to these charters or the code or guidelines, changed copies will also be made available on our website. Copies of these documents are also available directly from us free of charge. Our website also includes other financial information, including certain financial measures not in compliance with accounting principles generally accepted in the United States ("GAAP"), none of which is a part of this Annual Report on Form 10-K. Copies of our filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are also available free of charge from us, upon request.

ITEM 1A. RISK FACTORS

You should carefully consider the following risks in evaluating our company and our common shares. If any of the following risks were to occur, our business, prospects, financial condition, results of operations, cash flow and the ability to make distributions to our shareholders could be materially and adversely affected, which we refer herein collectively as a "material adverse effect on us," the per share trading price of our common shares could decline significantly, and you could lose all or a part of your investment. Some statements in this Form 10-K, including statements in the following risk factors, constitute forward-looking statements. Refer to the section entitled "Cautionary Statement Concerning Forward-Looking Statements" for additional information regarding these forward-looking statements.
 
Risks Related to Our Business and Operations
 
Our portfolio of assets is geographically concentrated in the Washington, D.C. metropolitan area and submarkets therein, and particularly concentrated in National Landing, which makes us susceptible to regional and local adverse economic and other conditions such that an economic downturn affecting this area could have a material adverse effect on us.
 
All our assets are located in the Washington, D.C. metropolitan area. As a result, we are particularly susceptible to adverse economic or other conditions in this market (such as periods of economic slowdown or recession, business layoffs or downsizing, industry slowdowns, actual or anticipated federal government shutdowns, uncertainties related to federal elections, relocations of businesses, increases in real estate and other taxes, and the cost of complying with governmental regulations or increased regulation), as well as to natural disasters (including earthquakes, floods, storms and hurricanes), potentially adverse effects of climate change and other disruptions that occur in this market (such as terrorist activity or threats of terrorist activity and other events), any of which may have a greater impact on the value of our assets or on our operating results than if we owned a more geographically diverse portfolio. This market has experienced economic downturns in past years. Similar or worse economic downturns in the future could have a material adverse effect on us. We cannot assure you that this market will grow or that underlying real estate fundamentals will be favorable to our asset classes or future development.

Moreover, the same risks that apply to the Washington, D.C. metropolitan area as a whole also apply to the individual submarkets where our assets are located. National Landing makes up more than half of our portfolio based on square footage at our share. Portions of our market, including National Landing, have underperformed other markets in the region with respect to rent growth and occupancy. Any adverse economic or other conditions in the Washington, D.C. metropolitan area, our submarkets, especially National Landing, or any decrease in demand for office, multifamily or retail assets could have a material adverse effect on us.


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Our assets and the property development market in the Washington, D.C. metropolitan area are dependent on a metropolitan economy that is heavily reliant on federal government spending, and any actual or anticipated curtailment of such spending could have a material adverse effect on us.  
 
The real estate and property development market in the Washington, D.C. metropolitan area is heavily dependent upon actual and anticipated federal government spending and the professional services and other industries that support the federal government. Any actual or anticipated curtailment of federal government spending, whether due to an actual or potential change of presidential administration or control of Congress, actual or anticipated federal government sequestrations, furloughs or shutdowns, a slowdown of the U.S. and/or global economy or other factors, could have an adverse impact on real estate values and property development in the Washington, D.C. metropolitan area, on demand and willingness to enter into long-term contracts for office space by the federal government and companies dependent upon the federal government, as well as on occupancy rates and annualized rents of multifamily and retail assets by occupants or patrons whose employment is by or related to the federal government. These curtailments in federal spending or changes in federal leasing policy could occur in the future, which could have a material adverse effect on us.

If Amazon invests less than the announced amounts in National Landing or makes such investment over a longer period, our ability to achieve the benefits associated with Amazon's headquarters location in National Landing could be adversely affected, which could have a material adverse effect on us and the market price of our common shares. Furthermore, National Landing could fail to achieve the anticipated collateral financial effect associated with Amazon's headquarters, which could have a material adverse effect on us and the market price of our common shares.

The benefits of Amazon's additional headquarters locating in National Landing that might accrue to us may be less than we, financial or industry analysts or investors anticipate. For example, if Amazon invests less than the announced amounts in National Landing or makes such investment over a longer period than anticipated, or if its business prospects decline, our ability to achieve the benefits associated with Amazon’s headquarters location in National Landing could be adversely affected. Furthermore, Amazon’s headquarters location in National Landing may not have the anticipated collateral financial effect. If we do not achieve the perceived benefits of such location as rapidly or to the extent anticipated by us, financial or industry analysts or investors, we and potentially the market price of our common shares could be adversely affected.

Amazon also currently leases a significant amount of office space from us, all or a substantial portion of which, we expect it will likely vacate following completion of the office buildings it is currently developing on land purchased from us in National Landing. If we are unable to re-lease that space at market rents, it could have a material adverse effect on us and the market price of our common shares.

We derive a significant portion of our revenues from U.S. federal government tenants and we may face additional risks and costs associated with directly managing assets occupied by government tenants.
 
In the year ended December 31, 2019, approximately 21.2% of the rental revenue from our commercial segment was generated by rentals to federal government tenants, and federal government tenants historically have been a significant source of new leasing for us. In the year ended December 31, 2019, GSA was our largest single tenant, with 67 leases comprising 23.4% of total annualized rent at our share. The occurrence of events that have a negative impact on the demand for federal government office space, such as a decrease in federal government payrolls or a change in policy that prevents governmental tenants from renting our office space, would have a much larger adverse effect on our revenues than a corresponding occurrence affecting other categories of tenants. If demand for federal government office space were to decline, it would be more difficult for us to lease our buildings and could reduce overall market demand and corresponding rental rates, all of which could have a material adverse effect on us.
 
Lease agreements with these federal government agencies contain provisions required by federal law, which require, among other things, that the lessor of the property agree to comply with certain rules and regulations, including rules and regulations related to anti-kickback procedures, examination of records, audits and records, equal opportunity provisions, prohibition against segregated facilities, certain executive orders, subcontractor cost or pricing data, and certain provisions intending to assist small businesses. We directly manage assets with federal government agency tenants and, therefore, we are subject to additional risks associated with compliance with all applicable federal rules and regulations. In addition, there are certain additional requirements relating to the potential application of equal opportunity provisions and the related requirement to prepare written affirmative action plans applicable to government contractors and subcontractors. Some of the factors used to determine whether these requirements apply to a company that is affiliated with the actual government contractor (the legal entity that is the lessor under a lease with a federal government agency) include whether such company and the government contractor are under common ownership, have common management, and are under common control. We own the entity that is the government contractor and the property manager, increasing the risk that requirements of the Employment Standards Administration’s Office of Federal Contract Compliance Programs and requirements to prepare affirmative action plans pursuant to the applicable executive order may be determined to

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be applicable to us. Compliance with these regulations is costly and any increase in regulation could increase our costs, which could have a material adverse effect on us.  
 
Capital markets and economic conditions can materially affect our liquidity, financial condition and results of operations, as well as the value of our equity and debt securities.
 
There are many factors that can affect the value of our equity securities and any debt securities we may issue in the future, including the state of the capital markets and the economy. Demand for office space may decline nationwide as it did in 2008 and 2009, due to an economic downturn, bankruptcies, downsizing, layoffs and cost cutting. Government action or inaction may adversely affect the state of the capital markets. The cost and availability of credit may be adversely affected by illiquid credit markets and wider credit spreads, which may adversely affect our liquidity and financial condition, including our results of operations, and the liquidity and financial condition of our tenants. Our inability or the inability of our tenants to timely refinance maturing liabilities and access the capital markets to meet liquidity needs may materially affect our financial condition and results of operations and the value of our equity securities and any debt securities we may issue in the future.
 
We are exposed to risks associated with real estate development and redevelopment, such as unanticipated expenses, delays and other contingencies, any of which could have a material adverse effect on us.
Real estate development and redevelopment activities are a critical element of our business strategy, and we expect to engage in such activities with respect to several of our properties and with properties that we may acquire in the future. To the extent that we do so, we will be subject to risks, including, without limitation:
construction or redevelopment costs of a project may exceed original estimates, possibly making the project less profitable than originally estimated, or unprofitable;
time required to complete the construction or redevelopment of a project or to lease-up the completed project may be greater than originally anticipated, thereby adversely affecting our cash flow and liquidity;
contractor, subcontractor and supplier disputes, strikes, labor disputes, weather conditions or supply disruptions;
failure to achieve expected occupancy and/or rent levels within the projected time frame, if at all;
delays with respect to obtaining, or the inability to obtain, necessary zoning, occupancy, land use and other governmental permits, and changes in zoning and land use laws;
occupancy rates and rents of a completed project may not be sufficient to make the project profitable;
incurrence of design, permitting and other development costs for opportunities that we ultimately abandon;
the ability of prospective real estate venture partners or buyers of our properties to obtain financing; and
the availability and pricing of financing to fund our development activities on favorable terms or at all.
Furthermore, if we develop assets in new markets or asset classes where we do not have the same level of market knowledge or experience as with our current markets and asset classes, then we may experience weaker than anticipated performance. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent the initiation or the completion of development or redevelopment activities, any of which could have a material adverse effect on us.
We may be unable to identify and complete acquisitions of properties that meet our criteria, which may impede our growth.
Our business strategy includes the acquisition of operating properties and properties to be held for development, including in connection with like-kind exchanges under the tax code. We evaluate the market for suitable acquisition candidates or investment opportunities that meet our criteria and are compatible with our growth strategies. However, we may be unable to acquire properties identified as potential acquisition opportunities on favorable terms, or at all. We may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones that we are subsequently unable to complete. If we are unable to complete planned like-kind exchanges using proceeds from asset dispositions, we will be required to distribute to our shareholders those proceeds rather than reinvest them to grow our portfolio. Even if we enter into agreements for the acquisition of properties, these agreements are subject to customary conditions to closing, including the completion of due diligence investigations and other conditions that are not within our control, which may not be satisfied. In addition, we may be unable to finance the acquisition on favorable terms or at all. Furthermore, if we acquire assets in new markets or asset classes where we do not have the same level of market knowledge or experience as with our current markets and asset classes, then we may experience weaker than anticipated performance. Our inability to identify, negotiate, finance or consummate property acquisitions, or acquire properties on favorable terms, or at all, could impede our growth and have a material adverse effect on us.

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Our future acquisitions may not yield the returns we expect, and we may otherwise be unable to operate acquired properties to meet our financial expectations, which could have a material adverse effect on us.
Our future acquisitions and our ability to successfully operate the properties we acquire in such acquisitions may expose us to the following significant risks:
even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the purchase price;
we may acquire properties that are not accretive to our results upon acquisition, and we may not be able to successfully manage and lease those properties to meet our expectations;
we may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
we may be unable to integrate new acquisitions quickly and efficiently, particularly acquisitions of portfolios of properties, into our existing operations, and, as a result, our results of operations and financial condition could be adversely affected;
market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and
we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities, such as liabilities for clean‑up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of such properties, liabilities incurred in the ordinary course of business and claims for indemnification by general partners, trustees, officers and others indemnified by the former owners of such properties.
If our future acquisitions do not yield the returns we expect, and we are otherwise unable to operate acquired properties to meet our financial expectations, it could have a material adverse effect on us.
We may not be able to control our operating expenses, or our operating expenses may remain constant or increase, even if our revenues do not increase, which could have a material adverse effect on us.
Operating expenses associated with owning a property include real estate taxes, insurance, loan payments, maintenance, repair and renovation costs, the cost of compliance with governmental regulation (including zoning) and the potential for liability under applicable laws. If our operating expenses increase, our results of operations may be adversely affected. Moreover, operating expenses are not necessarily reduced when circumstances such as market factors, competition or reduced occupancy cause a reduction in revenues from the property. As a result, if revenues decline, we may not be able to reduce our operating expenses associated with the property. An increase in operating expenses or the inability to reduce operating expenses commensurate with revenue reductions could have a material adverse effect on us.
Partnership or real estate venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on partners’ or co-venturers’ financial condition and disputes between us and our partners or co-venturers, which could have a material adverse effect on us.
 
As of December 31, 2019, approximately 11.8% of our assets measured by total square feet at our share were held through real estate ventures, and we expect to co-invest in the future with other third parties through partnerships, real estate ventures or other entities, acquiring noncontrolling interests in or sharing responsibility for managing the affairs of a property, partnership, real estate venture or other entity. In particular, we may use real estate ventures as a significant source of equity capital to fund our development strategy. Consequently, with respect to any such third-party arrangement, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, real estate venture or other entity, or structure of ownership and may, under certain circumstances, be exposed to risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions, and we may be forced to make contributions to maintain the value of the property. Partners or co-venturers may have economic or other business interests or goals that are inconsistent with our business interests or goals and may be in a position to take action or withhold consent contrary to our policies or objectives. In some instances, partners or co-venturers may have competing interests in our markets that could create conflict of interest issues. These investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or real estate venture. We and our respective partners or co-venturers may each have the right to trigger a buy-sell right or forced sale arrangement, which could cause us to sell our interest, or acquire our partners’ or co-venturers’ interest, or to sell the underlying asset, either on unfavorable terms or at a time when we otherwise would not have initiated such a transaction. In addition, a sale or transfer by us to a third party of our interests in the partnership or real estate venture may be subject to consent rights or rights of first refusal in favor of our partners or co-venturers, which would in each case restrict our ability to dispose of our interest in the partnership or real estate venture. Where we are a limited partner or non-managing member in any partnership or limited liability company, if the entity takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in that entity, including by contributing our interest to a subsidiary of ours that is subject to corporate level

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income tax. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or trustees from focusing their time and effort on our business. Consequently, actions by or disputes with partners or co-venturers might result in subjecting assets owned by the partnership or real estate venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers. Our real estate ventures may be subject to debt, and the refinancing of such debt may require equity capital calls. We will review the qualifications and previous experience of any partners and co-venturers, although we may not obtain financial information from, or undertake independent investigations with respect to, prospective partners or co-venturers. In addition, any cash distributions from real estate ventures will be subject to the operating agreements of the real estate ventures, which may limit distributions, the timing of distributions or specify certain preferential distributions among the respective parties. The occurrence of any of the risks described above could have a material adverse effect on us.

We may be unable to renew leases, lease vacant space or re-let space as leases expire, or do so on favorable terms, which could have a material adverse effect on us.
 
As of December 31, 2019, leases representing 12.8% of our share of the office and retail square footage in our Operating Portfolio are scheduled to expire during the year ending December 31, 2020 or have month-to-month terms, and 11.5% of our share of the square footage of the assets in our commercial portfolio was unoccupied and not generating rent. We cannot assure you that expiring leases will be renewed or that our assets will be re-let at rental rates equal to or above current average rental rates or that substantial free rent, tenant improvements, early termination rights or below-market renewal options will not be offered to attract new tenants or retain existing tenants.

In addition, our ability to lease our multifamily assets at favorable rates, or at all, may be adversely affected by any increase in supply and/or deterioration in the multifamily market, which is dependent upon the overall level of spending in the economy; and spending is adversely affected by, among other things, job losses and unemployment levels, recession, personal debt levels, housing market conditions, stock market volatility and uncertainty about the future.

If the rental rates on new leases at our assets decrease, our existing tenants do not renew their leases, or we do not re-let a significant portion of our available space and space for which leases expire, it could have a material adverse effect on us.
 
We depend on major tenants in our commercial portfolio, and the bankruptcy, insolvency or inability to pay rent of any of these tenants could have a material adverse effect on us.
 
As of December 31, 2019, the 20 largest office and retail tenants in our Operating Portfolio represented approximately 54.2% of our share of total annualized office and retail rent. In many cases, through tenant improvement allowances and other concessions, we have made substantial upfront investments in leases with our major tenants that we may not recover if they fail to pay rent through the end of the lease term.
 
The inability of a major tenant to pay rent, or the bankruptcy or insolvency of a major tenant, may adversely affect the income produced by our Operating Portfolio. For example, WeWork, which represents 2.1% of our share of total annualized office and retail rent, has recently experienced publicized issues regarding its management and capitalization. If a major tenant were unable to pay rent, or were to become bankrupt or insolvent, this may adversely affect the income produced by our Operating Portfolio. Additionally, if a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease with us. If a lease is rejected by a tenant in bankruptcy, we may have only a general unsecured claim for damages that is limited in amount and may only be paid to the extent that funds are available and in the same percentage as is paid to all other holders of unsecured claims. Moreover, any claim against this tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease.

If any of our major tenants were to experience a downturn in its business, or a weakening of its financial condition resulting in its failure to make timely rental payments or causing it to default under its lease, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment. Any such event could have a material adverse effect on us.
 

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We derive a significant portion of our revenues from five of our assets.
 
As of December 31, 2019, five of our assets in the aggregate generated approximately 25% of our share of annualized rent. The occurrence of events that have a negative impact on one or more of these assets, such as a natural disaster that damages one or more of these assets, would have a much larger adverse effect on our revenues than a corresponding occurrence affecting a less significant property. A substantial decline in the revenues generated by one or more of these assets could have a material adverse effect on us.
 
We derive most of our revenues from commercial assets and are subject to risks that affect the businesses of our commercial tenants, which are generally financial, legal and other professional firms as well as the federal government and defense contractors.
 
As of December 31, 2019, our 44 operating commercial assets generated approximately 75.7% of our share of annualized rent. As a result, the occurrence of events that have a negative impact on the market for office space, such as increased unemployment in the Washington, D.C. metropolitan area, would have a much larger adverse effect on our revenues than a corresponding occurrence affecting our multifamily segment. Many of our office tenants are financial, legal and other professional firms, as well as the federal government and defense contractors. Consequently, we are subject to factors that affect the financial, legal and professional services industries or the federal government generally, including the state of the economy, stock market volatility, and the level of unemployment. These factors could adversely affect the financial condition of our office tenants and the willingness of firms to lease space in our office buildings, which in turn could have a material adverse effect on us.

Some of our assets depend on anchor or major retail tenants to attract shoppers and could be adversely affected by the loss of, or a store closure by, one or more of these tenants.
 
Some of our assets are anchored by large, nationally recognized tenants. These tenants may experience a downturn in their business that may significantly weaken their financial condition. As a result, these tenants may fail to comply with their contractual obligations to us, seek concessions from us to continue operations or declare bankruptcy, any of which could result in the termination of these tenants’ leases. In addition, some of our tenants may cease operations at stores in our assets while continuing to pay rent. Moreover, mergers or consolidations among large retail establishments could result in the closure of existing stores or duplicate or geographically overlapping store locations, which could include stores at our assets.
 
Loss of, or a store closure by, an anchor or significant tenant could decrease customer traffic, thereby decreasing sales for our other tenants at the applicable retail property. If sales of our other tenants decrease, they may be unable to pay their minimum rents or expense recovery charges. These circumstances may significantly reduce our occupancy level or the rent we receive from our retail assets, and we may not have the right to re-lease vacated space or we may be unable to re-lease vacated space at attractive rents or at all. Moreover, if a significant tenant or anchor store defaults, we may experience delays and costs in enforcing our rights as landlord to recover amounts due to us under the terms of our agreements with those parties.
 
The occurrence of any of the situations described above, particularly if it involves an anchor or major tenant with leases in multiple locations, could have a material adverse effect on us.
 
Our Placemaking business model depends in significant part on a retail component, which frequently involves retail assets embedded in or adjacent to our commercial and/or multifamily assets, making us subject to risks that affect the retail environment generally, such as competition from discount and online retailers, weakness in the economy, consumer spending and the financial condition of large retail companies, any of which could adversely affect market rents for retail space and the willingness or ability of retailers to lease space in our retail assets.

We own and operate retail real estate assets and, consequently, are subject to factors that affect the retail environment generally, as well as the market for retail space. The retail environment and the market for retail space have previously been, and continue to be, adversely affected by increasing competition from online retailers and other online businesses. Additionally, discount retailers and outlet malls, weakness in national, regional and local economies, consumer spending, consumer confidence, adverse financial condition of some large retailing companies, ongoing consolidation in the retail sector and an excess amount of retail space in a number of markets could also adversely affect our retail assets. Increases in online consumer spending may significantly affect our retail tenants’ ability to generate sales in their stores. This inability to generate sales may cause retailers to, among other things, close stores, decrease the size of new or existing stores, ask for concessions from us or go bankrupt, all of which could have a material adverse effect on us.


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Additionally, our Placemaking model depends in significant part on a retail component, which frequently involves retail assets embedded in or adjacent to our office and/or multifamily assets, and if our retail assets lose tenants, whether to the proliferation of online businesses or otherwise, it could have a material adverse effect on us.

If we fail to reinvest in and redevelop our assets to maintain their attractiveness to retailers and shoppers, then retailers or shoppers may perceive that shopping at other venues or online is more convenient, cost-effective or otherwise more attractive, which could negatively affect our ability to rent retail space at our assets.
 
Any of the foregoing factors could adversely affect the financial condition of our retail tenants, the willingness of retailers to lease space from us, and the success of our Placemaking business model, which could have a material adverse effect on us.

The composition of our portfolio by asset type may change over time, which could expose us to different asset class risks than if our portfolio composition remained static.

We own commercial and multifamily assets, with commercial representing 75.7% of our annualized rent and 70.1% of our portfolio based on square footage. Therefore, our results of operations are more affected by conditions in the commercial market than markets for other asset types. If the composition of our portfolio changes, however, then we would become more exposed to the risks and markets of other asset classes. Under our current business plan, we expect that multifamily assets will become a greater proportion of our portfolio in the future. If we are successful in executing the current business plan, then we will become more exposed to the risks of the multifamily markets, and we may not manage those assets as well as our commercial assets, either of which could have a material adverse effect on us.
 
We may be adversely affected by trends in the office real estate industry.

Telecommuting, flexible work schedules, open workplaces, teleconferencing and the use of artificial intelligence are becoming more common. These practices enable businesses to reduce their space requirements. There is also an increasing trend among some businesses to utilize shared office spaces and co-working spaces. A continuation of the movement toward these practices could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations.

Increased affordability of residential homes and other competition for tenants of our multifamily properties could affect our ability to retain current residents of our multifamily properties, attract new ones or increase or maintain rents, which could adversely affect our results of operations and our financial condition.

Our multifamily properties compete with numerous housing alternatives in attracting residents, including owner occupied single and multifamily homes. Occupancy levels and market rents may be adversely affected by national and local political, economic and market conditions including, without limitation, new construction and excess inventory of multifamily and owned housing/condominiums, increasing portions of owned housing/condominium stock being converted to rental use, rental housing subsidized by the government, other government programs that favor single family rental housing or owner occupied housing over multifamily rental housing, governmental regulations, slow or negative employment growth and household formation, the availability of low-interest mortgages or the availability of mortgages requiring little or no down payment for single family home buyers, changes in social preferences and the potential for geopolitical instability, all of which are beyond our control. Finally, the federal government’s policies, many of which may encourage home ownership, can increase competition, possibly limit our ability to raise rents in our markets and lower the value of our properties. Competitive housing and increased affordability of owner occupied single and multifamily homes caused by lower housing prices, an influx of supply of such housing alternatives, attractive mortgage interest rates and government programs to promote home ownership could adversely affect our ability to retain our current residents, attract new ones or increase or maintain rents, which could adversely affect our results of operations and our financial condition.

Real estate is a competitive business.
 
We compete with numerous acquirers, developers, owners and operators of commercial real estate including other REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships and individual investors, some of which may have greater financial resources and be willing to accept lower returns on their investments than we are. The principal means of competition in leasing are lease terms (including rent charged and tenant improvement allowances), location, services provided and the nature and condition of the asset to be leased. If our competitors offer space at rental rates below current market rates, below the rental rates we currently charge our tenants, in better locations within our markets, in higher quality assets or offer better services, we may lose potential tenants and we may be pressured to reduce our rental rates below those we currently charge to retain tenants when our tenants’ leases expire.


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Our success depends upon, among other factors, trends of the global, national, regional and local economies, the financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population and employment trends.    
 
We depend on leasing space to tenants on economically favorable terms and collecting rent from tenants who may not be able to pay.
 
Our financial results depend significantly on leasing space in our assets to tenants on economically favorable terms. In addition, because most of our income is derived from renting real property, our income, funds available to pay indebtedness and funds available for distribution to shareholders will decrease if our tenants cannot pay their rent or if we are not able to maintain occupancy levels on favorable terms. If a tenant does not pay its rent, we might not be able to enforce our rights as landlord without delays and might incur substantial legal and other costs. During periods of economic adversity, there may be an increase in the number of tenants that cannot pay their rent and an increase in vacancy rates, which could have a material adverse effect on us.
 
We may find it necessary to make rent or other concessions and/or significant capital expenditures to improve our assets to retain and attract tenants, which could have a material adverse effect on us.
 
We may find it necessary to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our tenants. As a result, we may have to make significant capital or other expenditures to retain tenants whose leases expire and to attract new tenants in sufficient numbers. If the necessary capital is unavailable, we may be unable to make such expenditures. This could result in non-renewals by tenants upon expiration of their leases and our vacant space remaining untenanted, which could have a material adverse effect on us.
 
Affordable housing and tenant protection regulations may limit our ability to increase rents and pass through new or increased operating expenses to our tenants.
 
Certain states and municipalities have adopted laws and regulations imposing restrictions on the timing or amount of rent increases and other tenant protections. As of December 31, 2019, approximately 6% of the multifamily units in our Operating Portfolio were designated as affordable housing. In addition, Washington, D.C. and Montgomery County, Maryland have laws that require, in certain circumstances, an owner of a multifamily rental property to allow tenant organizations the option to purchase the building at a market price if the owner attempts to sell the property. We expect to continue operating and acquiring assets in areas that either are subject to these types of laws or regulations or where such laws or regulations may be enacted in the future. Such laws and regulations limit our ability to charge market rents, increase rents, evict tenants or recover increases in our operating expenses and could make it more difficult for us to dispose of assets in certain circumstances.
 
Our success depends on our senior management team whose continued service is not guaranteed, and the loss of one or more of these persons could adversely affect our ability to manage our business and to implement our growth strategies or could create a negative perception in the capital markets.
 
Our success and our ability to implement and manage anticipated future growth depend, in large part, upon the efforts of our senior management team, who have extensive market knowledge and relationships, and exercise substantial influence over our operational, financing, acquisition and disposition activity. Members of our senior management team have national or regional industry reputations that attract business and investment opportunities and assist us in negotiations with lenders, existing and potential tenants and other industry participants. The loss of services of one or more members of our senior management team, or our inability to attract and retain similarly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners, existing and prospective tenants and industry participants, which could have a material adverse effect on us.
 
The actual density of our future development pipeline and/or any particular future development parcel may not be consistent with our estimated potential development density.
 
As of December 31, 2019, we estimate that our 40 future development assets will total 21.9 million square feet (18.7 million square feet at our share) of estimated potential development density. We caution you not to place undue reliance on the potential development density estimates for our future development pipeline and/or any particular future development parcel because they are based solely on our estimates, using data available to us, and our business plans as of December 31, 2019. The actual density of our future development pipeline and/or any particular future development parcel may differ substantially from our estimates based on numerous factors, including our inability to obtain necessary zoning, land use and other required entitlements, legal challenges to our plans by activists and others, as well as building, occupancy and other required governmental permits and authorizations, and changes in the entitlement, permitting and authorization processes that restrict or delay our ability to develop, redevelop or use

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our future development pipeline at anticipated density levels. Moreover, we may strategically choose not to develop, redevelop or use our future development pipeline to its maximum potential development density or may be unable to do so as a result of factors beyond our control, including our ability to obtain financing on terms and conditions that we find acceptable, or at all, to fund our development activities. We can provide no assurance that the actual density of our future development pipeline and/or any particular future development parcel will be consistent with our estimated potential development density.
 
We may not be able to realize potential incremental annualized rent from our commercial, multifamily or other lease-up opportunities.
 
Based on current market demand in our submarkets and the efforts of our dedicated in-house leasing teams, we believe we can increase our occupancy and revenue at certain office, multifamily and retail assets. However, we cannot assure you that we will be able to realize potential incremental annualized rent from our commercial, multifamily or other lease-up opportunities. Our ability to increase our occupancy and revenue at certain commercial, multifamily and other assets may be adversely affected by an increase in supply and/or deterioration in the commercial, multifamily or other markets. In addition, if our competitors offer space at rental rates below current asking rates or below our in-place rates, we may experience difficulties attracting new tenants or retaining existing tenants and may be pressured to reduce our rental rates below those we currently charge or to offer more substantial free rent, tenant improvements, early termination rights or below-market renewal options in order to attract or retain tenants. We caution you not to place undue reliance on our belief that we can increase our occupancy and revenue at certain office, multifamily and retail assets.
 
We may from time to time be subject to litigation, which could have a material adverse effect on us.
We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others to which we may be subject from time to time may significantly divert the attention of our officers and/or trustees and result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured could have a material adverse effect on us. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and trustees.
Some of our potential losses may not be covered by insurance.
 
We maintain general liability insurance as well as all-risk property and rental value insurance coverage, with sub-limits for certain perils such as floods and earthquakes on each of our properties. However, there can be no assurance that losses incurred by us will be covered by these insurance policies. For example, product defects not covered by manufacturers’ warranties may not be covered by our insurance policies. We maintain coverage for terrorism acts including terrorism involving nuclear, biological, chemical and radiological terrorism events, as defined by the Terrorism Risk Insurance Program Reauthorization Act of 2019 ("TRIPRA"), which expires in December 2027. We will continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot provide assurance that such coverage will be available on commercially reasonable terms in the future.
Our mortgage loans are generally non-recourse and contain customary covenants requiring adequate insurance coverage. Although we believe that we currently have adequate insurance coverage for purposes of these agreements, 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 can obtain, it could adversely affect the ability to finance or refinance the properties.
 
Compliance or failure to comply with the Americans with Disabilities Act or other safety regulations and requirements could result in substantial costs.
 
The Americans with Disabilities Act ("ADA") generally requires that public buildings, including our assets, meet certain federal requirements related to access and use by disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants and/or legal fees to their counsel. If, under the ADA, we are required to make substantial alterations and capital expenditures in one or more of our assets, including the removal of access barriers, it could have a material adverse effect on us.
 
Our assets are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that will affect our cash flow and results of operations.

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Terrorist attacks may adversely affect the value of our assets and our ability to generate revenue.
 
Our assets are in the Washington, D.C. metropolitan area, which has been and may be in the future the target of actual or threatened terrorism activity. Terrorist attacks in the Washington, D.C. metropolitan area could directly or indirectly damage our assets, both physically and financially, or cause losses that materially exceed our insurance coverage. Properties that are occupied by federal government tenants may be more likely to be the target of a future attack. As a result of the foregoing, the value of our assets and our ability to generate revenues could decline materially, which could have a material adverse effect on us.
  
Our business and operations would suffer in the event of system failures.
 
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions. Any of the foregoing could have a material adverse effect on us.
 
The occurrence of cyber incidents, or a deficiency in our cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, regulatory enforcement and other legal proceedings and/or damage to our business relationships, all of which could negatively impact our financial results.
 
A cyber incident is any adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include unauthorized persons gaining access to systems to disrupt operations, corrupt data or steal confidential information. The risk of a cyber incident or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.

As our reliance on technology increases, so do the risks posed to our systems - both internal and external. Our primary risks that could directly result from the occurrence of a cyber incident are theft of assets; operational interruption; regulatory enforcement, lawsuits and other legal proceedings; damage to our relationships with our tenants; and private data exposure. A significant and extended disruption could damage our business or reputation, cause a loss of revenue, have an adverse effect on tenant relations, cause an unintended or unauthorized public disclosure, or lead to the misappropriation of proprietary, personally identifying, and confidential information, any of which could result in us incurring significant expenses to address and remediate or otherwise resolve these kinds of issues.

Although we have implemented processes, procedures and controls to help mitigate the risks associated with a cyber incident, there can be no assurance that these processes, procedures and controls will be sufficient for all possible situations. Even security measures that are appropriate, reasonable and/or in accordance with applicable legal requirements may not be sufficient to protect the information we maintain. Unauthorized parties, whether within or outside our company, may disrupt or gain access to our systems, or those of third parties with whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including break-ins, use of stolen credentials, social engineering, phishing, computer viruses or other malicious codes, and similar means of unauthorized and destructive tampering. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted cyber incidents evolve and generally are not recognized until launched against a target. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, making it impossible for us to entirely mitigate this risk.

Risks Related to the Formation Transaction
 
We have a limited history operating as an independent company, and our historical financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.
 
The historical information included herein covering periods prior to the Formation Transaction refers to our business as operated by Vornado and JBG separately from each other. Our historical financial information included herein covering periods prior to the Formation Transaction is derived from the consolidated financial statements and accounting records of Vornado and does not include the results of the assets contributed by JBG for any period prior to completion of the Formation Transaction. Accordingly, the historical financial information included herein does not necessarily reflect the financial condition, results of operations or

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cash flows that we would have achieved as a separate, publicly traded company during the periods presented or those that we will achieve in the future.

For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements, refer to "Selected Financial Data," "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and accompanying notes included herein.
 
We could be required to indemnify Vornado for certain material tax obligations that could arise as addressed in the Tax Matters Agreement.
 
The Tax Matters Agreement that we entered into with Vornado 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 (i) an acquisition of all or a portion of our equity securities or our assets, whether by merger or otherwise, (ii) other actions or failures to act by us, or (iii) any of our representations or undertakings being incorrect or violated. In addition, under the Tax Matters Agreement, we are liable for any taxes attributable to us and our subsidiaries, unless such taxes are imposed on us or any of the REITs contributed by Vornado (i) with respect to a period before the distribution as a result of any action taken by Vornado after the distribution, or (ii) with respect to any period as a result of Vornado’s failure to qualify as a REIT for the taxable year of Vornado that includes the distribution.
 
Unless Vornado and JBG SMITH were both REITs immediately after the distribution of JBG SMITH from Vornado and at all times during the two years thereafter, JBG SMITH could be required to recognize certain corporate-level gains for tax purposes.
 
Section 355(h) of the Code provides that tax-free treatment will not be available unless, as relevant here, Vornado and JBG SMITH were both REITs immediately after the distribution.
 
In addition, subject to certain exceptions, a REIT must recognize corporate-level gain if it acquires property from a non-REIT "C" corporation in certain so-called "conversion" transactions and engages in a Section 355 transaction within ten years of such conversion. For this purpose, a conversion transaction refers to the qualification of a non-REIT "C" corporation as a REIT or the transfer of property owned by a non-REIT "C" corporation to a REIT. JBG SMITH or its subsidiaries have acquired property pursuant to conversion transactions within ten years of the distribution. One of the exceptions to the recognition of corporate-level gain applies to a distribution described in Section 355 of the Code in which the distributing corporation and the controlled corporation are both REITs immediately after such distribution and at all times during the two years thereafter.
 
We believe that each of Vornado and JBG SMITH qualifies as a REIT and operated in a manner so that each qualified immediately after the distribution and at all times during the two years after the distribution. However, if either Vornado or JBG SMITH failed to qualify as a REIT immediately after the distribution of JBG SMITH from Vornado or at any time during the two years after the distribution, then, for our taxable year that includes the distribution, the IRS may assert that JBG SMITH would have to recognize corporate-level gain on assets acquired in conversion transactions.

Potential indemnification liabilities to Vornado pursuant to the Separation and Distribution Agreement (the "Separation Agreement") could have a material adverse effect on us.
 
The Separation Agreement provides for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist relating to our business activities, whether incurred prior to or after the Formation Transaction, as well as those obligations of Vornado that we assumed pursuant to the Separation Agreement. If we are required to indemnify Vornado under the circumstances set forth in this agreement, we may be subject to substantial liabilities.
 
There may be undisclosed liabilities of the Vornado and JBG assets contributed to us in the Formation Transaction that might expose us to potentially large, unanticipated costs.
 
Prior to entering into the Master Transaction Agreement ("MTA"), each of Vornado and JBG performed diligence with respect to the business and assets of the other. However, these diligence reviews were necessarily limited in nature and scope and may not have adequately uncovered all of the contingent or undisclosed liabilities that we assumed in connection with the Formation Transaction, many of which may not be covered by insurance. The MTA does not provide for indemnification for these types of liabilities by either party post-closing, and, therefore, we may not have any recourse with respect to such unexpected liabilities. Any such liabilities could cause us to experience losses, which may be significant, which could have a material adverse effect on us.
 

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Certain of our trustees and executive officers may have actual or potential conflicts of interest because of their previous or continuing equity interest in, or positions at, Vornado or JBG, as applicable, including trustees and members of our senior management, who have an ownership interest in the JBG Legacy Funds and own carried interests in certain JBG Legacy Funds 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.
 
Some of our trustees and executive officers are persons who are or have been employees of Vornado or were employees of JBG. Because of their current or former positions with Vornado or JBG, certain of our trustees and executive officers own Vornado common shares or other Vornado equity awards or equity interests in certain JBG Legacy Funds and related entities. In addition, one of our trustees continues to serve as chief executive officer and chairman of the Board of Trustees of Vornado. Ownership of Vornado common shares or interests in the JBG Legacy Funds, or service as a trustee or managing partner, as applicable, at either company, could create, or appear to create, potential conflicts of interest.
 
Certain of the JBG Legacy Funds own assets that were not contributed to us in the combination (the "JBG Excluded Assets"), which JBG Legacy Funds are owned in part by members of our senior management. In addition, although the asset management and property management fees associated with the JBG Excluded Assets were assigned to us upon completion of the Formation Transaction, the general partner and managing member interests in the JBG Legacy Funds held by former JBG executives (who became members of our management team) were not transferred to us and remain under the control of these individuals. As a result, our management’s time and efforts may be diverted from the management of our assets to management of the JBG Legacy Funds, which could adversely affect the execution of our business plan and our results of operations and cash flow.
 
In addition, members of our senior management 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 entitle them to receive additional compensation if the fund or real estate venture achieves certain return thresholds. As a result, members of our senior management could be incentivized to spend time and effort maximizing the cash flow from the assets being retained by the JBG Legacy Funds and certain real estate ventures, particularly through sales of assets, which may accelerate payments of the carried interest but would reduce the asset management and other fees that would otherwise be payable to us with respect to the JBG Excluded Assets. These actions could adversely impact our results of operations and cash flow.

Other potential conflicts of interest with the JBG Legacy Funds include transactions with these funds and competition for tenants. We have, and in the future we may, enter into transactions with the JBG Legacy Funds, such as purchasing assets from them. Any such transaction would create a conflict of interest as a result of our management team’s interests on both sides of the transaction, because we manage the JBG Legacy Funds and because members of our management own interests in the general partner or other managing entities of the funds. We may compete for tenants with the JBG Legacy Funds and because we typically manage the assets of the JBG Legacy Funds, we may have a conflict of interest when competing for a tenant if the tenant is interested in assets owned by us and the JBG Legacy Funds. Any of the above described conflicts of interest could have a material adverse effect on us.

Vornado is not required to present investments to us that satisfy our investment guidelines before pursuing such opportunities on Vornado’s behalf.
 
Our declaration of trust provides that a trustee who is also a trustee, officer, employee or agent of Vornado or any of Vornado’s affiliates has no duty to communicate or present any business opportunity to us. Additionally, our agreements with Vornado do not require Vornado to present to us investment opportunities that satisfy our investment guidelines before Vornado pursues such opportunities. While Vornado advised us at the time of the Formation Transaction that it did not intend to make acquisitions within the Washington, D.C. metropolitan area after the Formation Transaction, should it choose to do so, Vornado is free to direct investment opportunities away from us, and we may be unable to compete with Vornado in pursuing such opportunities.

In connection with the Formation Transaction, Vornado agreed to indemnify us for certain pre-distribution liabilities and liabilities related to Vornado assets. However, there can be no assurance that these indemnities will be sufficient to protect us against the full amount of such liabilities, or that Vornado’s ability to satisfy its indemnification obligation will not be impaired in the future.
 
Pursuant to the Separation Agreement, Vornado agreed to indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that Vornado agreed to retain, and there can be no assurance that Vornado will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Vornado any amounts for which we are held liable, such indemnification may be insufficient to fully offset the financial impact of such liabilities and/or we may be temporarily required to bear these losses while seeking recovery from Vornado.
 

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Risks Related to Our Indebtedness and Financing
 
We have a substantial amount of indebtedness, which may limit our financial and operating activities and expose us to the risk of default under our debt obligations.
 
As of December 31, 2019, we had $1.6 billion aggregate principal amount of consolidated debt outstanding, and our unconsolidated real estate ventures had $1.2 billion aggregate principal amount of debt outstanding ($330.2 million at our share), resulting in a total of $2.0 billion aggregate principal amount of debt outstanding at our share. A portion of our outstanding debt is guaranteed by our operating partnership, and we may incur significant additional debt to finance future acquisition and development activities.
 
Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our assets or to pay the dividends currently contemplated. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:
 
our cash flow may be insufficient to meet our required principal and interest payments;
we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to meet operational needs;
we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;
we may be forced to dispose of one or more of our assets, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;
we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and
our default under any loan with cross-default provisions could result in a default on other indebtedness.

If any one of these events were to occur, it could have a material adverse effect on us.
 
Our debt agreements include restrictive covenants, requirements to maintain financial ratios and default provisions, which could limit our flexibility and our ability to make distributions and require us to repay the indebtedness prior to its maturity.
 
The mortgages on our assets contain customary negative covenants that, among other things, limit our ability, without the prior consent of the lender, to further mortgage the property and to reduce or change insurance coverage. We have a $1.4 billion credit facility under which we have significant borrowing capacity. Additionally, our debt agreements contain customary covenants that, among other things, restrict our ability to incur additional indebtedness and may restrict our ability to engage in material asset sales, mergers, consolidations and acquisitions, and restrict our ability to make capital expenditures. These debt agreements, in some cases, also subject us to guarantor and liquidity covenants, and our credit facility requires, and other future debt may require, us to maintain various financial ratios. Some of our debt agreements contain cash flow sweep requirements and mandatory escrows, and our property mortgages generally require mandatory prepayments upon disposition of underlying collateral. Our ability to borrow is subject to compliance with these and other covenants, and failure to comply with our covenants could cause a default under the applicable debt instrument, and we may then be required to repay such debt with capital from other sources or give possession of a property to the lender. Under those circumstances, other sources of capital may not be available to us or may be available only on unattractive terms.
 
We may not be able to obtain capital to make investments.
 
Because the Code requires us, as a REIT, to distribute at least 90% of our taxable income, excluding net capital gains, to our shareholders, we depend primarily on external financing to fund the growth of our business. There is a separate requirement to distribute net capital gains or pay a corporate level tax in lieu thereof. Our access to debt or equity financing depends on the willingness of third parties to lend or make equity investments and on conditions in the capital markets generally. There can be no assurance that new financing will be available or available on acceptable terms.

Our future development plans are capital intensive. To complete these plans, we anticipate financing construction and development through asset sales, real estate ventures with third parties, recapitalizations of assets, and public or private equity offerings, or a combination thereof. Similarly, these plans require an even more significant amount of debt financing. If we are unable to obtain the required debt or equity capital, then we will not be able to execute our business plan, which could have a material adverse effect on us.


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For information about our available sources of funds, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and the notes to the consolidated and combined financial statements included herein.
  
High mortgage rates and/or unavailability of mortgage debt may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire or retain, our net income and the amount of cash distributions we can make.
If mortgage debt is not available at reasonable rates, or if lenders currently under contractual obligations to lend to us fail to perform on such obligations, we may not be able to finance the purchase of properties. If we place mortgages on properties, we may be unable to refinance the properties when the loans become due, or refinance on favorable terms or at all, including as a result of increases in interest rates or a decline in the value of our portfolio or portions thereof. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds from other capital transactions, such as new equity issuances, our operating cash flow may not be sufficient in all years to repay all maturing debt. This, in turn, could reduce cash available for distribution to our shareholders and may hinder our ability to raise more capital by issuing more shares or by borrowing more money. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to make distributions necessary to meet the distribution requirements imposed on REITs under the Code. As a result, we may be forced to postpone capital expenditures necessary for the maintenance of our properties, we may have to dispose of one or more properties on terms that would otherwise be unacceptable to us or we may be forced to allow the mortgage holder to foreclose on a property, any of the foregoing could have a material adverse effect on us.  
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.
Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property collateralizing loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties. For tax purposes, a foreclosure on any of our properties that is subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.  
Variable rate debt is subject to interest rate risk that could increase our interest expense, increase the cost to refinance and increase the cost of issuing new debt.
As of December 31, 2019, $1.1 billion of our outstanding consolidated debt was subject to instruments that bear interest at variable rates, and we may also borrow additional money at variable interest rates in the future. We have made arrangements that hedge against the risk of rising interest rates with respect to $797.5 million of our outstanding consolidated debt; but with respect to the remainder, increases in interest rates would increase our interest expense under these instruments, increase the cost of refinancing these instruments or issuing new debt, and adversely affect our cash flow and our ability to service our indebtedness and make distributions to our shareholders, which could, in turn, adversely affect the market price of our common shares. Based on our aggregate variable rate debt outstanding as of December 31, 2019, an increase of 100 basis points in interest rates would result in a hypothetical increase of approximately $2.7 million in interest expense on an annual basis. The amount of this change includes the benefit of swaps and caps we currently have in place.
The future of the reference rate used in our existing floating rate debt instruments and hedging arrangements is uncertain, which could have an uncertain economic effect on these instruments, which could hinder our ability to maintain effective hedges and may adversely affect our financial condition, results of operations, cash flow, per share market price of our common shares and ability to make distributions to our shareholders.
The REIT provisions of the Code impose certain restrictions on our ability to utilize hedges, swaps and other types of derivatives to hedge our liabilities. Subject to these restrictions, we may enter into hedging transactions to protect ourselves from the effects of interest rate fluctuations on floating rate debt. As of December 31, 2019, our hedging transactions include interest rate swap agreements, which covered $797.5 million of our outstanding consolidated debt. These agreements involve risks, such as the risk that such arrangements would not be effective in reducing our exposure to interest rate changes or that a court could rule that such an agreement is not legally enforceable. In addition, interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates, which could reduce the overall returns on our investments. Failure to hedge effectively against interest rate changes could have a material adverse effect on us. In addition, while such agreements would be intended to lessen the impact

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of rising interest rates on us, they could also expose us to the risk that the other parties to the agreements would not perform, and that the hedging arrangements may not be effective in reducing our exposure to interest rate changes. Moreover, there can be no assurance that our hedging arrangements will qualify as highly effective cash flow hedges under FASB Accounting Standards Codification, or Topic 815, Derivatives and Hedging, or that our hedging activities will have the desired beneficial impact on our results of operations. Furthermore, should we desire to terminate a hedging agreement, there could be significant costs and cash requirements involved to fulfill our obligation under the hedging agreement. Any of the foregoing could have a material adverse effect on us.
Our existing floating rate debt instruments, including our credit facility, and our hedging arrangements currently use as a reference rate the London Interbank Overnight Rate ("LIBOR"), as calculated for U.S. dollar ("USD-LIBOR"), and we expect a transition from LIBOR to another reference rate in the near term. In July 2017, due to a decline in the quantity of loans used to calculate LIBOR, the United Kingdom regulator that regulates LIBOR announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021, and LIBOR is expected to be phased out accordingly. In April 2018, the New York Federal Reserve commenced publishing an alternative reference rate for the U.S. dollar, the Secured Overnight Financing Rate ("SOFR"), proposed by a group of major market participants convened by the U.S. Federal Reserve with participation by SEC Staff and other regulators, the Alternative Reference Rates Committee ("ARRC"). SOFR has been published since April 2019. SOFR is based on transactions in the more robust U.S. Treasury repurchase market and has been proposed as the alternative to USD-LIBOR for use in derivatives and other financial contracts that currently rely on USD-LIBOR as a reference rate. ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry-wide and company-specific transition plans related to derivatives and cash markets exposed to LIBOR, but there remains uncertainty in the timing and details of this transition. The transition from USD-LIBOR to SOFR or any other replacement rate adopted is likely to cause uncertainty due to a mismatch in the USD-LIBOR maturities and the terms of SOFR. Additionally, there is some possibility that LIBOR continues to be published, but that the quantity of loans used to calculate LIBOR diminishes significantly enough to reduce the appropriateness of the rate as a reference rate. If a published USD-LIBOR is unavailable after 2021, the interest rates for our debt instruments that are indexed to USD-LIBOR will be determined using various alternative methods, any of which may result in interest obligations that are more than or do not otherwise correlate over time with the payments that would have been made on such debt if USD-LIBOR remained available.
We can provide no assurance regarding the future of LIBOR and when our current debt instruments and hedging arrangements will transition from USD-LIBOR as a reference rate to SOFR or another replacement reference rate. Confusion related to the transition from USD-LIBOR to SOFR or another replacement reference rate for our debt and hedging instruments could have an uncertain economic effect on these instruments and could also hinder our ability to establish effective hedges and result in a different economic value over time for these instruments than they otherwise would have had under USD-LIBOR.
We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in shareholder dilution and limit our ability to sell or refinance such assets.
In the future, we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our operating partnership, which may result in shareholder dilution through the issuance of OP Units that may be exchanged for common shares. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct (as compared to a transaction where we do not inherit the contributor’s tax basis but acquire tax basis equal to the value of the consideration exchanged for the property) until the OP units issued in such transactions are redeemed for cash or converted into common shares. While no such protection arrangements existed at December 31, 2019, in the future we may agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of, or refinance the debt on, the acquired properties for specified periods of time. Similarly, we may be required to incur or maintain debt we would otherwise not incur or maintain so that we can allocate the debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.
Risks Related to the Real Estate Industry
 
Real estate investments’ value and income fluctuate due to various factors.
 
The value of real estate fluctuates depending on conditions in the general economy and the real estate business. These conditions may also adversely impact our revenues and cash flows.
 
The factors that affect the value of our real estate include, among other things:
 
global, national, regional and local economic conditions; 

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competition from other available space;
local conditions such as an oversupply of space or a reduction in demand for real estate in the area;
how well we manage our assets;
the development and/or redevelopment of our assets;
changes in market rental rates;
 the timing and costs associated with property improvements and rentals;
whether we can pass all or portions of any increases in operating costs through to tenants; 
 changes in real estate taxes and other expenses;
 whether tenants and users consider a property attractive;
the financial condition of our tenants, including the extent of tenant bankruptcies or defaults;
 availability of financing on acceptable terms or at all;  
inflation or deflation;
fluctuations in interest rates; 
our ability to obtain adequate insurance; 
changes in zoning laws and taxation; 
government regulation; 
consequences of any armed conflict involving, or terrorist attack against, the United States or individual acts of violence in public spaces;
potential liability under environmental or other laws or regulations; 
natural disasters;
general competitive factors; and 
climate change.
 
The rents or sales proceeds we receive and the occupancy levels at our assets may decline as a result of adverse changes in any of these factors. If rental revenues, sales proceeds and/or occupancy levels decline, we generally would expect to have less cash available to pay indebtedness and for distribution to shareholders. In addition, some of our major expenses, including mortgage payments, real estate taxes and maintenance costs generally do not decline when the related rents decline.
 
It may be difficult to buy and sell real estate quickly, which may limit our flexibility.
 
Real estate investments are relatively difficult to buy and sell quickly. Consequently, we may have limited ability to vary our portfolio promptly in response to changes in economic or other conditions. Moreover, our ability to buy, sell, or finance real estate assets may be adversely affected during periods of uncertainty or unfavorable conditions in the credit markets as we, or potential buyers of our assets, may experience difficulty in obtaining financing.

Our property taxes could increase due to property tax rate changes or reassessment, which could have a material adverse effect on us.
Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay certain state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially from what we have paid in the past and such increases may not be covered by tenants pursuant to our lease agreements. An increase in the property taxes we pay could have a material adverse effect on us.
We may incur significant costs to comply with environmental laws, and environmental contamination may impair our ability to lease and/or sell real estate.
 
Our operations and assets are subject to various federal, state and local laws and regulations concerning the protection of the environment including air and water quality, hazardous or toxic substances and health and safety. Under some environmental laws, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances released at a property. The owner or operator may also be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by those parties because of the contamination. These laws often impose liability without regard to whether the owner or operator knew of the release of the substances or caused such release.

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The presence of contamination or the failure to remediate contamination may (1) expose us to third-party liability (e.g., for cleanup costs, natural resource damages, bodily injury or property damage), (2) subject our properties to liens in favor of the government for damages and costs the government incurs in connection with the contamination, (3) result in restrictions on the manner in which a property may be used or businesses may be operated, or (4) impair our ability to sell or lease real estate or to borrow using the real estate as collateral. To the extent we send contaminated materials to other locations for treatment or disposal, we may be liable for cleanup of those sites if they become contaminated.

Other laws and regulations govern indoor and outdoor air quality including those that can require the abatement or removal of asbestos-containing materials in the event of damage, demolition, renovation or remodeling, and also govern emissions of and exposure to asbestos fibers in the air. The maintenance and removal of lead paint and certain electrical equipment containing polychlorinated biphenyls (PCBs) are also regulated by federal and state laws. We are also subject to risks associated with human exposure to chemical or biological contaminants such as molds, pollens, viruses and bacteria which, above certain levels, can be alleged to be connected to allergic or other health effects and symptoms in susceptible individuals. Our predecessor companies may be subject to similar liabilities for activities of those companies in the past. We could incur fines for environmental noncompliance and be held liable for the costs of remedial action with respect to the foregoing regulated substances or related claims arising out of environmental contamination or human exposure at or from our assets.
 
Most of our assets have been subjected to varying degrees of environmental assessment at various times. To date, these environmental assessments have not revealed any environmental condition material to our business. However, identification of new compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, human exposure to contamination or changes in cleanup or compliance requirements could result in significant costs to us.
 
In addition, we may become subject to costs or taxes, or increases therein, associated with natural resource or energy usage (such as a "carbon tax"). These costs or taxes could increase our operating costs and decrease the cash available to pay our obligations or distribute to equity holders.

If we default on or fail to renew at expiration the ground leases for land on which some of our assets are located or other long-term leases, our results of operations could be adversely affected.
We own leasehold interests in certain land on which some of our assets are located. If we default under the terms of any of these ground leases, we may be liable for damages and could lose our leasehold interest in the property or our option to purchase the underlying fee interest in such assets. In addition, unless we purchase the underlying fee interests in the land on which a particular property is located, we will lose our right to operate the property or we will continue to operate it at much lower profitability, which would significantly adversely affect our results of operations. In addition, if we are perceived to have breached the terms of a ground lease, the fee owner may initiate proceedings to terminate the lease. As of December 31, 2019, the remaining weighted average term of our ground leases, including unilateral as-of-right extension rights available to us, was approximately 50.6 years. Our share of annualized rent from assets subject to ground leases as of December 31, 2019 was approximately $66.1 million, or 12.3% of total annualized rent.

Our assets may be subject to impairment charges, which could have a material adverse effect on our results of operations.
 We evaluate our long-lived assets, primarily real estate held for investment, for impairment periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. In evaluating and/or measuring impairment, the Company considers, among other things, current and estimated future cash flows associated with each property, market information for each sub-market and other quantitative and qualitative factors. Another key consideration in this assessment is the Company's assumptions about the highest and best use of its real estate investments and its intent and ability to hold them for a reasonable period that would allow for the recovery of their carrying values. These key assumptions are subjective in nature and could differ materially from actual results if the property was disposed. Changes in our strategy or changes in the marketplace may alter the anticipated hold period of an asset or asset group, which may result in an impairment loss, and such loss could be material to our financial condition or operating performance. If, after giving effect to such changes, we conclude that the carrying values of such assets or asset groups are no longer recoverable, we may recognize impairments in future periods equal to the excess of the carrying values over the estimated fair value.

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Climate change may adversely affect our business.
Climate change, including rising sea levels, flooding, extreme weather, and changes in precipitation and temperature, may result in physical damage to, a decrease in demand for and/or a decrease in rent from and value of our properties located in the areas affected by these conditions. We own several assets in low-lying areas close to sea level, making those assets susceptible to a rise in sea level. If sea levels were to rise, we may incur material costs to protect our low-lying assets or sustain damage, a decrease in value or total loss to those assets. Furthermore, our insurance premiums may increase as a result of the threat of climate change or the effects of climate change may not be covered by our insurance policies. We do not currently have any assets located within a FEMA Special Flood Hazard Area in our portfolio.

In addition, changes in federal and state legislation and regulations on climate change could result in increased utility expenses and/or increased capital expenditures to improve the energy efficiency of our existing properties or other related aspects of our properties in order to comply with such regulations or otherwise adapt to climate change. The four major jurisdictions where we operate are the District of Columbia, Arlington County, VA, Fairfax County, VA, and Montgomery County, MD, each of whom have made formal public commitments to carbon reduction aligned with the Paris Agreement's goal to keep global warming under 2 degrees Celsius. To enforce this commitment, in December 2018, the Washington, D.C. City Council passed the D.C. Clean Energy Omnibus bill. The bill requires that all electricity purchased in the District be renewable by 2032, as well as sets a building energy performance standard (BEPS) with minimum energy efficiency standards no lower than the median performance level for each building type. Under BEPS, all existing buildings over 50,000 square feet will be required to reach minimum levels of energy efficiency or deliver savings by 2026, with progressively smaller buildings phasing into compliance over the following years. This regulation may require unplanned capital improvements, and increased engagement to manage occupant energy use, which is a large driver of building performance. Properties that cannot meet performance standards within our investment thresholds risk fines for non-compliance, as well as a decrease in demand and a decline in value.

Any of the above could have a material and adverse effect on us.

Risks Related to Our Organization and Structure
 
Tax consequences to holders of JBG SMITH LP limited partnership units upon a sale of certain of our assets may cause the interests of our senior management to differ from your own.
 
Some holders of JBG SMITH LP limited partnership units, including members of our senior management, may suffer different and more adverse tax consequences than holders of our common shares upon the sale of certain of the assets owned by our operating partnership, and therefore these holders may have different objectives regarding the appropriate pricing, timing and other material terms of any sale or refinancing of certain assets, or whether to sell such assets at all.
 
Our declaration of trust and bylaws, the partnership agreement of our operating partnership and Maryland law contain provisions that may delay, defer or prevent a change of control transaction that might involve a premium price for our common shares or that our shareholders otherwise believe to be in their best interest.
 
Our declaration of trust contains ownership limits with respect to our shares.
 
Generally, to maintain our qualification as a REIT, no more than 50% in value of our outstanding shares of beneficial interest may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of our taxable year. The Code defines "individuals" for purposes of the requirement described in the preceding sentence to include some types of entities. Our declaration of trust authorizes our Board of Trustees to take such actions as it determines are necessary or advisable to preserve our qualification as a REIT. Our declaration of trust prohibits, among other things, the actual, beneficial or constructive ownership by any person of more than 7.5% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series. For these purposes, our declaration of trust includes a "group" as that term is used for purposes of Section 13(d)(3) of the Exchange Act in the definition of "person." Our Board of Trustees may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied.
  
This ownership limit and the other restrictions on ownership and transfer of our shares contained in our declaration of trust may:
 
discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our common shares or that our shareholders might otherwise believe to be in their best interest; or
result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.

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Provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that might involve a premium price for our common shares or that our shareholders might otherwise believe to be in their best interest.
 
Provisions of the Maryland General Corporation Law, or "MGCL", may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of common shares with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
 
"business combination" provisions that, subject to limitations, prohibit business combinations between us and an "interested shareholder" (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then-outstanding voting shares at any time within the two-year period immediately prior to the date in question) for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter impose fair price and/or supermajority shareholder voting requirements on these combinations; and
"control share" provisions that provide that a shareholder’s "control shares" of our company (defined as shares that, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a "control share acquisition" (defined as the direct or indirect acquisition of ownership or control of issued and outstanding "control shares") have no voting rights with respect to their control shares, except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
 
As permitted by the MGCL, we have elected in our bylaws to opt out of the business combination and control share provisions of the MGCL. However, we cannot assure you that our Board of Trustees will not opt to be subject to such provisions of the MGCL in the future, including opting to be subject to such provisions retroactively.
 
The limited partnership agreement of our operating partnership requires the approval of the limited partners with respect to certain extraordinary transactions involving JBG SMITH, which may reduce the likelihood of such transactions being consummated, even if they are in the best interests of, and have been approved by, our shareholders.
 
The limited partnership agreement of JBG SMITH LP provides that we may not engage in a merger, consolidation or other combination with or into another person, a sale of all or substantially all of our assets, or a reclassification, recapitalization or a change in outstanding shares (except for changes in par value, or from par value to no par value, or as a result of a subdivision or combination of our common shares), which we refer to collectively as an extraordinary transaction, unless specified criteria are met. In particular, with respect to any extraordinary transaction, if partners will receive consideration for their limited partnership units and if we seek the approval of our shareholders for the transaction (or if we would have been required to obtain shareholder approval of any such extraordinary transaction but for the fact that a tender offer shall have been accepted with respect to a sufficient number of our common shares to permit consummation of such extraordinary transaction without shareholder approval), then the limited partnership agreement prohibits us from engaging in the extraordinary transaction unless we also obtain "partnership approval." To obtain "partnership approval," we must obtain the consent of our limited partners (including us and any limited partners majority owned, directly or indirectly, by us) representing a percentage interest in JBG SMITH LP that is equal to or greater than the percentage of our outstanding common shares required (or that would have been required in the absence of a tender offer) to approve the extraordinary transaction, provided that we and any limited partners majority owned, directly or indirectly, by us will be deemed to have provided consent for our partnership units solely in proportion to the percentage of our common shares approving the extraordinary transaction (or, if there is no shareholder vote with respect to such extraordinary transaction because a tender offer shall have been accepted with respect to a sufficient number of our common shares to permit consummation of the extraordinary transaction without shareholder approval, the percentage of our common shares with respect to which such tender offer shall have been accepted).
 
The limited partners of JBG SMITH LP may have interests in an extraordinary transaction that differ from those of common shareholders, and there can be no assurance that, if we are required to seek "partnership approval" for such a transaction, we will be able to obtain it. As a result, if a sufficient number of limited partners oppose such an extraordinary transaction, the limited partnership agreement may prohibit us from consummating it, even if it is in the best interests of, and has been approved by, our shareholders.
 

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We may issue additional shares in a manner that could adversely affect the likelihood of takeover transactions.
 
Our declaration of trust authorizes the Board of Trustees, without shareholder approval, to:
 
cause us to issue additional authorized but unissued common or preferred shares;
classify or reclassify, in one or more classes or series, any unissued common or preferred shares;
set the preferences, rights and other terms of any classified or reclassified shares that we issue; and
amend our declaration of trust to increase the number of shares of beneficial interest that we may issue.
 
The Board of Trustees could establish a class or series of common or preferred shares whose terms could delay, deter or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interest of our shareholders, although the Board of Trustees does not now intend to establish a class or series of common or preferred shares of this kind. Our declaration of trust and bylaws contain other provisions that may delay, deter or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interest of our shareholders.
 
Substantially all our assets are owned by subsidiaries. We depend on dividends and distributions from these subsidiaries. The creditors of these subsidiaries are entitled to amounts payable to them by the subsidiaries before the subsidiaries may pay any dividends or other distributions to us.
 
Substantially all of our assets are held through JBG SMITH LP which holds substantially all of its assets through wholly owned subsidiaries. JBG SMITH LP’s cash flow is dependent on cash distributions to it by its subsidiaries, and in turn, substantially all of our cash flow is dependent on cash distributions to us by JBG SMITH LP. The creditors of each of our subsidiaries are entitled to payment of that subsidiary’s obligations to them when due and payable before distributions may be made by that subsidiary to its equity holders. In addition, the operating agreements governing some of our subsidiaries which are parties to real estate joint ventures may have restrictions on distributions which could limit the ability of those subsidiaries to make distributions to JBG SMITH LP. Thus, JBG SMITH LP’s ability to make distributions to holders of its units, including us, depends on its subsidiaries’ ability first to satisfy their obligations to their creditors, and then to make distributions to JBG SMITH LP. Likewise, our ability to pay dividends to our shareholders depends on JBG SMITH LP’s ability first to satisfy its obligations, if any, to its creditors and make distributions payable to holders of preferred units (if any), and then to make distributions to us.
 
In addition, our participation in any distribution of the assets of any of our subsidiaries upon the liquidation, reorganization or insolvency of the subsidiary, occurs only after the claims of the creditors, including trade creditors, and preferred security holders, if any, of the applicable direct or indirect subsidiaries are satisfied.

Our rights and the rights of our shareholders to take action against our trustees and officers are limited.
As permitted by Maryland law, under our declaration of trust, trustees and officers shall not be liable to us and our shareholders for money damages, except for liability resulting from:
actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the trustee or officer that was material to the cause of action adjudicated.

In addition, our declaration of trust requires us to indemnify our trustees and officers for actions taken by them in those and certain other capacities to the maximum extent permitted by Maryland law. The Maryland REIT law permits a REIT to indemnify and advance expenses to its trustees, officers, employees and agents to the same extent as permitted by the MGCL for directors and officers of a Maryland corporation. Generally, Maryland law permits a Maryland corporation to indemnify its present and former directors and officers except in instances where the person seeking indemnification acted in bad faith or with active and deliberate dishonesty, actually received an improper personal benefit in money, property or services or, in the case of a criminal proceeding, had reasonable cause to believe that his or her actions were unlawful. Under Maryland law, a Maryland corporation also may not indemnify a director or officer in a suit by or in the right of the corporation in which the director or officer was adjudged liable to the corporation or for a judgment of liability on the basis that a personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct; however, indemnification for an adverse judgment in a suit by us or in our right, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses. As a result, we and our shareholders may have more limited rights against our trustees and officers than might otherwise exist. Accordingly, if actions taken in good faith by any of our trustees or officers impede the performance of our company, your ability to recover damages from such trustee or officer will be limited.  

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Risks Related to Our Status as a REIT
 
We may fail to qualify or remain qualified as a REIT and may be required to pay income taxes at corporate rates.
 
Although we believe that we are organized and intend to operate to qualify as a REIT for federal income tax purposes, we may fail to remain so qualified. Qualification and taxation as a REIT are governed by highly technical and complex provisions of the Code for which there are only limited judicial or administrative interpretations and depend on various facts and circumstances that are not entirely within our control. In addition, legislation, new regulations, administrative interpretations or court decisions may significantly change the relevant tax laws and/or the federal income tax consequences of qualifying as a REIT. If, with respect to any taxable year, we fail to maintain our qualification as a REIT and do not qualify under statutory relief provisions, we could not deduct distributions to shareholders in computing our taxable income and would have to pay federal income tax on our taxable income at regular corporate rates. If we had to pay federal income tax, the amount of money available to distribute to shareholders and pay our indebtedness would be reduced for the year or years involved, and we would not be required to make distributions to shareholders in that taxable year and in future years until we were able to qualify as a REIT. In addition, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost, unless we were entitled to relief under the relevant statutory provisions.
 
REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan.
 
For us to qualify to be taxed as a REIT, and assuming that certain other requirements are also satisfied, we generally must distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to our shareholders each year, so that U.S. federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT, but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our shareholders in a calendar year is less than a minimum amount specified under U.S. federal income tax laws. We intend to distribute 100% of our REIT taxable income to our shareholders out of assets legally available therefor.
 
From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves, or required debt or amortization payments. Further, under the Code, income must be accrued for U.S. federal income tax purposes no later than when such income is taken into account as revenue in our financial statements, subject to certain exceptions, which could also create mismatches between REIT taxable income and the receipt of cash attributable to such income. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices, distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, or make taxable distributions of our shares or debt securities to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Further, amounts distributed will not be available to fund investment activities. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our shares. Any restrictions on our ability to incur additional indebtedness or make certain distributions could preclude us from meeting the 90% distribution requirement. Decreases in funds from operations due to unfinanced expenditures for acquisitions of assets or increases in the number of shares outstanding without commensurate increases in funds from operations would each adversely affect our ability to maintain our current level of distributions to our shareholders. Consequently, there can be no assurance that we will be able to make distributions at the anticipated distribution rate or any other rate.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends, which could depress the market price of our common shares if perceived as a less attractive investment.
The maximum tax rate applicable to income from "qualified dividends" payable by non‑REIT corporations to U.S. shareholders that are individuals, trusts or estates is 20%, and a 3.8% Medicare tax may also apply. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Commencing with taxable years beginning on or after January 1, 2018 and continuing through 2025, the effective tax rate on ordinary REIT dividends (i.e., dividends other than capital gain dividends and dividends attributable to certain qualified dividend income received by us) is reduced for U.S. holders of our common shares that are individuals, trusts or estates as a result of the ability of such holders to claim a deduction in determining their taxable income equal to 20% of any such dividends they receive (but limited to the excess of a holder’s taxable income over net capital gain). This results in a maximum effective rate of federal income tax (exclusive of the 3.8% Medicare tax) on ordinary REIT dividends of 29.6% through 2025, as compared to the 20% maximum federal income tax rate applicable to qualified dividend income received from

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a non-REIT corporation (although the maximum effective rate applicable to such dividends, after taking into account the 21% federal income tax applicable to non-REIT corporations, is 36.8%). Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, investors who are individuals, trusts or estates may perceive investments in REITs to be relatively less attractive than investments in the shares of non‑REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the per share trading price of our common shares.

The tax imposed on REITs engaging in "prohibited transactions" may limit our ability to engage in transactions that would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we and our subsidiary REITs believe that we have held, and intend to continue to hold, our properties for investment and do not intend to hold any properties that could be characterized as held for sale to customers in the ordinary course of our business unless a sale or disposition qualifies under a statutory safe harbor applicable to REITs, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbor. In the case of some of our properties held through partnerships with third parties, our ability to dispose of such properties in a manner that satisfies the statutory safe harbor depends in part on the action of third parties over which we have no control or only limited influence.
If our operating partnership failed to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.
We believe that our operating partnership will be treated as a partnership for U.S. federal income tax purposes. As a partnership, our operating partnership will not be subject to U.S. federal income tax on its income. Instead, each of its partners, including us, will be allocated, and may be required to pay tax with respect to, its share of our operating partnership’s income. We cannot assure you, however, that the IRS will not challenge the status of our operating partnership or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership as an entity taxable as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would cease to qualify as a REIT. Also, the failure of our operating partnership or any subsidiary partnership to qualify as a partnership could cause the entity to become subject to U.S. federal, state or local corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to us.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, income that we generate from transactions intended to hedge our interest rate and certain types of foreign currency risk generally will be excluded from gross income for purposes of the 75% and 95% gross income tests applicable to REITs if the instrument hedges interest rate or foreign currency risk on liabilities used to carry or acquire real estate assets or certain other types of foreign currency risk, and such instrument is properly identified. Income from certain hedges entered into in connection with the termination of a hedging transaction described in the preceding sentence, where the property or indebtedness that was the subject of the prior hedging transaction was extinguished or disposed of, will also be excluded from gross income for purposes of the 75% and 95% gross income tests. Income from hedging transactions that do not meet these requirements will generally constitute non‑qualifying income for purposes of both the 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the cost of our hedging activities, because our TRS would be subject to tax on gains, or could expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax benefit, except to the extent they can be carried forward and used to offset future taxable income in the TRS.
Our ability to own a significant interest in TRSs will be limited, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our TRSs are not conducted on arm’s length terms.

We own interests in TRSs and may establish additional TRSs in the future. A TRS is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a TRS. If a TRS owns more than 35% percent of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to U.S. federal, state and local income tax as a regular C corporation, and its after-tax net income is available for distribution to the parent REIT but is not required to be distributed. Our domestic TRSs are subject to U.S. federal income tax on their taxable income at a maximum rate of 21% (as well as applicable state and local income tax), but net operating loss, or NOL, carryforwards

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of TRS losses arising in taxable years beginning after December 31, 2018 may be deducted only to the extent of 80% of TRS taxable income in the carryforward year (computed without regard to the NOL deduction). In addition, a 100% excise tax will be imposed on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s length basis.
A REIT’s ownership of securities of a TRS is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25% of our total assets may be represented by securities (including securities of one or more TRSs), other than those securities includable in the 75% asset test, and not more than 20% of our total assets may be represented by securities of one or more TRSs. We anticipate that the aggregate value of the stock and securities of our TRSs and other nonqualifying assets will be less than 20% of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable ownership limitations. In addition, we intend to structure our transactions with our TRSs to ensure that they are entered on arm’s length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the TRS asset limitation or to avoid application of the 100% excise tax discussed above.
Our ability to provide certain services to our tenants may be limited by the REIT provisions of the Code, or we may have to provide such services through a TRS.
As a REIT, we generally cannot provide services to our tenants other than those that are customarily provided by landlords, and we cannot derive income from a third party that provides such services. If we forego providing such services to our tenants, we may be at a disadvantage to competitors who are not subject to the same restrictions. However, we can provide such non‑customary services to tenants and share in the revenue from such services if we do so through a TRS, though income earned through the TRS will be subject to corporate income taxes.
We face possible adverse changes in tax laws, which may result in an increase in our tax liability and adverse consequences to our shareholders.
 
At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. Any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation, could have a material adverse effect on us.

In particular, the Tax Cuts and Jobs Act, which generally took effect for taxable years beginning on or after January 1, 2018 (subject to certain exceptions), made many significant changes to the U.S. federal income tax laws. A number of changes that affect noncorporate taxpayers will expire at the end of 2025 unless Congress acts to extend them. However, there can be no assurance that such changes will be extended. 
 
Additionally, the rules of Section 355 of the Code and the Treasury regulations promulgated thereunder, which apply to determine the taxability of the Formation Transaction, have been the subject of change and may continue to be the subject of change, possibly with retroactive application, which could have a negative effect on us and our shareholders. If such changes occur, we may be required to pay additional taxes on our assets or income. These increased tax costs could have a material adverse effect on us.

Other legislative proposals could be enacted in the future that could affect REITs and their shareholders. Prospective investors are urged to consult their tax advisors regarding potential tax law changes on an investment in our common shares.
 
Risks Related to Our Common Shares
 
We cannot guarantee the timing, amount, or payment of dividends on our common shares.
 
Although we expect to pay regular cash dividends, the timing, declaration, amount and payment of future dividends to shareholders will fall within the discretion of our Board of Trustees. Our Board of Trustees’ decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, limitations under our financing arrangements, industry practice, legal requirements, regulatory constraints, and other factors that it deems relevant. Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and access the capital markets. We cannot guarantee that we will pay a dividend in the future.
 

32




Future offerings of debt or equity securities, which would be senior to our common shares upon liquidation, and/or preferred equity securities, which may be senior to our common shares for purposes of dividend distributions or upon liquidation, may adversely affect the per share trading price of our common shares.
In the future, we may attempt to increase our capital resources by offering debt or equity securities (or causing our operating partnership to issue debt securities), including medium-term notes, senior or subordinated notes and classes or series of preferred shares. Upon liquidation, holders of our debt securities and preferred shares and lenders with respect to other borrowings will be entitled to receive our available assets prior to distribution to the holders of our common shares. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common shares and may result in dilution to owners of our common shares. Holders of our common shares are not entitled to preemptive rights or other protections against dilution. Our preferred shares, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to pay dividends to the holders of our common shares. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.
Your percentage of ownership in our company may be diluted in the future.
 
Your percentage of ownership in us may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise. We also have granted and anticipate continuing to grant compensatory equity awards to our trustees, officers, employees, advisors and consultants who provide services to us. Such awards have a dilutive effect on our earnings per share, which could adversely affect the market price of our common shares.
 
In addition, our declaration of trust authorizes us to issue, without the approval of our shareholders, one or more classes or series of preferred shares having such designation, voting powers, preferences, rights and other terms, including preferences over our common shares with respect to dividends and distributions, as our Board of Trustees generally may determine. The terms of one or more classes or series of preferred shares could dilute the voting power or reduce the value of our common shares. For example, we could grant the holders of preferred shares the right to elect some number of our trustees in all events or on the occurrence of specified events, or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred shares could affect the residual value of our common shares.
 
From time to time we may seek to make one or more material acquisitions. The announcement of such a material acquisition may result in a rapid and significant decline in the price of our common shares.
 
We are continuously looking at material transactions that we believe will maximize shareholder value. However, an announcement by us of one or more significant acquisitions could result in a quick and significant decline in the price of our common shares.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements contained herein constitute forward-looking statements within the meaning of the federal securities laws. 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 Annual Report on Form 10-K.

In particular, information included under "Business," "Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements. 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. Such factors include, but are not limited to:

the economic health of the greater Washington Metro region and our geographic concentration therein, in particular our concentration in National Landing;
reductions in or actual or threatened changes to the timing of federal government spending;
changes in general political, economic and competitive conditions and specific market conditions;
the risks associated with real estate development and redevelopment, including unanticipated expenses, delays and other contingencies;
the risks associated with the acquisition, disposition and ownership of real estate in general and our real estate assets in particular;
the ability to control our operating expenses;

33




the risks related to co-investments in real estate ventures and partnerships;
the ability to renew leases, lease vacant space or re-let space as leases expire, and to do so on favorable terms;
the economic health of our tenants;
fluctuations in interest rates;
the supply of competing properties and competition in the real estate industry generally;
the availability and terms of financing and capital and the general volatility of securities markets;
the risks associated with mortgage debt and other indebtedness;
compliance with applicable laws, including those concerning the environment and access by persons with disabilities;
terrorist attacks and the occurrence of cyber incidents or system failures;
the ability to maintain key personnel;
failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and
other factors discussed under the caption "Risk Factors."

For a further discussion of factors that could materially affect the outcome of our forward-looking statements, see "Risk Factors" in this Annual Report on Form 10-K.

You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or the date of any document incorporated by reference. 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 Annual Report on Form 10-K.

ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved comments from the staff of the SEC as of the date of this Annual Report on Form 10-K.

ITEM 2. PROPERTIES
Note on presentation of "at share" information. We present certain financial information and metrics "at JBG SMITH Share," which refers to our ownership percentage of consolidated and unconsolidated assets in real estate ventures. Financial information "at JBG SMITH Share" is calculated on an entity-by-entity basis. "At JBG SMITH Share" information, which we also refer to as being "at share," "our pro rata share" or "our share," is not, and is not intended to be, a presentation in accordance with GAAP. Because as of December 31, 2019, approximately 11.8% of our assets, as measured by total square feet, were held through real estate ventures in which we own less than 100% of the ownership interest, we believe this form of presentation, which includes our economic interests in the unconsolidated real estate ventures, provides investors important information regarding a significant component of our portfolio, its composition, performance and capitalization. We classify our portfolio as "operating," "under construction," "near-term development" or "future development." "Under construction" refers to assets that were under construction as of December 31, 2019. "Near-term development" refers to assets that have substantially completed the entitlement process and on which we intend to commence construction within 18 months following December 31, 2019, subject to market conditions. We had no near-term development assets as of December 31, 2019. "Future development" refers to assets that are development opportunities on which we do not intend to commence construction within 18 months of December 31, 2019 where we (i) own land or control the land through a ground lease or (ii) are under a long-term conditional contract to purchase or enter into a leasehold interest with respect to land.
The tables below provide information about each of our commercial, multifamily, near-term development and future development portfolios as of December 31, 2019. Many of our future development parcels are adjacent to or an integrated component of operating commercial or multifamily assets in our portfolio. A significant number of our assets included in the tables below are held through real estate ventures with third parties or are subject to ground leases. In addition to other information, the tables below indicate our percentage ownership, whether the assets are consolidated or unconsolidated and whether the asset is subject to a ground lease.


34




Commercial Assets
Commercial Assets%
Ownership

C/U
(1)
Same Store (2):
YTD 2018-2019
Total
Square Feet
%
Leased
(3)
Office % OccupiedRetail % Occupied
        
D.C.       
Universal Buildings100.0%CY659,809
97.4%97.1%99.6%
2101 L Street100.0%CY378,696
84.8%84.1%92.6%
1730 M Street (4)
100.0%CY204,746
88.5%88.0%100.0%
1700 M Street (5)
100.0%CN34,000



L’Enfant Plaza Office-East (4)
49.0%UY397,057
89.5%89.5%
L’Enfant Plaza Office-North49.0%UY298,445
96.8%97.6%85.9%
L’Enfant Plaza Retail (4)
49.0%UY119,291
73.5%100.0%69.2%
The Foundry9.9%UY225,095
92.2%89.4%100.0%
1101 17th Street55.0%UY211,781
84.4%84.0%82.7%
        
VA       
Courthouse Plaza 1 and 2 (4)
100.0%CY628,988
85.2%83.8%100.0%
2121 Crystal Drive100.0%CY505,349
84.3%84.3%
2345 Crystal Drive100.0%CY503,178
85.7%83.6%10.1%
2231 Crystal Drive100.0%CY468,262
85.6%83.1%100.0%
1550 Crystal Drive100.0%CY449,364
89.5%89.5%
RTC-West (6)
100.0%CY432,509
94.5%94.5%
RTC-West Retail100.0%CN40,025
91.9%
91.9%
2011 Crystal Drive100.0%CY439,286
87.2%87.0%49.7%
2451 Crystal Drive100.0%CY401,535
88.5%70.4%95.5%
1235 S. Clark Street100.0%CY383,953
95.7%87.7%100.0%
241 18th Street S.100.0%CY360,034
94.0%91.8%90.2%
251 18th Street S.100.0%CY342,333
96.9%95.1%97.0%
1215 S. Clark Street100.0%CY336,159
100.0%100.0%100.0%
201 12th Street S.100.0%CY329,607
98.5%98.5%100.0%
800 North Glebe Road100.0%CY303,644
98.5%100.0%82.3%
2200 Crystal Drive100.0%CY283,608
82.8%76.2%
1225 S. Clark Street100.0%CY277,145
96.9%53.5%100.0%
1901 South Bell Street100.0%CY276,987
93.3%93.2%100.0%
Crystal City Marriott (345 Rooms)100.0%CY266,000



2100 Crystal Drive100.0%CY249,281
100.0%97.4%
1800 South Bell Street100.0%CN215,828
100.0%100.0%100.0%
200 12th Street S.100.0%CY202,708
90.5%90.5%
2001 Richmond Highway (6)
100.0%CN77,584
100.0%100.0%
Crystal City Shops at 2100100.0%CY59,574
88.2%
88.2%
Crystal Drive Retail100.0%CY56,965
87.9%
85.1%
Central Place Tower (4) (7)
50.0%UN552,437
93.0%92.6%100.0%
Stonebridge at Potomac Town Center*10.0%UY503,613
95.8%
95.4%
Pickett Industrial Park10.0%UY246,145
100.0%100.0%
Rosslyn Gateway-North18.0%UY144,157
87.6%86.8%96.0%
Rosslyn Gateway-South18.0%UY102,194
86.9%90.6%40.4%
        
MD       
7200 Wisconsin Avenue100.0%CY269,941
90.4%79.9%83.9%
One Democracy Plaza* (4)
100.0%CY212,894
96.9%96.9%100.0%
4749 Bethesda Avenue Retail100.0%CY7,999
47.9%
47.9%
11333 Woodglen Drive18.0%UY62,650
97.6%97.2%100.0%
        

35




Commercial Assets%
Ownership

C/U
(1)
Same Store (2):
YTD 2018-2019
Total
Square Feet
%
Leased
(3)
Office % OccupiedRetail % Occupied
Total / Weighted Average  12,520,856
91.7%88.8%91.7%
        
Recently Delivered       
DC       
500 L'Enfant Plaza49.0%UN215,213
85.7%79.2%
        
Operating - Total / Weighted Average 12,736,069
91.6%88.7%91.7%
        
        
Under Construction       
D.C.       
1900 N Street (4)
55.0%U 271,433
73.4%  
VA       
1770 Crystal Drive100.0%C 271,572
97.8%  
Central District Retail100.0%C 108,825
75.2%  
MD       
4747 Bethesda Avenue (8)
100.0%C 291,414
87.7%  
Under Construction - Total / Weighted Average 943,244
85.1%  
        
Total / Weighted Average 13,679,313
91.1%  
        
Totals at JBG SMITH Share      
In service assets   10,602,754
91.5%88.3%91.2%
Recently delivered assets   105,444
85.7%79.2%
Operating assets   10,708,198
91.4%88.2%91.2%
Under construction assets   821,099
86.8%

_______________
Note: At 100% share, unless otherwise noted. Excludes our 10% subordinated interests in two commercial buildings held through a real estate venture in which we have no economic interest.
* Not Metro-served.

(1) 
"C" denotes a consolidated interest. "U" denotes an unconsolidated interest.
(2) 
"Y" denotes an asset as same store and "N" denotes an asset as non-same store. Same store refers to assets that were in service for the entirety of both periods being compared, except for assets for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
(3) 
Represents percentage of total square feet subject to executed leases, including leases that have been executed but for which the tenants have not taken occupancy of the space.
(4) 
Asset is subject to a ground lease.
(5) 
This asset, a development site in Washington, D.C., was leased by us (as landlord) in 2018 for a 99-year term, with no extension options.
(6) 
The following assets contain space that is held for development or not otherwise available for lease. This out-of-service square footage is excluded from area, leased, and occupancy metrics in the above table.
    
Commercial Asset In-ServiceNot Available
for Lease
RTC - West 432,509
17,988
2001 Richmond Highway 77,584
82,254
(7) 
In December 2019, we sold a 50% interest in a real estate venture that owns Central Place Tower.
(8) 
Includes our corporate office lease for approximately 84,400 square feet.


36




Multifamily Assets
Multifamily Assets%
Ownership

C/U
(1)
Same Store (2):
YTD 2018-2019
Number
of
Units
Total
Square
Feet
%
Leased
(3)
Multifamily
%
Occupied
Retail
%
Occupied
         
D.C.        
Fort Totten Square100.0%CY345
384,956
95.6%91.6%100.0%
WestEnd25100.0%CY283
273,264
94.3%90.1%
F1RST Residences (4)
100.0%CN325
270,928
92.0%91.7%91.8%
1221 Van Street100.0%CN291
225,530
95.1%92.1%100.0%
North End Retail100.0%CY
27,355
95.6%N/A
95.6%
The Gale Eckington5.0%UY603
466,716
95.7%93.2%100.0%
Atlantic Plumbing64.0%UY310
245,527
97.4%94.8%100.0%
         
VA        
RiverHouse Apartments100.0%CY1,676
1,327,551
95.0%93.4%100.0%
The Bartlett100.0%CY699
619,372
94.7%93.8%100.0%
220 20th Street100.0%CY265
271,476
96.2%93.2%100.0%
2221 S. Clark Street100.0%CY216
164,743
100.0%100.0%
Fairway Apartments*10.0%UY346
370,850
94.2%93.1%
         
MD        
Falkland Chase-South & West100.0%CY268
222,797
95.5%94.4%
Falkland Chase-North100.0%CY170
112,229
91.2%91.2%
Galvan1.8%UY356
390,641
96.0%94.4%96.8%
The Alaire (5)
18.0%UY279
266,673
94.6%92.5%100.0%
The Terano (5) (6)
1.8%UY214
195,864
94.1%93.0%76.2%
         
Total / Weighted Average  6,646
5,836,472
95.1%93.3%97.7%
         
Recently Delivered 
        
D.C.        
West Half (7)
100.0%CN465
388,653
30.2%23.9%57.1%
Operating - Total / Weighted Average  7,111
6,225,125
91.1%88.7%93.8%
         
Under Construction        
D.C.        
965 Florida Avenue (8)
96.1%C 433
336,092
   
Atlantic Plumbing C100.0%C 256
225,531
   
MD        
7900 Wisconsin Avenue50.0%U 322
359,025
   
Under Construction - Total  1,011
920,648
   
        
Total  8,122
7,145,773
   
         
Totals at JBG SMITH Share       
In service assets   4,862
4,176,318
95.1%93.3%98.9%
Recently delivered assets   465
388,653
30.2%23.9%57.1%
Operating assets   5,327
4,564,971
89.5%87.2%93.2%
Under construction assets   833
728,163



_______________
Note: At 100% share, unless otherwise noted.
* Not Metro-served.

(1) 
"C" denotes a consolidated interest. "U" denotes an unconsolidated interest.
(2) 
"Y" denotes an asset as same store and "N" denotes an asset as non-same store. Same store refers to assets that were in service for the entirety of both periods being compared, except for assets for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared.
(3) 
Represents percentage of total square feet subject to executed leases, including leases that have been executed but for which the tenants have not taken occupancy of the space.
(4) 
In December 2019, we acquired F1RST Residences for $160.5 million.

37




(5) 
Asset is subject to a ground lease.
(6) 
The following asset contains space that is held for development or not otherwise available for lease. This out-of-service square footage is excluded from area, leased, and occupancy metrics in the above table.
Multifamily Asset In-ServiceNot Available
for Lease
The Terano 195,864
3,904

(7) 
During the third quarter of 2019, we completed the construction of West Half.
(8) 
Ownership percentage reflects expected dilution of our real estate venture partner as contributions are funded during the construction of the asset. As of December 31, 2019, our ownership interest was 95.0%.

Near-Term Developments

As of December 31, 2019, we had no near-term development assets.

Future Developments
  
Estimated Commercial SF / Multifamily Units to be Replaced (1)
  Number of Assets         
   Estimated Potential Development Density (SF) 
Region  Total Office Multifamily Retail 
             
Owned            
D.C.            
D.C. 8
 1,678,400
 312,100
 1,357,300
 9,000
 
VA            
National Landing 11
 6,910,400
 2,135,000
 4,655,700
 119,700
  293,412 SF
Reston 4
 2,589,200
 924,800
 1,462,400
 202,000
  15 units
Other VA 4
 199,600
 88,200
 102,100
 9,300
  21,568 SF
  19
 9,699,200
 3,148,000
 6,220,200
 331,000
  314,980 SF / 15 units
MD            
Silver Spring 1
 1,276,300
 
 1,156,300
 120,000
  170 units
Greater Rockville 4
 126,500
 19,200
 88,600
 18,700
 
  5
 1,402,800
 19,200
 1,244,900
 138,700
  170 units
Total / weighted average 32
 12,780,400
 3,479,300
 8,822,400
 478,700
 314,980 SF / 185 units
             
Optioned (2)
            
D.C.            
D.C. 3
 1,793,600
 78,800
 1,498,900
 215,900
 
VA            
Other VA 1
 11,300
 
 10,400
 900
 
Total / weighted average 4
 1,804,900
 78,800
 1,509,300
 216,800
 
             
Held for Sale            
VA            
National Landing (3)
 4
 4,082,000
 4,082,000
 
 
 
             
Total / Weighted Average 40
 18,667,300
 7,640,100
 10,331,700
 695,500
 314,980 SF / 185 units
_______________
Note: At JBG SMITH share.
(1) 
Represents management's estimate of the total office and/or retail rentable square feet and multifamily units that would need to be redeveloped to access some of the estimated potential development density.
(2) 
As of December 31, 2019, the weighted average remaining term for the optioned future development assets is 4.5 years.
(3) 
Represents the estimated potential development density that we have sold to Amazon pursuant to executed purchase and sale agreements. Subject to customary closing conditions, Amazon contracted to acquire these two development sites for an estimated aggregate $293.9 million. In January 2020, we sold the Metropolitan Park land sites to Amazon for a gross sales price of $155.0 million, which represents an $11.0 million increase over the previously estimated contract value resulting from an increase in the approved development density on the sites. We expect the sale of the Pen Place land site to Amazon to be completed in 2021.

38





Major Tenants
The following table sets forth information for our 10 largest tenants by annualized rent for the year ended December 31, 2019:
    At JBG SMITH Share
Tenant Number of Leases 

Square Feet
 % of Total Square Feet 
Annualized Rent
(In thousands)
 % of Total Annualized Rent
GSA 67
 2,447,892
 25.8% $97,169
 23.4%
Family Health International 3
 295,977
 3.1% 15,311
 3.7%
Amazon 3
 326,665
 3.4% 14,130
 3.4%
Gartner, Inc 1
 174,424
 1.8% 11,360
 2.7%
Lockheed Martin Corporation 2
 232,598
 2.4% 10,860
 2.6%
Arlington County 2
 235,779
 2.5% 9,908
 2.4%
WeWork (1)
 2
 163,918
 1.7% 8,543
 2.1%
Greenberg Traurig LLP 1
 101,602
 1.1% 7,304
 1.8%
Accenture LLP 2
 116,736
 1.2% 6,763
 1.6%
Public Broadcasting Service 1
 140,885
 1.5% 5,186
 1.2%
Total 84
 4,236,476
 44.5% $186,534
 44.9%
________________
Note: Includes all in-place leases as of December 31, 2019 for office and retail space within our Operating Portfolio. As signed but not yet commenced leases commence and tenants take occupancy, our tenant concentration will change.
(1) Excludes the WeLive lease at 2221 South Clark Street.

Lease Expirations
The following table sets forth as of December 31, 2019 the scheduled expirations of tenant leases in our Operating Portfolio for each year from 2020 through 2028 and thereafter, assuming no exercise of renewal options or early termination rights:
    At JBG SMITH Share
Year of Lease Expiration Number
of Leases
 
Square Feet
 % of
Total
Square Feet
 Annualized
Rent
(in thousands)
 % of
Total
Annualized
Rent
 Annualized
Rent Per
Square Foot
 
Estimated
Annualized
Rent Per
Square Foot at
Expiration
(1)
Month-to-Month 62
 158,441
 1.7% $5,049
 1.2% $31.87
 $31.87
2020 160
 1,051,182
 11.1% 42,275
 10.2% 40.22
 40.62
2021 116
 989,425
 10.4% 46,014
 11.1% 46.51
 48.11
2022 104
 1,539,568
 16.2% 66,996
 16.1% 43.52
 45.65
2023 91
 553,972
 5.8% 24,274
 5.8% 43.82
 47.32
2024 97
 1,047,902
 11.0% 48,004
 11.5% 45.81
 49.99
2025 76
 608,702
 6.4% 25,315
 6.1% 41.59
 46.98
2026 55
 265,397
 2.8% 11,607
 2.8% 43.73
 50.36
2027 49
 455,115
 4.8% 20,166
 4.8% 44.31
 52.37
2028 45
 386,045
 4.1% 17,902
 4.3% 46.37
 55.62
Thereafter 99
 2,440,276
 25.7% 108,449
 26.1% 44.44
 56.84
 Total / Weighted Average 954
 9,496,025
 100.0% $416,051
 100.0% $43.81
 $49.52
____________________
Note: Includes all in-place leases as of December 31, 2019 for office and retail space within our Operating Portfolio and assuming no exercise of renewal options or early termination rights. The weighted average remaining lease term for the entire portfolio is 5.8 years.

(1) 
Represents monthly base rent before free rent, plus tenant reimbursements, as of lease expiration multiplied by 12 and divided by square feet. Triple net leases are converted to a gross basis by adding tenant reimbursements to monthly base rent. Tenant reimbursements at lease expiration are estimated by escalating tenant reimbursements as of December 31, 2019, or management’s estimate thereof, by 2.75% annually through the lease expiration year.


39




ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, involved in legal actions arising in the ordinary course of business. In our opinion, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Dividends
Our common shares began regular way trading on the New York Stock Exchange, or NYSE, on July 18, 2017, under the symbol "JBGS." On February 20, 2020, there were 912 holders of record of our common shares. This does not reflect individuals or other entities who hold their shares in "street name."

Dividends declared in 2019 totaled $0.90 per common share (regular quarterly dividends of $0.225 per common share each quarter). Dividends declared in 2018 totaled $1.00 per common share (regular quarterly dividends of $0.225 per common share each quarter plus a special dividend of $0.10 per common share). Dividends declared in 2017 totaled $0.45 per common share (regular quarterly dividends of $0.225 per common share each quarter following the Formation Transaction). While future dividends will be declared at the discretion of our Board of Trustees and will depend upon cash generated by our operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Code and such other factors as our Board of Trustees deems relevant, management currently expects regular quarterly dividends in 2020 will be comparable in amount with those declared in 2019. To qualify for the beneficial tax treatment accorded to REITs under the Code, we are currently required to make distributions to holders of our shares in an amount equal to at least 90% of our REIT taxable income as defined in Section 857 of the Code.

The annual dividend amounts are different from dividends as calculated for federal income tax purposes. Distributions to the extent of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to a shareholder as ordinary dividend income. Distributions in excess of current and accumulated earnings and profits will be treated as a nontaxable reduction of the shareholder’s basis in such shareholder’s shares, to the extent thereof, and thereafter as taxable capital gain. Distributions that are treated as a reduction of the shareholder’s basis in its shares will have the effect of increasing the amount of gain, or reducing the amount of loss, recognized upon the sale of the shareholder’s shares. No assurances can be given regarding what portion, if any, of distributions in 2020 or subsequent years will constitute a return of capital for federal income tax purposes. During a year in which a REIT earns a net long-term capital gain, the REIT can elect under Section 857(b)(3) of the Code to designate a portion of dividends paid to shareholders as capital gain dividends. If this election is made, the capital gain dividends are generally taxable to the shareholder as long-term capital gains.

Performance Graph

This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings of under the Securities Act or the Exchange Act.

The graph below compares the cumulative total return of our common shares, the S&P MidCap 400 Index and the FTSE NAREIT Equity Office Index, from July 18, 2017 (the completion date of the Formation Transaction) through December 31, 2019. The comparison assumes $100 was invested on July 18, 2017 in our common shares and in each of the foregoing indexes and assumes reinvestment of dividends, as applicable. We have included the FTSE NAREIT Equity Office Index because we believe that it is representative of the industry in which we compete and is relevant to an assessment of our performance. There can be no assurance that the performance of our shares will continue in line with the same or similar trends depicted in the graph below.



40




chart-fedc0f1d3c54876b4b5.jpg

 Period Ending
 7/18/201712/31/2017
12/31/2018
12/31/2019
JBG SMITH Properties100.0094.51
97.36
114.18
S&P MidCap 400 Index100.00108.61
96.58
121.88
FTSE NAREIT Equity Office Index100.00102.57
87.70
115.25

Sales of Unregistered Shares

During the year ended December 31, 2019, we did not sell any unregistered securities.
Repurchases of Equity Securities
During the year ended December 31, 2019, we did not repurchase any of our equity securities.
Equity Compensation Plan Information
Information regarding equity compensation plans is presented in Part III, Item 12 of this Annual Report on Form 10-K and incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

The following table includes selected consolidated and combined financial data set forth as of and for each of the five years in the period ended December 31, 2019. The consolidated balance sheets as of December 31, 2019, 2018 and 2017 reflect the consolidation of properties that are wholly owned and properties in which we own less than 100% interest, including JBG SMITH LP, but in which we have a controlling interest. The consolidated statements of operations for the years ended December 31, 2019 and 2018 include our consolidated accounts. The consolidated and combined statement of operations for the year ended December 31, 2017 includes our consolidated accounts and the combined accounts of the Vornado Included Assets. Accordingly, the results presented for the year ended December 31, 2017 reflect the operations, comprehensive income (loss), and changes in cash flows and equity on a carved-out and combined basis for the period from January 1, 2017 through the date of the Separation and on a consolidated basis subsequent to the Separation. Consequently, our results for the periods before and after the Formation Transaction are not

41




directly comparable. The financial data for the periods prior to the Separation consist of the Vornado Included Assets and are derived from audited combined financial statements. This selected financial data should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of Operations", and our audited consolidated and combined financial statements and related notes included in Part II, Items 7 and 8 of this Annual Report on Form 10-K.


 Year Ended December 31,
 2019 2018 2017 2016 2015
 (In thousands, except per share data)
Statement of Operations Data:         
Total revenue$647,770
 $644,182
 $543,013
 $478,519
 $470,607
Depreciation and amortization191,580
 211,436
 161,659
 133,343
 144,984
Property operating137,622
 148,081
 118,836
 100,304
 101,511
Real estate taxes70,493
 71,054
 66,434
 57,784
 58,874
General and administrative:
        
Corporate and other46,822
 33,728
 39,350
 48,753
 44,424
Third-party real estate services113,495
 89,826
 51,919
 19,066
 18,217
Share-based compensation related to Formation
   Transaction and special equity awards
42,162
 36,030
 29,251
 
 
Transaction and other costs23,235
 27,706
 127,739
 6,476
 
Total expenses625,409
 617,861
 595,188
 365,726
 368,010
Other income (expense):
 
 
 
 
Income (loss) from unconsolidated real estate ventures, net(1,395) 39,409
 (4,143) (947) (4,283)
Interest and other income, net5,385
 15,168
 1,788
 2,992
 2,557
Interest expense(52,695) (74,447) (58,141) (51,781) (50,823)
Gain on sale of real estate104,991
 52,183
 
 
 
Loss on extinguishment of debt(5,805) (5,153) (701) 
 
Gain (reduction of gain) on bargain purchase
 (7,606) 24,376
 
 
Total other income (expense)50,481
 19,554
 (36,821) (49,736) (52,549)
Income (loss) before income tax (expense) benefit72,842
 45,875
 (88,996) 63,057
 50,048
Income tax (expense) benefit1,302
 738
 9,912
 (1,083) (420)
Net income (loss)74,144
 46,613
 (79,084) 61,974
 49,628
Net (income) loss attributable to redeemable
   noncontrolling interests
(8,573) (6,710) 7,328
 
 
Net loss attributable to noncontrolling interest
 21
 3
 
 
Net income (loss) attributable to common shareholders$65,571
 $39,924
 $(71,753) $61,974
 $49,628
Earnings (loss) per common share:         
Basic$0.48
 $0.31
 $(0.70) $0.62
 $0.49
Diluted$0.48
 $0.31
 $(0.70) $0.62
 $0.49
Weighted average number of common shares
   outstanding - basic and diluted
130,687
 119,176
 105,359
 100,571
 100,571

42





 Year Ended December 31,
 2019 2018 2017 2016 2015
 (In thousands, except per share data)
Balance Sheet Data:         
Real estate, net$4,655,948
 $4,740,859
 $5,006,174
 $3,224,622
 $3,129,973
Total assets5,986,251
 5,997,285
 6,071,807
 3,660,640
 3,575,878
Mortgages payable, net1,125,777
 1,838,381
 2,025,692
 1,165,014
 1,302,956
Revolving credit facility200,000
 
 115,751
 
 
Unsecured term loans, net297,295
 297,129
 46,537
 
 
Redeemable noncontrolling interests612,758
 558,140
 609,129
 
 
Total equity3,386,677
 2,987,352
 2,974,814
 2,121,984
 2,059,491
Cash Flow Statement Data:         
Provided by operating activities$173,986
 $188,193
 $74,183
 $159,541
 $178,230
Provided by (used in) investing activities(240,672) 66,327
 (7,676) (258,807) (236,617)
Provided by (used in) financing activities(190,330) (193,545) 239,787
 51,083
 122,671
Other Information:         
Dividends declared per common share$0.90
 $1.00
 $0.45
 
 
Funds from operations ("FFO") attributable to common
   shareholders (1)
$150,590
 $158,640
 
 
 
FFO per diluted common share (1)
$1.15
 $1.33
 
 
 
_________________
(1) 
FFO attributable to common shareholders and FFO per diluted common share prior to the year ended December 31, 2018 are excluded since periods before and after the Formation Transaction are not directly comparable. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations-Funds from Operations" for a reconciliation of net income attributable to common shareholders, the most directly comparable GAAP measure, to FFO.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated and combined financial statements and notes thereto appearing in Item 8 - Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Organization and Basis of Presentation

JBG SMITH was organized as a Maryland REIT for the purpose of receiving, via the spin-off on July 17, 2017, substantially all of the assets and liabilities of Vornado's Washington, D.C. segment. On July 18, 2017, JBG SMITH acquired the management business and certain assets and liabilities of JBG. Substantially all of our assets are held by, and our operations are conducted through, JBG SMITH LP, our operating partnership.

Prior to the Separation from Vornado, JBG SMITH was a wholly owned subsidiary of Vornado and had no material assets or operations. On July 17, 2017, Vornado distributed 100% of the then outstanding common shares of JBG SMITH on a pro rata basis to the holders of its common shares. Prior to such distribution by Vornado, Vornado Realty L.P. ("VRLP"), Vornado's operating partnership, distributed OP Units in JBG SMITH LP on a pro rata basis to the holders of VRLP's common limited partnership units, consisting of Vornado and the other common limited partners of VRLP. Following such distribution by VRLP and prior to such distribution by Vornado, Vornado contributed to JBG SMITH all of the OP Units it received in exchange for common shares of JBG SMITH.

Our operations are presented as if the transfer of the Vornado Included Assets had been consummated prior to all historical periods presented in the accompanying consolidated and combined financial statements at the carrying amounts of such assets and liabilities reflected in Vornado’s books and records. The assets and liabilities of the JBG Assets and subsequent results of operations and cash flows are reflected in our consolidated and combined financial statements beginning on the date of the Combination.

The following is a discussion of the historical results of operations and liquidity and capital resources of JBG SMITH as of December 31, 2019 and 2018, and for each of the three years in the period ended December 31, 2019, which includes results prior to the consummation of the Formation Transaction. The historical results presented prior to the consummation of the Formation Transaction include the Vornado Included Assets, all of which were under common control of Vornado until July 17, 2017. Unless otherwise specified, the discussion of the historical results prior to July 18, 2017 does not include the results of the JBG Assets. Consequently, our results for the periods before and after the Formation Transaction are not directly comparable.
References to the financial statements refer to our consolidated and combined financial statements as of December 31, 2019 and 2018, and for each of the three years in the period ended December 31, 2019. References to our balance sheets refer to our consolidated balance sheets as of December 31, 2019 and 2018. References to our statements of operations refer to our consolidated and combined statements of operations for each of the three years in the period ended December 31, 2019. References to our statements of cash flows refer to our consolidated and combined statements of cash flows for each of the three years in the period ended December 31, 2019.
The accompanying financial statements are prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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. The historical financial results for the Vornado Included Assets for periods prior to the Formation Transaction reflect charges for certain corporate costs allocated by Vornado which were based on either actual costs incurred or a proportion of costs estimated to be applicable to the Vornado Included Assets based on an analysis of key metrics, including total revenues. Such costs do not necessarily reflect what the actual costs would have been if JBG SMITH had been operating as a separate standalone public company. These charges are discussed further in Note 20 to the financial statements included herein.
We have elected to be taxed as a REIT under sections 856-860 of 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 TRSs under the Code. As such, we are subject to federal, state, and local taxes on the income from these activities.

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

44


We also participate in the activities conducted by our subsidiary entities that have elected to be treated as TRSs under the Code. As such, we are subject to federal, state, and local taxes on the income from these activities. Income taxes attributable to our TRSs are accounted for under the asset and liability method. Under the asset and liability method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future.
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.
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, 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-growth 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 December 31, 2019, our Operating Portfolio consists of 62 operating assets comprising 44 commercial assets totaling 12.7 million square feet (10.7 million square feet at our share) and 18 multifamily assets totaling 7,111 units (5,327 units at our share). Additionally, we have (i) seven assets under construction comprising four commercial assets totaling 943,000 square feet (821,000 square feet at our share) and three multifamily assets totaling 1,011 units (833 units at our share); and (ii) 40 future development assets totaling 21.9 million square feet (18.7 million square feet at our share) of estimated potential development density.
During 2019, we sold or recapitalized approximately $426 million of assets, which included approximately $270 million of operating assets, that were identified for sale or recapitalization because of their relatively low expected return potential and their high tax basis, enabling better capital retention. The assets sold or recapitalized generated approximately $10 million of NOI in 2019. We expect to continue this opportunistic strategy in 2020 by marketing over $500 million of assets for sale. Based on the current challenging investment sales market, and our opportunistic expectations as a seller, we expect to transact on at least $200 million in 2020. 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. The lease renewals we executed in 2017 and 2018 reduced our NOI in 2019, primarily due to free rent associated with these early renewals. Because (i) the concessions in our commercial portfolio have burned off to stabilized levels, (ii) we delivered Under Construction assets on or ahead of schedule, and (iii) we acquired F1RST Residences, we expect NOI to rebound in 2020. We do not, however, expect to see this NOI increase immediately flow through to FFO in 2020, primarily due to the reduction in capitalized interest from the delivery of our assets under construction. As these assets stabilize, we expect the increase in earnings to offset the increase in interest expense which will increase FFO.
Since mid-2017, we have been focused on a comprehensive plan to reposition our holdings in National Landing through a broad array of Placemaking strategies. Our Placemaking strategies include the delivery of new multifamily and office developments, locally sourced amenity retail and thoughtful improvements to the streetscape, sidewalks, parks and other outdoor gathering spaces. In keeping with our dedication to Placemaking, each new project is intended to contribute to authentic and distinct neighborhoods by creating a vibrant street environment with a robust offering of amenity retail and improved public spaces.
In November 2018, Amazon announced it had selected sites that we own in National Landing in Northern Virginia as the location of an additional headquarters. To date, Amazon has executed leases totaling approximately 857,000 square feet at five office buildings in our National Landing portfolio. In March 2019, we executed three initial leases with Amazon totaling approximately 537,000 square feet at three of our office buildings in National Landing. These three initial 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. Amazon began moving into 241 18th Street South and 1800 South Bell in 2019, and we expect Amazon to begin moving into 1770 Crystal Drive by the end of 2020. In April 2019, we executed a lease with Amazon for an additional approximately 48,000 square feet of office space at 2345 Crystal Drive in National Landing. Amazon moved its first employees into 2345 Crystal Drive during the second quarter of 2019. In December 2019, we executed a lease with Amazon for an additional approximately 272,000 square feet of office space at 2100 Crystal Drive in National Landing. We expect Amazon to begin occupying space in 2100 Crystal Drive in late 2020.


45


In March 2019, we also executed purchase and sale agreements with Amazon for two of our National Landing development sites, Metropolitan Park and Pen Place, 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 contracted to acquire these two development sites for an estimated aggregate $293.9 million, or $72.00 per square foot based on their combined estimated potential development density of up to approximately 4.1 million square feet. In May 2019, Amazon submitted its plans to Arlington County for approval of two new office buildings, totaling 2.1 million square feet, inclusive of over 50,000 square feet of street-level retail with new shops and restaurants, on the Metropolitan Park land sites. In January 2020, we sold the Metropolitan Park land sites to Amazon for $155.0 million, which represents an $11.0 million increase over the previously estimated contract value resulting from an increase in the approved development density on the sites. We expect the sale of the Pen Place land site to Amazon to be completed in 2021. We are the developer, property manager and retail leasing agent for Amazon’s new headquarters at National Landing.

In February 2019, the Commonwealth of Virginia enacted an incentives bill, 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.
Key highlights of operating results for the years ended December 31, 2019 included:
net income attributable to common shareholders of $65.6 million, or $0.48 per diluted common share, for the year ended December 31, 2019 as compared to $39.9 million, or $0.31 per diluted common share, for the year ended December 31, 2018. Net income attributable to common shareholders for the years ended December 31, 2019 and 2018 included gains on the sale of real estate of $105.0 million and $52.2 million, and transaction and other costs of $23.2 million and $27.7 million;
third-party real estate services revenue, including reimbursements, of $120.9 million for the year ended December 31, 2019 as compared to $98.7 million for the year ended December 31, 2018;
operating commercial portfolio leased and occupied percentages at our share of 91.4% and 88.2% as of December 31, 2019 compared to 89.6% and 85.5% as of December 31, 2018;
operating multifamily portfolio leased and occupied percentages at our share of 89.5% and 87.2% as of December 31, 2019 and 95.7% and 93.9% as of December 31, 2018. The decreases are due in part to the movement of West Half into our recently delivered operating assets during the fourth quarter of 2019. The in service operating multifamily portfolio was 95.1% leased and 93.3% occupied as of December 31, 2019;
the leasing of approximately 2.3 million square feet, or 2.1 million square feet at our share, at an initial rent (1) of $45.61 per square foot and a GAAP-basis weighted average rent per square foot (2) of $46.31 for the year ended December 31, 2019; and
a decrease in same store (3) NOI of 7.0% to $292.3 million for the year ended December 31, 2019 as compared to $314.1 million for the year ended December 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 year ended December 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 offering expenses, of $472.8 million;
the sale of three commercial assets for the gross sales price of $165.4 million, and the sale of a 50.0% interest in a real estate venture that owns Central Place Tower for the gross sales price of $220.0 million;
the execution of agreements for the sale of the Pen Place and Metropolitan Park land sites with Amazon for its headquarters in National Landing, for an estimated aggregate $293.9 million. In January 2020, we sold the Metropolitan Park land sites to Amazon for the gross sales price of $155.0 million, which represents an $11.0 million increase over the previously estimated contract value as the result of an increase in the approved development density on the sites;
the acquisition of F1RST Residences, a 325-unit multifamily asset located in the Ballpark submarket of Washington, D.C. with approximately 21,000 square feet of street level retail, for $160.5 million through a like-kind exchange agreement with a third-party intermediary;
a $200.0 million draw under the revolving credit facility, which was repaid in 2020;
the repayment of mortgages payable totaling $709.1 million;
the payment of dividends totaling $129.8 million and distributions to our noncontrolling interests of $17.4 million; and
the investment of $441.0 million in development, construction in progress and real estate additions.

46


Activity subsequent to December 31, 2019 included:
the amendment of the credit facility to extend the maturity date of the revolving credit facility to January 2025;
the closing of a mortgage loan with a principal balance of $175.0 million collateralized by 4747 and 4749 Bethesda Avenue; and
the issuance of 471,598 long-term incentive partnership units ("LTIP Units") and 593,100 LTIP Units with performance-based vesting requirements ("Performance-Based LTIP Units") to management and employees with an estimated aggregate fair value of $29.4 million.

Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP, requires management to make estimates and assumptions that in certain circumstances may significantly impact our financial results. These estimates are prepared using management’s best judgment, after considering past and current events and economic conditions. In addition, certain information relied upon by management in preparing such estimates includes internally generated financial and operating information, external market information, when available, and when necessary, information obtained from consultations with third-party experts. Actual results could differ from these estimates. We consider an accounting estimate to be critical if changes in the estimate could have a material impact on our consolidated and combined results of operations or financial condition.
Our significant accounting policies are more fully described in Note 2 to the financial statements included in Part II, Item 8 of this Annual Report on Form 10-K; however, the most critical accounting policies, which involve the use of estimates and assumptions as to future uncertainties and, therefore, may result in actual amounts that differ from estimates, are as follows:
Asset Acquisitions and Business Combinations
We account for asset acquisitions, which includes the consolidation of previously unconsolidated real estate ventures, at cost, including transaction costs, plus the fair value of any assumed debt. We estimate the fair values of acquired tangible assets (consisting of real estate, cash and cash equivalents, tenant and other receivables, investments in unconsolidated real estate ventures and other assets, as applicable), identified intangible assets and liabilities (consisting of the value of in-place leases, above- and below-market leases, options to enter into ground leases and management contracts, as applicable), assumed debt and other liabilities, and noncontrolling interests, as applicable, based on our evaluation of information and estimates available at the date of acquisition. Based on these estimates, we allocate the purchase price, including all transaction costs related to the acquisition, to the identified assets acquired and liabilities assumed based on their relative fair value.
We similarly account for business combinations by estimating the fair values of acquired tangible assets, identified intangible assets and liabilities, assumed debt and other liabilities, and noncontrolling interests, as applicable, based on our evaluation of information and estimates. Any excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill, and any excess of the fair value of assets acquired over the purchase price is recorded as a gain on bargain purchase. If, up to one year from the acquisition date, information regarding the fair value of the assets acquired and liabilities assumed is received and the estimates are refined, appropriate adjustments are made on a prospective basis to the purchase price allocation, which may include adjustments to identified assets, assumed liabilities, and goodwill or the gain on bargain purchase, as applicable. Transaction costs are expensed as incurred and included in "Transaction and other costs" in our statements of operations.
For both asset acquisitions and business combinations, the results of operations of acquisitions are prospectively included in our financial statements beginning with the date of the acquisition.
The fair values of buildings are determined using the "as-if vacant" approach whereby we use discounted cash flow models with inputs and assumptions that we believe are consistent with current market conditions for similar assets. The most significant assumptions in determining the allocation of the purchase price to buildings are the exit capitalization rate, discount rate, estimated market rents and hypothetical expected lease-up periods. We assess fair value of land based on market comparisons and development projects using an income approach of cost plus a margin.
The fair values of identified intangible assets are determined based on the following:
The value allocable to the above- or below-market component of an acquired in-place lease is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired lease) of the difference between (i) the contractual amounts to be received pursuant to the lease over its remaining term and (ii) management’s estimate of the amounts that would be received using market rates over the remaining term of the lease. Amounts allocated to above- market leases are recorded as lease intangible assets in "Other assets, net" in our balance sheets, and amounts allocated to below-market leases are recorded as lease intangible liabilities in "Other liabilities, net" in our balance sheets. These intangibles are amortized to "Property rentals revenue" in our statements of operations over the remaining terms of the respective leases;

47


Factors considered in determining the value allocable to in-place leases during hypothetical lease-up periods related to space that is leased at the time of acquisition include (i) lost rent and operating cost recoveries during the hypothetical lease-up period and (ii) theoretical leasing commissions required to execute similar leases. These intangible assets are recorded as lease intangible assets in "Other assets, net" in our balance sheets and are amortized to "Depreciation and amortization expense" in our statements of operations over the remaining term of the existing lease; and
The fair value of the in-place property management, leasing, asset management, and development and construction management contracts is based on revenue and expense projections over the estimated life of each contract discounted using a market discount rate. These management contract intangibles are amortized to "Depreciation and amortization expense" in our statements of operations over the weighted average life of the management contracts.
The fair value of investments in unconsolidated real estate ventures and related noncontrolling interests is based on the estimated fair values of the identified assets acquired and liabilities assumed of each venture, including future expected cash flows from promote interests.
The fair value of the mortgages payable assumed is determined using current market interest rates for comparable debt financings. The fair values of the interest rate swaps and caps are based on the estimated amounts we would receive or pay to terminate the contract at the acquisition date and are determined using interest rate pricing models and observable inputs. The carrying value of cash, restricted cash, working capital balances, leasehold improvements and equipment, and other assets acquired and liabilities assumed approximates fair value.
Real Estate
Real estate is carried at cost, net of accumulated depreciation and amortization. Maintenance and repairs are expensed as incurred and are included in "Property operating expenses" in our statements of operations. As real estate is undergoing redevelopment activities, all property operating expenses directly associated with and attributable to the redevelopment, including interest expense, are capitalized to the extent that we believe such costs are recoverable through the value of the property. The capitalization period ends when the asset is ready for its intended use, but no later than one year from substantial completion of major construction activities. General and administrative costs are expensed as incurred. Depreciation and amortization require an estimate of the useful life of each property and improvement as well as an allocation of the costs associated with a property to its various components. Depreciation and amortization are recognized on a straight‑line basis over estimated useful lives, which range from three to 40 years. Tenant improvements are amortized on a straight‑line basis over the lives of the related leases, which approximate the useful lives of the tenant improvements. When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period.
Construction in progress, including land, is carried at cost, and no depreciation is recorded. Real estate undergoing significant renovations and improvements is considered to be under development. All direct and indirect costs related to development activities are capitalized into "Construction in progress, including land" on our balance sheets, except for certain demolition costs, which are expensed as incurred. Direct development costs incurred include: pre-development expenditures directly related to a specific project, development and construction costs, interest, insurance and real estate taxes. Indirect development costs include: employee salaries and benefits, travel and other related costs that are directly associated with the development. Our method of calculating capitalized interest expense is based upon applying our weighted average borrowing rate to the actual accumulated expenditures if the property does not have property specific debt. If the property is encumbered by specific debt, we will capitalize both the interest incurred applicable to that debt and additional interest expense using our weighted average borrowing rate for any accumulated expenditures in excess of the principal balance of the debt encumbering the property. The capitalization of such expenses ceases when the real estate is ready for its intended use, but no later than one-year from substantial completion of major construction activities.
Our assets and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Estimates of future cash flows are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. An impairment loss is recognized if the carrying amount of the asset is not recoverable and is measured based on the excess of the property’s carrying amount over its estimated fair value. If our estimates of future cash flows, anticipated holding periods, or fair values change, based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our financial statements. Estimates of future cash flows are subjective and are based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.

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Investments in Real Estate Ventures
We analyze our real estate ventures to determine whether the entities should be consolidated. If it is determined that these entities are variable interest entities ("VIEs") in which we have a variable interest, we assess whether we are the primary beneficiary of the VIE to determine whether it should be consolidated. We are not the primary beneficiary of entities when we do not have voting control, lack the power to direct the activities that most significantly impact the entity's economic performance, or the limited partners (or non-managing members) have substantive participatory rights. If it is determined that these entities are not VIEs, then the determination as to whether we consolidate is based on whether we have a controlling financial interest in the entity, which is based on our voting interests and the degree of influence we have over the entity. Management uses its judgment when determining if we are the primary beneficiary of, or have a controlling financial interest in, an entity in which we have a variable interest. Factors considered in determining whether we have the power to direct the activities that most significantly impact the entity’s economic performance include voting rights, involvement in day-to-day capital and operating decisions and the extent of our involvement in the entity.

We use the equity method of accounting for investments in unconsolidated real estate ventures when we have significant influence but do not have a controlling financial interest. Significant influence is typically indicated through ownership of 20% or more of the voting interests. Under the equity method, we record our investments in these entities in "Investments in unconsolidated real estate ventures" on our balance sheets, and our proportionate share of earnings or losses earned by the real estate venture is recognized in "Income (loss) from unconsolidated real estate ventures, net" in the accompanying statements of operations. We earn revenues from the management services we provide to unconsolidated entities. These fees are determined in accordance with the terms specific to each arrangement and may include property and asset management fees or transactional fees for leasing, acquisition, development and construction, financing and legal services provided. We account for this revenue gross of our ownership interest in each respective real estate venture and recognize such revenue in "Third-party real estate services, including reimbursements" in our statements of operations when earned. Our proportionate share of related expenses is recognized in "Income (loss) from unconsolidated real estate ventures, net" in our statements of operations.

We may also earn incremental promote distributions if certain financial return benchmarks are achieved upon ultimate disposition of the underlying properties. Promote fees are recognized when certain earnings events have occurred, and the amount is determinable and collectible. Any promote fees are reflected in "Income (loss) from unconsolidated real estate ventures, net" in our statements of operations.

With regard to distributions from unconsolidated real estate ventures, we use the information that is available to us to determine the nature of the underlying activity that generated the distributions. Using the nature of distribution approach, cash flows generated from the operations of an unconsolidated real estate venture are classified as a return on investment (cash inflow from operating activities) and cash flows from property sales, debt refinancing or sales of our investments are classified as a return of investment (cash inflow from investing activities).
On a periodic basis, we evaluate our investments in unconsolidated entities for impairment. We assess whether there are any indicators, including underlying property operating performance and general market conditions, that the value of our investments in unconsolidated real estate ventures may be impaired. An investment in a real estate venture is considered impaired if we determine that its fair value is less than the net carrying value of the investment in that real estate venture on an other-than-temporary basis. Cash flow projections for the investments consider property level factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. We consider various qualitative factors to determine if a decrease in the value of our investment is other-than-temporary. These factors include age of the venture, our intent and ability to retain our investment in the entity, financial condition and long-term prospects of the entity and relationships with our partners and banks. If we believe that the decline in the fair value of the investment is temporary, no impairment charge is recorded. If our analysis indicates that there is an other-than temporary impairment related to the investment in a particular real estate venture, the carrying value of the venture will be adjusted to an amount that reflects the estimated fair value of the investment.
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

49


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. Tenant reimbursements, which vary each period, are non-lease components that are not the predominant activity within the contract. We combine certain lease and non-lease components of our operating leases. Non-lease components are recognized together with fixed base rent in "Property rentals revenue", 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.

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 when the tenant takes possession of the space. 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 revenue" 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, includes property and asset management fees, and transactional fees for leasing, acquisition, development and 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. Development fees are earned from providing services to third-party property owners and our unconsolidated real estate ventures. The performance obligations associated with our development services contracts are satisfied over time and we recognize our development fee revenue using a time based measure of progress over the course of the development project due to the stand-ready nature of the promised services. The transaction prices for our performance obligations that are expected to be completed in greater than twelve months are variable based on the costs ultimately incurred to develop the underlying assets. Judgments impacting the timing and amount of revenue recognized from our development services contracts include the determination of the nature and number of performance obligations within a contract, estimates of total development project costs, from which the fees are typically derived, and estimates of the period of time over which the development services are expected to be performed, which is the period over which the revenue is recognized. We recognize development fees earned from unconsolidated joint venture projects to the extent of the third-party partners’ ownership interest.

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

Compensation expense is based on the fair value of our common shares at the date of the grant and is recognized ratably over the vesting period using a graded vesting attribution model. We account for forfeitures as they occur. Distributions paid on unvested OP Units, LTIP Units, LTIP Units with time-based vesting requirements ("Time-Based LTIP Units") and Performance-Based LTIP Units are recorded to "Redeemable noncontrolling interests" in our balance sheets.

Recent Accounting Pronouncements

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

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During the year ended December 31, 2019, we sold Commerce Executive/Commerce Executive Metro Land, 1600 K Street, Vienna Retail and a 50.0% interest in the entity that owns Central Place Tower; and during 2018, we sold Summit I and II, the Bowen Building, Executive Tower, 1233 20th Street and the out-of-service portion of Falkland Chase-North, which we collectively refer to as the "Disposed Properties" in the discussion below. In December 2019, we acquired F1RST Residences, which did not have a material impact on our statement of operations for the year ended December 31, 2019.
Comparison of the Year Ended December 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 year ended December 31, 2019 as compared to the same period in 2018:
 Year Ended December 31,
 2019 2018 % Change
 (In thousands)  
Property rentals revenue$493,273
 $513,447
 (3.9)%
Third-party real estate services revenue, including reimbursements
120,886
 98,699
 22.5 %
Depreciation and amortization expense191,580
 211,436
 (9.4)%
Property operating expense137,622
 148,081
 (7.1)%
Real estate taxes expense70,493
 71,054
 (0.8)%
General and administrative expense:     
Corporate and other46,822
 33,728
 38.8 %
Third-party real estate services113,495
 89,826
 26.3 %
Share-based compensation related to Formation Transaction and
special equity awards
42,162
 36,030
 17.0 %
Transaction and other costs23,235
 27,706
 (16.1)%
Income (loss) from unconsolidated real estate ventures, net(1,395) 39,409
 (103.5)%
Interest and other income, net5,385
 15,168
 (64.5)%
Interest expense52,695
 74,447
 (29.2)%
Gain on sale of real estate104,991
 52,183
 101.2 %
Loss on extinguishment of debt5,805
 5,153
 12.7 %
Reduction of gain on bargain purchase
 7,606
 (100.0)%
Property rentals revenue, decreased by approximately $20.2 million, or 3.9%, to $493.3 million in 2019 from $513.4 million in 2018. The decrease was primarily due to a $26.1 million decline in property rentals revenue related to the Disposed Properties and a $2.8 million decline related to properties taken out of service for redevelopment. The decrease in property rentals revenue was partially offset by a $4.2 million increase in revenue related to 1221 Van Street, which we placed into service during the first quarter of 2018, a combined $1.9 million increase in revenue related to West Half and 4747 Bethesda Avenue, which were both placed into service during the second half of 2019, and an increase in straight line rental revenue, primarily related to a ground lease at 1700 M Street that was executed in the fourth quarter of 2018.
Third-party real estate services revenue, including reimbursements, increased by approximately $22.2 million, or 22.5%, to $120.9 million in 2019 from $98.7 million in 2018. The increase was primarily due to an $8.1 million increase in development fee income and a $16.4 million increase in reimbursement revenue primarily driven by construction management revenue, resulting from an increase in construction projects in 2019.
Depreciation and amortization expense decreased by approximately $19.9 million, or 9.4%, to $191.6 million in 2019 from $211.4 million in 2018. The decrease was primarily due to a $14.1 million decline related to properties taken out of service for redevelopment and a $7.6 million decrease related to the Disposed Properties. The decrease in depreciation and amortization expense was partially offset by an increase of $3.6 million related to 1221 Van Street, West Half and 4747 Bethesda Avenue.
Property operating expense decreased by approximately $10.5 million, or 7.1%, to $137.6 million in 2019 from $148.1 million in 2018. The decrease was primarily due to an $8.3 million decline related to the Disposed Properties, a $3.5 million decline in property operating expenses at Courthouse Plaza 1 and 2 due to a reduction in ground rent expense, and a $2.4 million reduction associated with properties taken out of service for redevelopment. The decrease in property operating expense was partially offset by an increase of $2.9 million related to 1221 Van Street, West Half and 4747 Bethesda Avenue.

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Real estate tax expense decreased by approximately $561,000, or 0.8%, to $70.5 million in 2019 from $71.1 million in 2018. The decrease was primarily due to a $4.0 million decline related to the Disposed Properties and a $1.2 million decrease related to properties taken out of service for redevelopment for which we began capitalizing expenses during 2019. The decrease in real estate tax expense was partially offset by an increase in real estate taxes related to various properties throughout our portfolio.
General and administrative expense: corporate and other increased by approximately $13.1 million, or 38.8%, to $46.8 million in 2019 from $33.7 million in 2018. The increase was primarily due to an increase in share-based compensation expense from the issuance of the 2019 equity awards, an increase in compensation expense as a result of the adoption of Accounting Standards Update 2016-02, Leases ("Topic 842"), which requires the expensing of previously capitalized indirect internal leasing costs, and an increase in overall consulting, legal and marketing expenses.
General and administrative expense: third-party real estate services increased by approximately $23.7 million, or 26.3%, to $113.5 million in 2019 from $89.8 million in 2018. The increase was primarily due to an increase in reimbursable expenses resulting from an increase in construction management projects, an increase in share-based compensation expense from the issuance of the 2019 equity awards and an increase in overall consulting and legal fees.
General and administrative expense: share-based compensation related to Formation Transaction and special equity awards increased by approximately $6.1 million, or 17.0%, to $42.2 million in 2019 from $36.0 million in 2018. The increase was primarily due to share-based compensation associated with the special equity awards issued in the fourth quarter of 2018 related to our successful pursuit of Amazon's additional headquarters in National Landing, partially offset by the vesting of certain awards issued in prior years.
Transaction and other costs of $23.2 million in 2019 include $10.9 million of expenses related to the relocation of our corporate headquarters primarily due to an impairment charge on the right-of-use assets for leases associated with our former corporate headquarters, $5.4 million of demolition costs related to 1900 Crystal Drive, $5.3 million of costs incurred in connection with the Formation Transaction (including integration and severance costs), $651,000 of expenses related to other completed, potential and pursued transactions and $1.0 million of other costs related to a contribution to the Washington Housing Conservancy. Transaction and other costs of $27.7 million in 2018 include $15.9 million of costs incurred in connection with the Formation Transaction (including transition services provided by our former parent, and integration and severance costs), $9.0 million of expenses related to other completed, potential and pursued transactions and $2.8 million of other costs related to the successful pursuit of Amazon's additional headquarters at our properties in National Landing.
Income (loss) from unconsolidated real estate ventures, net decreased by approximately $40.8 million, or 103.5%, to $(1.4) million for 2019 from $39.4 million in 2018. The decrease was primarily due to the 2018 sales of our 5% interest in a real estate venture that owned the Investment Building, resulting in a gain of $15.5 million, and the sale of The Warner Building by one of our unconsolidated real estate ventures, resulting in a gain of $20.6 million.
Interest and other income, net decreased by $9.8 million, or 64.5%, to $5.4 million in 2019 from $15.2 million in 2018. The decrease is primarily due to a greater reduction in assumed lease liabilities in 2018 and lower income from other investments. The decrease in interest and other income was partially offset by higher interest income in 2019.
Interest expense decreased by approximately $21.8 million, or 29.2%, to $52.7 million in 2019 from $74.4 million in 2018. The decrease was primarily due to the repayment of several mortgages payable during 2019 and 2018, a $9.0 million increase in capitalized interest related to higher construction spend and additional projects under redevelopment and a $1.1 million decrease related to the Disposed Properties. The decrease in interest expense was partially offset by additional revolving credit facility borrowings in 2019 and ceasing the capitalization of interest for 1221 Van Street and West Half.
Gain on the sale of real estate of $105.0 million in 2019 was due to the sales of Commerce Executive/Commerce Metro Land, 1600 K Street, Vienna Retail, and a 50% interest in the entity that owns Central Place Tower and the subsequent remeasurement of our remaining interest to fair value. Gain on the sale of real estate of $52.2 million in 2018 was primarily related to the sales of Summit I and II, the Bowen Building, Executive Tower, 1233 20th Street and the out-of-service portion of Falkland Chase - North.
Loss on the extinguishment of debt was $5.8 million in 2019, of which $2.9 million related to our repayment of various mortgages payable and $2.9 million related to the termination of various interest rate swaps in connection with the repayment of the loan encumbering Central Place Tower. Loss on extinguishment of debt of $5.2 million in 2018 was due to our repayment of various mortgages payable.
The reduction of gain on bargain purchase of $7.6 million in 2018 was due to finalizing the fair values used in the purchase price allocation related to the Combination.


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FFO
FFO is a non-GAAP financial measure computed in accordance with the definition established by National Association of Real Estate Investment Trusts ("NAREIT") in the NAREIT FFO White Paper - 2018 Restatement issued in 2018. NAREIT defines FFO as net income (computed in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity, including our share of such adjustments for unconsolidated real estate ventures.
We believe FFO is a meaningful non‑GAAP financial measure useful in comparing our levered operating performance from period-to-period and as compared to similar real estate companies because FFO excludes real estate depreciation and amortization expense and other non-comparable income and expenses, which implicitly assumes that the value of real estate diminishes predictably over time rather than fluctuating based on market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income (computed in accordance with GAAP) as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures used by other companies.
The following is the reconciliation of net income attributable to common shareholders, the most directly comparable GAAP measure, to FFO:
 Year Ended December 31,
 2019 2018
 (In thousands, except per share amounts)
Net income attributable to common shareholders$65,571
 $39,924
Net income attributable to redeemable noncontrolling interests8,573
 6,710
Net loss attributable to noncontrolling interests
 (21)
Net income74,144
 46,613
Gain on sale of real estate(104,991) (52,183)
Gain on sale from unconsolidated real estate ventures(335) (36,042)
Real estate depreciation and amortization180,508
 201,062
Pro rata share of real estate depreciation and amortization from unconsolidated real estate ventures20,577
 25,039
Net income attributable to noncontrolling interests in consolidated real estate ventures(7) (51)
FFO attributable to OP Units (1)
169,896
 184,438
FFO attributable to redeemable noncontrolling interests(19,306) (25,798)
FFO attributable to common shareholders (1)
$150,590
 $158,640
FFO per diluted common share$1.15
 $1.33
Weighted average diluted shares130,687
 119,176
_______________

Note: FFO is presented for the two years ended December 31, 2019 and 2018. FFO for the year ended December 31, 2017 is excluded due to the lack of comparability of periods prior to the Combination.
(1) 
Due to our adoption of Topic 842, beginning in 2019, we no longer capitalize internal leasing costs and expense these costs as incurred (such costs were $6.5 million for the year ended December 31, 2018).  

NOI and Same Store NOI
We utilize NOI, which is a non-GAAP financial measure, to assess a segment’s performance. The most directly comparable GAAP measure is net income attributable to common shareholders. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only property related revenue (which includes base rent, tenant reimbursements and other operating revenue, net of free rent and payments associated with assumed lease liabilities) less operating expenses and ground rent, if applicable. NOI also excludes deferred rent, related party management fees, interest expense, and certain other non-cash adjustments, including the accretion of acquired below-market leases and amortization of acquired above-market leases and below-market ground lease intangibles. Management uses NOI as a supplemental performance measure for our assets and believes it provides useful information to investors because it

53


reflects only those revenue and expense items that are incurred at the asset level, excluding non-cash items. In addition, NOI is considered by many in the real estate industry to be a useful starting point for determining the value of a real estate asset or group of assets. However, because NOI excludes depreciation and amortization and captures neither the changes in the value of our assets that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our assets, all of which have real economic effect and could materially impact the financial performance of our assets, the utility of NOI as a measure of the operating performance of our assets is limited. NOI presented by us may not be comparable to NOI reported by other REITs that define these measures differently. We believe that to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income attributable to common shareholders as presented in our financial statements. NOI should not be considered as an alternative to net income attributable to common shareholders as an indication of our performance or to cash flows as a measure of liquidity or our ability to make distributions.

We also provide certain information on a "same store" basis. Information provided on a same store basis includes the results of 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. While there is judgment surrounding changes in designations, a property is removed from the same store pool when the property is considered to be under construction because it is undergoing significant redevelopment or renovation pursuant to a formal plan or is being repositioned in the market and such renovation or repositioning is expected to have a significant impact on property NOI. A development property or property under construction is moved to the same store pool once a substantial portion of the growth expected from the development or redevelopment is reflected in both the current and comparable prior year period. Acquisitions are moved into the same store pool once we have owned the property for the entirety of the comparable periods and the property is not under significant development or redevelopment. 

During the year ended December 31, 2019, our same store pool changed from the prior year due to the inclusion of the JBG Assets and one Vornado Included Asset (The Bartlett), and the exclusion of Commerce Executive, 1600 K Street and Vienna Retail, which were sold during 2019, and 2001 Richmond Highway, which is being phased out of service for future development.

Same store NOI decreased by $21.9 million, or 7.0%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The decrease in same store NOI for the year ended December 31, 2019, was largely attributable to increased rental abatements and rent reductions, and an increase in assumed lease liability payments. The lease renewals we executed in 2017 and 2018 reduced our NOI in 2019, primarily due to free rent associated with these early renewals. Because (i) the concessions in our commercial portfolio have burned off to stabilized levels, (ii) we delivered Under Construction assets on or ahead of schedule, and (iii) we acquired F1RST Residences, we expect NOI to rebound in 2020.


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The following is the reconciliation of net income attributable to common shareholders to NOI and same store NOI:
 Year Ended December 31,
 2019 2018
 (Dollars in thousands)
Net income attributable to common shareholders$65,571
 $39,924
Add:   
Depreciation and amortization expense191,580
 211,436
General and administrative expense:   
Corporate and other46,822
 33,728
Third-party real estate services113,495
 89,826
Share-based compensation related to Formation Transaction and
special equity awards
42,162
 36,030
Transaction and other costs23,235
 27,706
Interest expense52,695
 74,447
Loss on extinguishment of debt5,805
 5,153
Reduction of gain on bargain purchase
 7,606
Income tax benefit(1,302) (738)
Net income attributable to redeemable noncontrolling
interests
8,573
 6,710
Less:   
Third-party real estate services, including reimbursements
120,886
 98,699
Other revenue (1)
7,638
 6,358
Income (loss) from unconsolidated real estate ventures, net(1,395) 39,409
Interest and other income, net5,385
 15,168
Gain on sale of real estate104,991
 52,183
Net loss attributable to noncontrolling interests
 21
Consolidated NOI311,131
 319,990
NOI attributable to unconsolidated real estate ventures at our share21,797
 36,684
Non-cash rent adjustments (2)
(34,359) (10,349)
Other adjustments (3)
13,979
 15,061
Total adjustments1,417
 41,396
NOI312,548
 361,386
Less: out-of-service NOI loss (4)
(7,013) (4,395)
Operating Portfolio NOI319,561
 365,781
Non-same store NOI (5)
27,298
 51,646
Same store NOI (6)
$292,263
 $314,135
    
Change in same store NOI(7.0)%  
Number of properties in same store pool53
  

___________________________________________________ 
(1) 
Excludes parking revenue of $26.0 million and $25.7 million for the years ended December 31, 2019 and 2018.
(2) 
Adjustment to exclude straight-line rent, above/below market lease amortization and lease incentive amortization.
(3) 
Adjustment to include other revenue and payments associated with assumed lease liabilities related to operating properties and to exclude commercial lease termination revenue and allocated corporate general and administrative expenses to operating properties.
(4) 
Includes the results for our under construction assets and future development pipeline.
(5) 
Includes the results for properties that were not in service for the entirety of both periods being compared and properties for which significant redevelopment, renovation or repositioning occurred during either of the periods being compared. The decrease in non-same store NOI was primarily attributable to lost income from disposed assets.
(6) 
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.

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Reportable Segments
We review operating and financial data for each property on an individual basis; therefore, each of our individual properties is a separate operating segment. We defined our reportable segments to be aligned with our method of internal reporting and the way our Chief Executive Officer, who is also our Chief Operating Decision Maker ("CODM"), makes key operating decisions, evaluates financial results, allocates resources and manages our business. Accordingly, we aggregate our operating segments into three reportable segments (commercial, multifamily, and third-party asset management and real estate services) based on the economic characteristics and nature of our assets and services.

The CODM measures and evaluates the performance of our operating segments, with the exception of the third-party asset management and real estate services business, based on the NOI of properties within each segment. NOI includes property rental revenue and other property revenue, 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 our statements of operations and discussed in the preceding pages under "Results of Operations." The following represents the components of revenue from our third-party real estate services business:
 Year Ended December 31,
 2019 2018
 (In thousands)
Property management fees$22,437
 $24,831
Asset management fees14,045
 14,910
Leasing fees7,377
 6,658
Development fees15,655
 7,592
Construction management fees1,669
 2,892
Other service revenue4,269
 2,801
Third-party real estate services revenue,
   excluding reimbursements
65,452
 59,684
Reimbursements revenue (1)
55,434
 39,015
Third-party real estate services revenue,
   including reimbursements
$120,886
 $98,699
_________________
(1) 
Represents reimbursements of expenses incurred by us on behalf of third parties, including allocated payroll costs and amounts paid to third-party contractors for construction management projects.

Third-party real estate services revenue, including reimbursements, increased by approximately $22.2 million, or 22.5%, to $120.9 million in 2019 from $98.7 million in 2018. The increase was primarily due to an $8.1 million increase in development fee income and a $16.4 million increase in reimbursement revenue primarily driven by construction management revenue, resulting from an increase in construction projects in 2019.
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.

Property revenue is calculated as property rentals revenue plus other property revenue (primarily parking revenue). Property expense is calculated as property operating expenses plus real estate taxes. Consolidated NOI is calculated as total property revenue less total property expense. See Note 18 to the financial statements for the reconciliation of net income attributable to common shareholders to consolidated NOI for each of the three years in the period ended December 31, 2019. The following is a summary of NOI by segment:

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 Year Ended December 31,
 2019 2018
 (In thousands)
Property revenue:   
Commercial$408,904
 $430,042
Multifamily116,710
 109,357
Other (1)
(6,368) (274)
Total property revenue519,246
 539,125
    
Property expense:   
Commercial163,292
 171,612
Multifamily50,257
 45,782
Other (1)
(5,434) 1,741
Total property expense208,115
 219,135
    
Consolidated NOI:   
Commercial245,612
 258,430
Multifamily66,453
 63,575
Other (1)
(934) (2,015)
Consolidated NOI$311,131
 $319,990
_________________
(1) 
Includes activity related to future development assets and corporate entities and the elimination of intersegment activity.
Comparison of the Year Ended December 31, 2019 to 2018
Commercial: Property revenue decreased by $21.1 million, or 4.9%, to $408.9 million in 2019 from $430.0 million in 2018. Consolidated NOI decreased by $12.8 million, or 5.0%, to $245.6 million in 2019 from $258.4 million in 2018. The decrease in property revenue and consolidated NOI was primarily due to the sale of the Disposed Properties, properties that were taken out of service for redevelopment, and rent reductions at 2101 L Street and Courthouse Plaza 1 and 2. These decreases were partially offset by an increase in revenue and consolidated NOI from Central Place Tower, which we placed into service during the first quarter of 2018, 4747 Bethesda Avenue, which we placed into service during the fourth quarter of 2019, and the ground lease at 1700 M Street executed in the fourth quarter of 2018.
Multifamily: Property revenue increased by $7.4 million, or 6.7%, to $116.7 million in 2019 from $109.4 million in 2018. Consolidated NOI increased by $2.9 million, or 4.5%, to $66.5 million in 2019 from $63.6 million in 2018. The increase in property revenue and consolidated NOI was primarily due to an increase in occupancy at 1221 Van Street, which we placed into service during the first quarter of 2018, an increase in occupancy at RiverHouse Apartments and the acquisition of F1RST Residences.
Liquidity and Capital Resources
Property rental income is our primary source of operating cash flow and is dependent on a number of factors including occupancy levels and rental rates, as well as our tenants’ ability to pay rent. In addition, our third-party asset management and real estate services business provides fee-based real estate services to the JBG Legacy Funds, the WHI Impact Pool and other third parties. Our assets provide a relatively consistent level of cash flow that enables us to pay operating expenses, debt service, recurring capital expenditures, dividends to shareholders and distributions to holders of OP Units. Other sources of liquidity to fund cash requirements include proceeds from financings, asset sales and the issuance and sale of equity securities, including from any "at the market" ("ATM") offerings under our ATM program. We anticipate that cash flows from continuing operations and proceeds from financings, recapitalizations and asset sales, together with existing cash balances, will be adequate to fund our business operations, debt amortization, capital expenditures, dividends to shareholders and distributions to holders of OP Units over the next 12 months.

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Financing Activities
The following is a summary of mortgages payable:
  
Weighted Average
Effective
Interest Rate
(1)
 December 31,
   2019 2018
    (In thousands)
Variable rate (2)
 3.36% $2,200
 $308,918
Fixed rate (3)
 4.29% 1,125,648
 1,535,734
Mortgages payable   1,127,848
 1,844,652
Unamortized deferred financing costs and premium/
  discount, net
   (2,071) (6,271)
Mortgages payable, net   $1,125,777
 $1,838,381
__________________________ 
(1) 
Weighted average effective interest rate as of December 31, 2019.
(2) 
Includes a variable rate mortgage payable with an interest rate cap agreement as of December 31, 2018.
(3) 
Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements.
As of December 31, 2019 and 2018, the net carrying value of real estate collateralizing our mortgages payable, excluding assets held for sale, totaled $1.4 billion and $2.3 billion. Our mortgages payable 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 mortgages payable are recourse to us. See Note 19 to the financial statements for additional information. As of December 31, 2019, we were not in default under any mortgage loan.
During the year ended December 31, 2019, aggregate borrowings under mortgages payable totaled $2.2 million related to construction draws. During the year ended December 31, 2019, we repaid mortgages payable with an aggregate principal balance of $709.1 million. The loss on the extinguishment of debt was $5.8 million for the year ended December 31, 2019, of which $2.9 million related to our repayment of various mortgages payable and $2.9 million related to the termination of various interest rate swaps in connection with the repayment of the loan encumbering Central Place Tower. In February 2020, we entered into a mortgage loan with a principal balance of $175.0 million collateralized by 4747 and 4749 Bethesda Avenue.
During the year ended December 31, 2018, aggregate borrowings under mortgages payable totaled $118.1 million, of which $47.5 million related to the principal balance on a new mortgage payable collateralized by 1730 M Street and the remainder related to construction draws under mortgages payable. During the year ended December 31, 2018, we repaid mortgages payable with an aggregate principal balance of $298.1 million, which resulted in a loss on the extinguishment of debt of $5.2 million.
As of December 31, 2019 and 2018, we had various interest rate swap and cap agreements on certain of our mortgages payable with an aggregate notional value of $867.6 million and $1.3 billion. During the year ended December 31, 2019, in connection with the repayment of the loan encumbering Central Place Tower, we terminated various interest rate swaps with an aggregate notional value of $220.0 million. During the year ended December 31, 2018, we entered into various interest rate swap and cap agreements on certain of our mortgages payable with an aggregate notional value of $381.3 million. See Note 17 to the financial statements for additional information.
As of December 31, 2019, our $1.4 billion credit facility consisted 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. Effective as of July 17, 2019, the credit facility was amended to extend the delayed draw period of our Tranche A-1 Term Loan to July 2020. In December 2019, we drew $200.0 million under the revolving credit facility, which was repaid in 2020.
Based on the terms as of December 31, 2019, the interest rate for the credit facility varies based on a ratio of our total outstanding indebtedness to a valuation of certain real property and assets and ranges (a) in the case of the revolving credit facility, from LIBOR plus 1.10% to LIBOR plus 1.50%, (b) in the case of the Tranche A-1 Term Loan, from LIBOR plus 1.20% to LIBOR plus 1.70% and (c) in the case of the Tranche A-2 Term Loan, effective as of July 17, 2019, from LIBOR plus 1.15% to LIBOR plus 1.70%, reflecting a 40 basis point reduction from the prior credit facility. There are various LIBOR options in the credit facility, and we elected the one-month LIBOR option as of December 31, 2019. We were not in default under our credit facility as of December 31, 2019. In January 2020, the credit facility was amended to extend the maturity date of the revolving credit facility from July 2021 to January 2025, and to reduce its range of interest rates by five basis points to LIBOR plus 1.05% to 1.50%.

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As of December 31, 2019 and 2018, we had interest rate swaps with an aggregate notional value of $100.0 million, which mature in January 2023 and effectively convert the variable interest rate applicable to our Tranche A-1 Term Loan to a fixed interest rate, providing weighted average base interest rates under the facility agreements of 2.12% per annum for both periods. As of December 31, 2019, we had interest rate swaps with an aggregate notional value of $137.6 million, which effectively convert the variable interest rate applicable to a portion of the outstanding balance of our Tranche A-2 Term Loan to a fixed interest rate, providing a weighted average base interest rate under the facility agreements of 2.59% per annum.
The following is a summary of amounts outstanding under the credit facility:
  Effective December 31,
  
Interest Rate (1)
 2019 2018
    (In thousands)
Revolving credit facility (2) (3) (4)
 2.86% $200,000
 $
       
Tranche A-1 Term Loan (5)
 3.32% $100,000
 $100,000
Tranche A-2 Term Loan (5)
 3.74% 200,000
 200,000
Unsecured term loans   300,000
 300,000
Unamortized deferred financing costs, net   (2,705) (2,871)
Unsecured term loans, net   $297,295
 $297,129
__________________________ 
(1) 
Interest rate as of December 31, 2019.
(2) 
As of December 31, 2019 and 2018, letters of credit with an aggregate face amount of $1.5 million and $5.7 million were provided under our revolving credit facility.
(3) 
As of December 31, 2019 and 2018, net deferred financing costs related to our revolving credit facility totaling $3.1 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. In January 2020, the credit facility was amended to extend the maturity date of the revolving credit facility from July 2021 to January 2025, and to reduce its range of interest rates by five basis points to LIBOR plus 1.05% to 1.50%.
(5) 
The interest rate includes the impact of interest rate swap agreements.
Our existing floating rate debt instruments, including our credit facility, and our hedging arrangements, currently use LIBOR as a reference rate, and we expect a transition from LIBOR to another reference rate in the near term. In July 2017, due to a decline in the quantity of loans used to calculate LIBOR, the United Kingdom regulator that regulates LIBOR announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021, and LIBOR is expected to be phased out accordingly. In April 2018, the New York Federal Reserve commenced publishing an alternative reference rate for the U.S. dollar, the SOFR, proposed by a group of major market participants convened by the U.S. Federal Reserve with participation by SEC Staff and other regulators, the ARRC. ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry-wide and company-specific transition plans related to derivatives and cash markets exposed to LIBOR, but there remains uncertainty in the timing and details of this transition.
Liquidity Requirements
Our principal liquidity needs for the next 12 months and beyond are to fund:
normal recurring expenses;
debt service and principal repayment obligations, including balloon payments on maturing debt;
capital expenditures, including major renovations, tenant improvements and leasing costs;
development expenditures;
dividends to shareholders and distributions to holders of OP Units and
possible acquisitions of properties, either directly or indirectly through the acquisition of equity interests therein.

59


We expect to satisfy these needs using one or more of the following:
cash flows from operations;
distributions from real estate ventures;
cash and cash equivalent balances;
proceeds from the issuance and sale of equity securities and
proceeds from financings, recapitalizations and asset sales.
We anticipate that cash flows from continuing operations and proceeds from financings, recapitalizations and asset sales, together with existing cash balances, will be adequate to fund our business operations, debt amortization, capital expenditures, dividends to shareholders and distributions to holders of OP Units over the next 12 months.
Contractual Obligations and Commitments
The following is a summary of our contractual obligations and commitments as of December 31, 2019:
 Total 2020 2021 2022 2023 2024 Thereafter
Contractual cash obligations
   (principal and interest):
(In thousands)
Debt obligations (1) (2)
$1,870,093
 $167,619
 $155,518
 $364,836
 $303,224
 $351,997
 $526,899
Operating leases (3)
53,052
 5,999
 3,348
 3,064
 2,000
 2,061
 36,580
Other727
 231
 175
 175
 146
 
 
Total contractual cash obligations (4)
$1,923,872
 $173,849
 $159,041
 $368,075
 $305,370
 $354,058
 $563,479
_________________

(1) 
Interest was computed giving effect to interest rate hedges. One-month LIBOR of 1.76% was applied to loans which are variable (no hedge) or variable with an interest rate cap. Additionally, we assumed no additional borrowings on construction loans.
(2) 
Excludes our proportionate share of unconsolidated real estate venture indebtedness. See additional information in Off-Balance Sheet Arrangements section below.
(3) 
With the adoption of Topic 842, as of January 1, 2019, we recognized right-of-use assets and lease liabilities in our balance sheet associated with our corporate office lease and various ground leases for which we are the lessee. See Note 2 to the financial statements for more information.
(4)
Excludes obligations related to construction or development contracts, since payments are only due upon satisfactory performance under the contracts. See Commitments and Contingencies section below for additional information.
As of December 31, 2019, we have capital commitments and certain recorded guarantees to our unconsolidated real estate ventures totaling approximately $57.7 million.
In December 2019, our Board of Trustees declared a quarterly dividend of $0.225 per common share, which was paid on January 8, 2020.
Summary of Cash Flows
The following summary discussion of our cash flows is based on our statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows:
 Year Ended December 31,
 2019 2018
 (In thousands)
Net cash provided by operating activities$173,986
 $188,193
Net cash (used in) provided by investing activities(240,672) 66,327
Net cash used in financing activities(190,330) (193,545)
Cash Flows for the Year Ended December 31, 2019
Cash and cash equivalents, and restricted cash decreased $257.0 million to $142.5 million as of December 31, 2019, compared to $399.5 million as of December 31, 2018. This decrease resulted from $240.7 million of net cash used in investing activities and $190.3 million of net cash used in financing activities, partially offset by $174.0 million of net cash provided by operating activities. Our outstanding debt was $1.6 billion and $2.1 billion as of December 31, 2019 and 2018. The $516.8 million decrease in outstanding debt was primarily from repayments of mortgages payable, partially offset by a draw on the revolving credit facility.

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Net cash provided by operating activities of $174.0 million primarily comprised: (i) $214.8 million of net income (before $245.6 million of non-cash items and a $105.0 million gain on sale of real estate) and (ii) $2.7 million of return on capital from unconsolidated real estate ventures, partially offset by (iii) $43.5 million of net change in operating assets and liabilities. Non-cash income adjustments of $245.6 million primarily include depreciation and amortization expense, share-based compensation expense, deferred rent, impairment of the right-of-use asset for leases associated with our former corporate headquarters, amortization of lease incentives and loss on extinguishment of debt.
Net cash used in investing activities of $240.7 million primarily comprised: (i) $441.0 million of development costs, construction in progress and real estate additions, (ii) $165.2 million related to the acquisition of F1RST Residences in December 2019, and (iii) $18.7 million of investments in unconsolidated real estate ventures, partially offset by (iv) $377.5 million of proceeds from the sales of real estate and (v) $7.6 million of distributions of capital from unconsolidated real estate ventures.
Net cash used in financing activities of $190.3 million primarily comprised: (i) $719.0 million of repayments of mortgages payable, (ii) $129.8 million of dividends paid to common shareholders and (iii) $17.4 million of distributions to redeemable noncontrolling interests, partially offset by (iv) $472.8 million of net proceeds from the issuance of common stock and (v) $200.0 million of proceeds from borrowings under our revolving credit facility.
Cash Flows for the Year Ended December 31, 2018
Cash and cash equivalents, and restricted cash increased $61.0 million to $399.5 million as of December 31, 2018, compared to $338.6 million as of December 31, 2017. This increase resulted from $188.2 million of net cash provided by operating activities and $66.3 million of net cash provided by investing activities, partially offset by $193.5 million of net cash used in financing activities.
Net cash provided by operating activities of $188.2 million primarily comprised: (i) $227.7 million of net income (before $233.2 million of non-cash items and $52.2 million gain on sale of real estate) and (ii) $7.8 million of return on capital from unconsolidated real estate ventures, partially offset by (iii) $47.3 million of net change in operating assets and liabilities. Non-cash income adjustments of $233.2 million primarily include depreciation and amortization expense, share-based compensation expense, income from unconsolidated real estate ventures, deferred rent and reduction of gain on bargain purchase.
Net cash provided by investing activities of $66.3 million primarily comprised: (i) $413.1 million of proceeds from sale of real estate, (ii) $80.3 million of distributions of capital from sales of unconsolidated real estate ventures and (iii) $14.4 million of distributions of capital from unconsolidated real estate ventures, partially offset by (iv) $385.9 million of development costs, construction in progress and real estate additions, (v) $31.2 million of investments in unconsolidated real estate ventures and (vi) $23.2 million of real estate acquisitions.
Net cash used in financing activities of $193.5 million primarily comprised: (i) $312.9 million of repayments of mortgages payable, (ii) $150.8 million repayment of our revolving credit facility, (iii) $107.4 million of dividends paid to common shareholders and (iv) $17.4 million of distributions to redeemable noncontrolling interests, partially offset by (v) $250.0 million of proceeds from borrowings under our unsecured term loans, (vi) $118.1 million of aggregate proceeds from borrowings under mortgages payable and (vii) $35.0 million of proceeds from borrowings under our revolving credit facility.
Off-Balance Sheet Arrangements
Unconsolidated Real Estate Ventures
We consolidate entities in which we have a controlling interest or are the primary beneficiary in a variable interest entity. From time to time, we may have off-balance-sheet unconsolidated real estate ventures and other unconsolidated arrangements with varying structures.
As of December 31, 2019, we have investments in unconsolidated real estate ventures totaling $543.0 million. For the majority of these investments, we exercise significant influence over but do not control these entities and, therefore. account for these investments using the equity method of accounting. For a more complete description of our real estate ventures, see Note 6 to the financial statements.
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 borrowings, (2) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) in connection with borrowings or (3) provide guarantees to lenders and other third parties for the completion of development projects. We customarily have agreements with our outside venture 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. At times, we also have agreements with certain of our outside venture partners whereby we agree to either indemnify the partners and/or

61



the associated ventures with respect to certain contingent liabilities associated with operating assets or to reimburse our partner for its share of any payments made by them under certain guarantees. Guarantees (excluding environmental) customarily terminate either upon the satisfaction of specified circumstances or repayment of the underlying debt. Amounts that we may be required to pay in future periods in relation to guarantees associated with budget overruns or operating losses are not estimable.
As of December 31, 2019, we have additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures totaling $57.7 million. As of December 31, 2019, we had no principal payment guarantees related to our unconsolidated real estate ventures.
Reconsideration events could cause us to consolidate these unconsolidated real estate ventures and partnerships in the future or deconsolidate a consolidated entity. We evaluate reconsideration events as we become aware of them. Some triggers to be considered are additional contributions required by each partner and each partner's ability to make those contributions. Under certain of these circumstances, we may purchase our partner’s interest. Our unconsolidated real estate ventures are held in entities which appear sufficiently stable to meet their capital requirements; however, if market conditions worsen and our partners are unable to meet their commitments, we may have to consolidate these entities.

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 a portion of the first loss on the above limits and 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 mortgages payable secured by our properties, a revolving credit facility and unsecured term loans, contains 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 December 31, 2019, we have construction in progress that will require an additional $196.9 million to complete ($160.1 million related to our consolidated entities and $36.8 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.
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.
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 determined not to be 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.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on such real estate. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of remediation or removal of such substances may be substantial and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of our assets, we may be potentially liable for such costs. The operations of current

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and former tenants at our assets have involved, or may have involved, the use of hazardous materials or generated hazardous wastes. The release of such hazardous materials and wastes could result in us incurring liabilities to remediate any resulting contamination. The presence of contamination or the failure to remediate contamination at our properties may (1) expose us to third-party liability (e.g., for cleanup costs, natural resource damages, bodily injury or property damage), (2) subject our properties to liens in favor of the government for damages and costs the government incurs in connection with the contamination, (3) impose restrictions on the manner in which a property may be used or businesses may be operated, or (4) materially adversely affect our ability to sell, lease or develop the real estate or to borrow using the real estate as collateral. In addition, our assets are exposed to the risk of contamination originating from other sources. While a property owner may not be responsible for remediating contamination that has migrated onsite from an identifiable and viable offsite source, the contaminant’s presence can have adverse effects on operations and the redevelopment of our assets. To the extent we send contaminated materials to other locations for treatment or disposal, we may be liable for cleanup of those sites if they become contaminated.

Most of our assets have been subject, at some point, to environmental assessments that are intended to evaluate the environmental condition of the subject and surrounding assets. These environmental assessments generally have included a historical review, a public records review, a visual inspection of the site and surrounding assets, visual or historical evidence of underground storage tanks, and the preparation and issuance of a written report. Soil and/or groundwater subsurface testing is conducted at our assets, when necessary, to further investigate any issues raised by the initial assessment that could reasonably be expected to pose a material concern to the property or result in us incurring material environmental liabilities as a result of redevelopment. They may not, however, have included extensive sampling or subsurface investigations. In each case where the environmental assessments have identified conditions requiring remedial actions required by law, we have initiated appropriate actions. 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. As disclosed in Note 19 to the financial statements, environmental liabilities total $17.9 million as of both December 31, 2019 and 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We have exposure to fluctuations in interest rates, which are sensitive to many factors that are beyond our control. The following is a summary of our exposure to a change in interest rates:
 December 31, 2019 December 31, 2018
   
Weighted
Average
Effective
Interest
Rate
 
Effect of 1%
Change in
Base Rates
   Weighted
Average
Effective
Interest
Rate
 Balance   Balance 
Debt (contractual balances):(Dollars in thousands)
Mortgages payable         
Variable rate (1)
$2,200
 3.36% $22
 $308,918
 4.30%
Fixed rate (2)
1,125,648
 4.29% 
 1,535,734
 4.09%
 $1,127,848
   $22
 $1,844,652
  
Credit facility (variable rate):         
Revolving credit facility (3)
$200,000
 2.86% $2,028
 $
 3.60%
Tranche A-1 Term Loan (4)
100,000
 3.32% 
 100,000
 3.32%
Tranche A-2 Term Loan (5)
200,000
 3.74% 633
 200,000
 4.05%
 $500,000
   $2,661
    
Pro rata share of debt of unconsolidated entities (contractual balances):         
Variable rate (1)
$228,226
 4.30% $2,314
 $146,980
 6.19%
Fixed rate (2)
101,993
 4.24% 
 152,410
 4.44%
 $330,219
   $2,314
 $299,390
  
________________
(1) 
Includes a variable rate mortgage payable with an interest rate cap agreement as of December 31, 2018.
(2) 
Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements.

63


(3) 
The interest rate for the revolving credit facility excludes a 0.15% facility fee.
(4) 
As of December 31, 2019 and 2018, the outstanding balance was fixed by interest rate swap agreements.
(5) 
As of December 31, 2019, a portion of the outstanding balance was fixed by interest rate swap agreements with a notional value of $137.6 million.

The fair value of our mortgages payable is estimated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit profiles based on market sources. The fair value of our revolving credit facility and unsecured term loans is calculated based on the net present value of payments over the term of the facilities using estimated market rates for similar notes and remaining terms. As of December 31, 2019 and 2018, the estimated fair value of our consolidated debt was $1.7 billion and $2.2 billion. These estimates of fair value, which are made at the end of the reporting period, may be different from the amounts that may ultimately be realized upon the disposition of our financial instruments.
Hedging Activities
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.
Derivative Financial Instruments Designated as Cash Flow Hedges
Certain derivative financial instruments, consisting of interest rate swap and cap agreements, are designated as cash flow hedges, and are carried at their estimated fair value on a recurring basis. We assess the effectiveness of our cash flow hedges both at inception and on an ongoing basis. If the hedges are deemed to be effective, the fair value is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into "Interest expense" in the period that the hedged forecasted transactions affect earnings. Our cash flow hedges become less than perfectly effective if the critical terms of the hedging instrument and the forecasted transactions do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and interest rates. In addition, we evaluate the default risk of the counterparty by monitoring the creditworthiness of the counterparty. While management believes its judgments are reasonable, a change in a derivative’s effectiveness as a hedge could materially affect expenses, net income and equity.
As of December 31, 2019 and 2018, we had interest rate swap and cap agreements with an aggregate notional value of $935.1 million and $786.4 million, which were designated as cash flow hedges. The fair value of our interest rate swaps and caps designated as cash flow hedges consisted of assets totaling $7.9 million as of December 31, 2018, included in "Other assets, net" in our balance sheet, and liabilities totaling $17.4 million and $1.7 million as of December 31, 2019 and 2018, included in "Other liabilities, net" in our balance sheets.
Derivative Financial Instruments Not Designated as Hedges
Certain derivative financial instruments, consisting of interest rate swap and cap agreements, are considered economic hedges, but not designated as accounting hedges, and are carried at their estimated fair value on a recurring basis. Realized and unrealized gains are recorded in "Interest expense" in our statements of operations in the period in which the change occurs. As of December 31, 2019 and 2018, we had various interest rate swap and cap agreements with an aggregate notional value of $307.7 million and $646.4 million, which were not designated as cash flow hedges. The fair value of our interest rate swaps and caps not designated as hedges primarily consisted of assets totaling $2.5 million as of December 31, 2018 , included in "Other assets, net" in our balance sheet.


64



ITEM 8. Financial Statements and Supplementary Data

TABLE OF CONTENTS 
  
 Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated and Combined Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated and Combined Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017
Consolidated and Combined Statements of Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated and Combined Financial Statements


65



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Trustees of JBG SMITH Properties

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of JBG SMITH Properties and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for the years ended December 31, 2019 and 2018, the related consolidated and combined statements of operations, comprehensive income (loss), equity, and cash flows, for the year ended December 31, 2017, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Investments in Unconsolidated Real Estate Ventures - Refer to Notes 2, 6 and 7 to the financial statements
Critical Audit Matter Description
The Company has investments in unconsolidated real estate ventures which are required to be evaluated for consolidation, including determining whether the real estate venture is a variable interest entity ("VIE"), and if so, whether the Company is the primary beneficiary. Significant judgment is required by management to determine whether the Company has the power to direct the activities that most significantly impact the entity’s economic performance. Factors considered by management in determining whether the Company has the power to direct the activities that most significantly impact the entity’s economic performance include voting rights, involvement in day-to-day capital and operating decisions and the extent of the Company’s involvement in the entity.
In December 2019, the Company sold a 50.0% interest in a real estate venture that owns Central Place Tower, an office building. The Company determined that the real estate venture was not a VIE, and it does not have a controlling financial interest in the venture. As a result, the Company recognized an aggregate $53.4 million gain, net of certain liabilities, on the partial sale and subsequent remeasurement of its remaining interest in the real estate venture.


66



Given the complexities associated with the accounting for the Company’s investments in real estate ventures, and the related management judgments to determine whether a real estate venture is a VIE and whether the Company is the primary beneficiary or has a controlling financial interest, performing the audit procedures to evaluate these investments in real estate ventures, including the Central Place Tower venture, involved especially complex and subjective auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s judgments to determine whether a real estate venture, including the entity that owns Central Place Tower, is a VIE and whether the Company is the primary beneficiary or has a controlling financial interest included the following, among others:
We tested the effectiveness of the controls over management’s judgments to determine whether a real estate venture is a VIE and whether the Company is the primary beneficiary or has a controlling financial interest, both at inception of a real estate venture and upon occurrence of a reconsideration event.
We assessed each of the Company’s new or modified real estate ventures and evaluated the appropriateness of the Company’s accounting conclusions upon formation and reconsideration events by:
Reading the operating agreements, including the operating agreement for the real estate venture that owns Central Place Tower, and other related documents and evaluating the structure and terms of the agreements to determine whether a real estate venture is a VIE and whether the Company is the primary beneficiary or has a controlling financial interest that should be consolidated.
Evaluating the evidence obtained in other areas of the audit to determine if there were additional reconsideration events that had not been identified by the Company, including, among others, reading board minutes and understanding changes to the real estate venture’s economics and status of development projects, if applicable.



/s/ Deloitte & Touche LLP
McLean, Virginia
February 25, 2020

We have served as the Company's auditor since 2016.


67



JBG SMITH PROPERTIES
Consolidated Balance Sheets
(In thousands, except par value amounts)
 December 31, 2019 December 31, 2018
ASSETS   
Real estate, at cost:   
Land and improvements$1,240,455
 $1,371,874
Buildings and improvements3,880,973
 3,722,930
Construction in progress, including land654,091
 697,930
 5,775,519
 5,792,734
Less accumulated depreciation(1,119,571) (1,051,875)
Real estate, net4,655,948
 4,740,859
Cash and cash equivalents126,413
 260,553
Restricted cash16,103
 138,979
Tenant and other receivables, net52,941
 46,568
Deferred rent receivable, net
169,721
 143,473
Investments in unconsolidated real estate ventures543,026
 322,878
Other assets, net
253,687
 264,994
Assets held for sale168,412
 78,981
TOTAL ASSETS$5,986,251
 $5,997,285
    
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY   
Liabilities:   
Mortgages payable, net$1,125,777
 $1,838,381
Revolving credit facility200,000
 
Unsecured term loans, net297,295
 297,129
Accounts payable and accrued expenses157,702
 130,960
Other liabilities, net206,042
 181,606
Liabilities related to assets held for sale
 3,717
Total liabilities1,986,816
 2,451,793
Commitments and contingencies

 

Redeemable noncontrolling interests612,758
 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; 134,148 and 120,937
   shares issued and outstanding as of December 31, 2019 and 2018
1,342
 1,210
Additional paid-in capital3,633,042
 3,155,256
Accumulated deficit(231,164) (176,018)
Accumulated other comprehensive income (loss)(16,744) 6,700
Total shareholders' equity of JBG SMITH Properties3,386,476
 2,987,148
Noncontrolling interests in consolidated subsidiaries201
 204
Total equity3,386,677
 2,987,352
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
   EQUITY
$5,986,251
 $5,997,285


See accompanying notes to the consolidated and combined financial statements.




68



JBG SMITH PROPERTIES
Consolidated and Combined Statements of Operations
(In thousands, except per share data)
 Year Ended December 31,
 2019 2018 2017
REVENUE     
Property rentals$493,273
 $513,447
 $451,541
Third-party real estate services, including reimbursements120,886
 98,699
 63,236
Other revenue33,611
 32,036
 28,236
Total revenue647,770
 644,182
 543,013
EXPENSES     
Depreciation and amortization191,580
 211,436
 161,659
Property operating137,622
 148,081
 118,836
Real estate taxes70,493
 71,054
 66,434
General and administrative:     
Corporate and other46,822
 33,728
 39,350
Third-party real estate services113,495
 89,826
 51,919
Share-based compensation related to Formation Transaction and
special equity awards
42,162
 36,030
 29,251
Transaction and other costs23,235
 27,706
 127,739
Total expenses625,409
 617,861
 595,188
OTHER INCOME (EXPENSE)
 
 
Income (loss) from unconsolidated real estate ventures, net(1,395) 39,409
 (4,143)
Interest and other income, net5,385
 15,168
 1,788
Interest expense(52,695) (74,447) (58,141)
Gain on sale of real estate104,991
 52,183
 
Loss on extinguishment of debt(5,805) (5,153) (701)
Gain (reduction of gain) on bargain purchase
 (7,606) 24,376
Total other income (expense)50,481
 19,554
 (36,821)
INCOME (LOSS) BEFORE INCOME TAX BENEFIT72,842
 45,875
 (88,996)
Income tax benefit1,302
 738
 9,912
NET INCOME (LOSS)74,144
 46,613
 (79,084)
Net (income) loss attributable to redeemable noncontrolling interests(8,573) (6,710) 7,328
Net loss attributable to noncontrolling interests
 21
 3
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS$65,571
 $39,924
 $(71,753)
EARNINGS (LOSS) PER COMMON SHARE:     
Basic$0.48
 $0.31
 $(0.70)
Diluted$0.48
 $0.31
 $(0.70)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING:
     
Basic130,687
 119,176
 105,359
Diluted130,687
 119,176
 105,359


See accompanying notes to the consolidated and combined financial statements.




69



JBG SMITH PROPERTIES
Consolidated and Combined Statements of Comprehensive Income (Loss)
(In thousands)
  Year Ended December 31,
  2019 2018 2017
NET INCOME (LOSS) $74,144
 $46,613
 $(79,084)
OTHER COMPREHENSIVE INCOME (LOSS):      
Change in fair value of derivative financial instruments (27,722) 5,382
 1,438
Reclassification of net loss on derivative financial
   instruments from accumulated other comprehensive income (loss)
   into interest expense
 1,694
 1,090
 399
Other comprehensive income (loss) (26,028) 6,472
 1,837
COMPREHENSIVE INCOME (LOSS) 48,116
 53,085
 (77,247)
Net (income) loss attributable to redeemable noncontrolling interests (8,573) (6,710) 7,328
Other comprehensive (income) loss attributable to redeemable
   noncontrolling interests
 2,584
 (1,384) (225)
Net loss attributable to noncontrolling interests 
 21
 3
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO
   JBG SMITH PROPERTIES
 $42,127
 $45,012
 $(70,141)


See accompanying notes to the consolidated and combined financial statements.




70



JBG SMITH PROPERTIES
Consolidated and Combined Statements of Equity
 (In thousands)

                
 Common Shares 
Additional
Paid-In
Capital
 Accumulated Deficit Accumulated Other Comprehensive Income (Loss) 
Former
Parent
Equity
 Noncontrolling Interests in Consolidated Subsidiaries Total Equity
Shares Amount      
BALANCE AS OF JANUARY 1, 2017          $2,121,689
 $295
 $2,121,984
Net loss attributable to common
  shareholders and noncontrolling interests

 $
 $
 $(42,729) $
 (29,024) (3) (71,756)
Deferred compensation shares and
  options, net

 
 
 
 
 1,526
 
 1,526
Contributions from former parent, net
 
 
 
 
 333,020
 
 333,020
Issuance of common limited partnership
   units at the Separation

 
 
 
 
 (96,632) 
 (96,632)
Issuance of common shares at the
  Separation
94,736
 947
 2,329,632
 
 
 (2,330,579) 
 
Issuance of common shares in connection
  with the Combination
23,219
 233
 864,685
 
 
 
 
 864,918
Noncontrolling interests acquired in
   connection with the Combination

 
 
 
 
 
 3,586
 3,586
Dividends declared on common shares
   ($0.45 per common share)

 
 
 (53,080) 
 
 
 (53,080)
Distributions to noncontrolling interests
 
 
 
 
 
 (171) (171)
Contributions from noncontrolling
  interests

 
 
 
 
 
 499
 499
Redeemable noncontrolling interest
   redemption value adjustment and other
   comprehensive income allocation

 
 (130,692) 
 (225) 
 
 (130,917)
Other comprehensive income
 
 
 

1,837
 
 
 1,837
BALANCE AS OF DECEMBER 31, 2017117,955
 1,180
 3,063,625
 (95,809) 1,612
 
 4,206
 2,974,814
Net income (loss) attributable to common
shareholders and noncontrolling
  interests

 
 
 39,924
 
 
 (21) 39,903
Conversion of common limited partnership
   units to common shares
2,962
 30
 109,092
 
 
 
 
 109,122
Common shares issued pursuant to
   Employee Share Purchase Plan ("ESPP")
20
 
 741
 
 
 
 
 741
Dividends declared on common shares
($1.00 per common share)

 
 
 (120,133) 
 
 
 (120,133)
Distributions to noncontrolling interests
 
 
 
 
 
 (347) (347)
Contributions from noncontrolling
  interests

 
 
 
 
 
 250
 250
Redeemable noncontrolling interests
redemption value adjustment and other
comprehensive income allocation

 
 (16,172) 
 (1,384) 
 
 (17,556)
Acquisition of consolidated real estate
   venture

 
 (1,666) 
 
 
 (3,884) (5,550)
Other comprehensive income
 
 
 
 6,472
 
 
 6,472
Other
 
 (364) 
 
 
 
 (364)
BALANCE AS OF DECEMBER 31, 2018120,937
 1,210
 3,155,256
 (176,018) 6,700
 
 204
 2,987,352
Net income attributable to common
shareholders and noncontrolling interests

 
 
 65,571
 
 
 
 65,571
Common shares issued11,500
 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 ESPP47
 
 1,803
 
 
 
 
 1,803
Dividends declared on common shares
($0.90 per common share)

 
 
 (120,717) 
 
 
 (120,717)
Distributions to noncontrolling interests
 
 
 
 
 
 (176) (176)
Contributions from noncontrolling
  interests

 
 
 
 
 
 173
 173
Redeemable noncontrolling interests
redemption value adjustment and other
comprehensive (income) loss allocation

 
 (53,983) 
 2,584
 
 
 (51,399)
Other comprehensive loss
 
 
 
 (26,028) 
 
 (26,028)
BALANCE AS OF DECEMBER 31, 2019134,148
 $1,342
 $3,633,042
 $(231,164) $(16,744) $
 $201
 $3,386,677

See accompanying notes to the consolidated and combined financial statements.


71



JBG SMITH PROPERTIES
Consolidated and Combined Statements of Cash Flows
(In thousands)
 Year Ended December 31,
 2019 2018 2017
 OPERATING ACTIVITIES:     
 Net income (loss)$74,144
 $46,613
 $(79,084)
 Adjustments to reconcile net income (loss) to net cash provided by operating activities:     
 Share-based compensation expense65,273
 52,675
 33,693
 Depreciation and amortization, including amortization of debt issuance costs195,795
 215,659
 164,580
 Deferred rent(39,174) (14,056) (10,388)
 (Income) loss from unconsolidated real estate ventures, net1,395
 (39,409) 4,143
 Amortization of market lease intangibles, net(791) (220) (862)
 Amortization of lease incentives6,336
 3,406
 4,023
 Reduction of gain (gain) on bargain purchase
 7,606
 (24,376)
 Loss on extinguishment of debt5,805
 4,536
 701
 Gain on sale of real estate(104,991) (52,183) 
 Net unrealized loss (gain) on ineffective derivative financial instruments50
 (926) (1,348)
 Losses on operating lease receivables1,560
 3,298
 3,807
 Return on capital from unconsolidated real estate ventures2,690
 7,827
 2,563
 Other non-cash items517
 1,388
 3,955
 Deferred tax benefit(1,336) (718) (10,408)
 Impairment of corporate assets10,170
 
 
 Changes in operating assets and liabilities:     
 Tenant and other receivables(8,382) (5,582) (2,098)
 Other assets, net(9,177) (16,600) (23,481)
 Accounts payable and accrued expenses(7,678) (5,984) 16,160
 Other liabilities, net(18,220) (19,137) (7,397)
 Net cash provided by operating activities173,986
 188,193
 74,183
 INVESTING ACTIVITIES:     
Development costs, construction in progress and real estate additions(441,014) (385,943) (210,593)
Acquisition of real estate(165,208) (23,246) 
Cash and restricted cash received in connection with the Combination, net
 
 97,416
Deposits for real estate acquisitions(850) 
 
Proceeds from sale of real estate377,511
 413,077
 
Acquisition of interests in unconsolidated real estate ventures, net of cash acquired
 (386) (8,834)
Distributions of capital from unconsolidated real estate ventures7,557
 14,408
 6,929
Distributions of capital from sales of unconsolidated real estate ventures
 80,279
 
Investments in unconsolidated real estate ventures(18,668) (31,197) (16,321)
Repayment of notes receivable
 
 50,934
Other
 (665) (2,207)
Proceeds from repayment of receivable from former parent
 
 75,000
 Net cash (used in) provided by investing activities(240,672) 66,327
 (7,676)
 FINANCING ACTIVITIES:     
Contributions from former parent, net
 
 160,203
Acquisition of interest in consolidated real estate venture
 (5,550) 
Repayment of borrowings from former parent
 
 (115,630)
Proceeds from borrowings from former parent
 
 4,000
Finance lease payments(137) (114) (17,827)
Borrowings under mortgages payable2,200
 118,141
 366,239
Borrowings under revolving credit facility200,000
 35,000
 115,751
Borrowings under unsecured term loans
 250,000
 50,000
Repayments of mortgages payable(719,003) (312,894) (272,905)
Repayments of revolving credit facility
 (150,751) 
Debt issuance costs(515) (3,114) (19,287)
Proceeds from the issuance of common stock, net of issuance costs472,780
 
 
Proceeds from common stock issued pursuant to ESPP1,457
 597
 
Dividends paid to common shareholders(129,834) (107,372) (26,540)
Distributions to redeemable noncontrolling interests(17,390) (17,398) (4,556)
Contributions from noncontrolling interests207
 250
 357
Distributions to noncontrolling interests(95) (340) (18)
 Net cash (used in) provided by in financing activities(190,330) (193,545) 239,787

72



JBG SMITH PROPERTIES
Consolidated and Combined Statements of Cash Flows
 (In thousands)
 Year Ended December 31,
 2019 2018 2017
      
 Net (decrease) increase in cash and cash equivalents and restricted cash(257,016) 60,975
 306,294
 Cash and cash equivalents and restricted cash as of the beginning of the year399,532
 338,557
 32,263
 Cash and cash equivalents and restricted cash as of the end of the year$142,516
 $399,532
 $338,557
      
      
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AS OF END
  OF THE YEAR:
     
Cash and cash equivalents$126,413
 $260,553
 $316,676
Restricted cash16,103
 138,979
 21,881
Cash and cash equivalents and restricted cash$142,516
 $399,532
 $338,557
      
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION: 
     
Transfer of mortgage payable to former parent$
 $
 $115,630
 Cash paid for interest (net of capitalized interest of $29,806, $20,804 and $12,727 in
   2019, 2018 and 2017)
49,437
 64,605
 52,388
Accrued capital expenditures included in accounts payable and accrued expenses84,076
 53,073
 12,445
Write-off of fully depreciated assets66,533
 52,272
 55,998
Cash received (payments) for income taxes282
 1,965
 (3,396)
Deconsolidation of properties181,813
 95,923
 
Accrued dividends to common shareholders30,184
 39,298
 26,540
Accrued distributions to redeemable noncontrolling interests3,828
 5,896
 4,557
Acquisition of consolidated real estate venture
 
 5,420
Conversion of common limited partnership units to common shares57,318
 109,208
 
Initial recognition of operating right-of-use assets35,318
 
 
Initial recognition of lease liabilities related to operating right-of-use assets37,922
 
 
Cash paid for amounts included in the measurement of lease liabilities for operating leases6,202
 
 
Non-cash transactions related to the Formation Transaction:     
Issuance of common limited partnership units at the Separation
 
 96,632
Issuance of common shares at the Separation
 
 2,330,579
Issuance of common shares in connection with the Combination
 
 864,918
Issuance of common limited partnership units in connection with the Combination
 
 359,967
Contribution from former parent in connection with the Separation
 
 172,817


See accompanying notes to the consolidated and combined financial statements.




73



JBG SMITH PROPERTIES
Notes to Consolidated and Combined Financial Statements



1.    Organization and Basis of Presentation
Organization

JBG SMITH Properties ("JBG SMITH") was organized as a Maryland real estate investment trust ("REIT") 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 Washington, D.C. segment (the "Vornado Included Assets"). On July 18, 2017, JBG SMITH acquired the management business and certain assets and liabilities (the "JBG Assets") of The JBG Companies ("JBG") (the "Combination"). The Separation and the Combination are collectively referred to as the "Formation Transaction." JBG SMITH is hereinafter referred to as "we," "us," "our" or other similar terms. References to "our share" refer 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 December 31, 2019, we, as its sole general partner, controlled JBG SMITH LP and owned 89.9% of its common limited partnership units ("OP Units").

Prior to the Separation from Vornado Realty Trust ("Vornado" or "former parent"), JBG SMITH was a wholly owned subsidiary of Vornado and had no material assets or operations. On July 17, 2017, Vornado distributed 100% of the then outstanding common shares of JBG SMITH on a pro rata basis to the holders of its common shares. Prior to such distribution by Vornado, Vornado Realty L.P. ("VRLP"), Vornado's operating partnership, distributed OP Units in JBG SMITH LP on a pro rata basis to the holders of VRLP's common limited partnership units, consisting of Vornado and the other common limited partners of VRLP. Following such distribution by VRLP and prior to such distribution by Vornado, Vornado contributed to JBG SMITH all of the OP Units it received in exchange for common shares of JBG SMITH.

Our operations are presented as if the transfer of the Vornado Included Assets had been consummated prior to all historical periods presented in the accompanying consolidated and combined financial statements at the carrying amounts of such assets and liabilities reflected in Vornado’s books and records. The assets and liabilities of the JBG Assets, and subsequent results of operations and cash flows, are reflected in our consolidated and combined financial statements beginning on the date of the Combination.
We own and operate a portfolio of high-growth 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 December 31, 2019, our Operating Portfolio consists of 62 operating assets comprising 44 commercial assets totaling 12.7 million square feet (10.7 million square feet at our share) and 18 multifamily assets totaling 7,111 units (5,327 units at our share). Additionally, we have (i) 7 assets under construction comprising 4 commercial assets totaling 943,000 square feet (821,000 square feet at our share) and 3 multifamily assets totaling 1,011 units (833 units at our share); and (ii) 40 future development assets totaling 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.

Only the U.S. federal government accounted for 10% or more of our rental revenue, which consists of property rentals and other property revenue, as follows:
 Year Ended December 31,
(Dollars in thousands)2019 2018 2017
Rental revenue from the U.S. federal government$86,644
 $94,822
 $92,192
Percentage of commercial segment rental revenue21.2% 22.0% 24.0%
Percentage of total rental revenue16.7% 17.6% 19.4%


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Basis of Presentation
The accompanying consolidated and combined financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany transactions and balances have been eliminated.
The accompanying 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 7 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 consolidated and combined financial statements.
References to the financial statements refer to our consolidated and combined financial statements as of December 31, 2019 and 2018, and for each of the three years in the period ended December 31, 2019. References to our balance sheets refer to our consolidated balance sheets as of December 31, 2019 and 2018. References to our statements of operations refer to our consolidated and combined statements of operations for each of the three years in the period ended December 31, 2019. References to our statements of comprehensive income (loss) refer to our consolidated and combined statements of comprehensive income (loss) for each of the three years in the period ended December 31, 2019. References to our statements of cash flows refer to our consolidated and combined statements of cash flows for each of the three years in the period ended December 31, 2019.
Formation Transaction
JBG SMITH and the Vornado Included Assets were under common control of Vornado for all periods prior to the Separation. The transfer of the Vornado Included Assets from Vornado to JBG SMITH was completed, at net book values (historical carrying amounts) carved out from Vornado’s books and records. For purposes of the formation of JBG SMITH, the Vornado Included Assets were designated as the predecessor and the accounting acquirer of the JBG Assets. Consequently, the financial statements of JBG SMITH, as set forth herein, represent a continuation of the financial information of the Vornado Included Assets as the predecessor and accounting acquirer such that the historical financial information included herein as of any date or for any periods on or prior to the completion of the Combination represents the pre-Combination financial information of the Vornado Included Assets. The financial statements reflect the common shares as of the date of the Separation as outstanding for all periods prior to July 17, 2017. The acquisition of the JBG Assets completed subsequently by JBG SMITH was accounted for as a business combination using the acquisition method whereby identifiable assets acquired and liabilities assumed are recorded at acquisition-date fair values and income and cash flows from the operations were consolidated into the financial statements of JBG SMITH commencing July 18, 2017. Consequently, the financial statements for the periods before and after the Formation Transaction are not directly comparable.
The accompanying financial statements as of December 31, 2019 and 2018 and for the years ended December 31, 2019 and 2018 include our consolidated accounts. The results of operations for the year ended December 31, 2017 reflects the aggregate operations and changes in cash flows and equity on a combined basis for all periods prior to July 17, 2017 and on a consolidated basis for all periods subsequent to July 17, 2017. Therefore, our results of operations, cash flows and financial condition set forth in this report are not necessarily indicative of our future results of operations, cash flows or financial condition as an independent, publicly traded company.
The historical financial results for the Vornado Included Assets for periods prior to the Formation Transaction reflect charges for certain corporate costs allocated by Vornado, which were based on either actual costs incurred or a proportion of costs estimated to be applicable, to the Vornado Included Assets based on an analysis of key metrics, including total revenues. Such costs do not necessarily reflect what the actual costs would have been if JBG SMITH had been operating as a separate standalone public company. See Note 20 for additional information.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation as follows:
Reclassification of parking revenue totaling $25.7 million and $23.1 million previously included in "Property rentals revenue" for the years ended December 31, 2018 and 2017 to "Other revenue" in our statements of operations.
Reclassification of tenant reimbursements totaling $39.3 million and $38.0 million for the years ended December 31, 2018 and 2017 to "Property rentals revenue" in our statements of operations.


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2.    Summary of Significant Accounting Policies
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.
Asset Acquisitions and Business Combinations
We account for asset acquisitions, which includes the consolidation of previously unconsolidated real estate ventures, at cost, including transaction costs, plus the fair value of any assumed debt. We estimate the fair values of acquired tangible assets (consisting of real estate, cash and cash equivalents, tenant and other receivables, investments in unconsolidated real estate ventures and other assets, as applicable), identified intangible assets and liabilities (consisting of the value of in-place leases, above- and below-market leases, options to enter into ground leases and management contracts, as applicable), assumed debt and other liabilities, and noncontrolling interests, as applicable, based on our evaluation of information and estimates available at the date of acquisition. Based on these estimates, we allocate the purchase price, including all transaction costs related to the acquisition, to the identified assets acquired and liabilities assumed based on their relative fair value.
We similarly account for business combinations by estimating the fair values of acquired tangible assets, identified intangible assets and liabilities, assumed debt and other liabilities, and noncontrolling interests, as applicable, based on our evaluation of information and estimates. Any excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill, and any excess of the fair value of assets acquired over the purchase price is recorded as a gain on bargain purchase. If, up to one year from the acquisition date, information regarding the fair value of the assets acquired and liabilities assumed is received and the estimates are refined, appropriate adjustments are made on a prospective basis to the purchase price allocation, which may include adjustments to identified assets, assumed liabilities, and goodwill or the gain on bargain purchase, as applicable. Transaction costs are expensed as incurred and included in "Transaction and other costs" in our statements of operations.
For both asset acquisitions and business combinations, the results of operations of acquisitions are prospectively included in our financial statements beginning with the date of the acquisition.
The fair values of buildings are determined using the "as-if vacant" approach whereby we use discounted cash flow models with inputs and assumptions that we believe are consistent with current market conditions for similar assets. The most significant assumptions in determining the allocation of the purchase price to buildings are the exit capitalization rate, discount rate, estimated market rents and hypothetical expected lease-up periods. We assess fair value of land based on market comparisons and development projects using an income approach of cost plus a margin.
The fair values of identified intangible assets are determined based on the following:
The value allocable to the above- or below-market component of an acquired in-place lease is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired lease) of the difference between (i) the contractual amounts to be received pursuant to the lease over its remaining term and (ii) management’s estimate of the amounts that would be received using market rates over the remaining term of the lease. Amounts allocated to above- market leases are recorded as lease intangible assets in "Other assets, net" in our balance sheets, and amounts allocated to below-market leases are recorded as lease intangible liabilities in "Other liabilities, net" in our balance sheets. These intangibles are amortized to "Property rentals revenue" in our statements of operations over the remaining terms of the respective leases;
Factors considered in determining the value allocable to in-place leases during hypothetical lease-up periods related to space that is leased at the time of acquisition include (i) lost rent and operating cost recoveries during the hypothetical lease-up period and (ii) theoretical leasing commissions required to execute similar leases. These intangible assets are recorded as lease intangible assets in "Other assets, net" in our balance sheets and are amortized to "Depreciation and amortization expense" in our statements of operations over the remaining term of the existing lease; and
The fair value of the in-place property management, leasing, asset management, and development and construction management contracts is based on revenue and expense projections over the estimated life of each contract discounted using a market discount rate. These management contract intangibles are amortized to "Depreciation and amortization expense" in our statements of operations over the weighted average life of the management contracts.

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The fair value of investments in unconsolidated real estate ventures and related noncontrolling interests is based on the estimated fair values of the identified assets acquired and liabilities assumed of each venture, including future expected cash flows from promote interests.
The fair value of the mortgages payable assumed is determined using current market interest rates for comparable debt financings. The fair values of the interest rate swaps and caps are based on the estimated amounts we would receive or pay to terminate the contract at the acquisition date and are determined using interest rate pricing models and observable inputs. The carrying value of cash, restricted cash, working capital balances, leasehold improvements and equipment, and other assets acquired and liabilities assumed approximates fair value.
Real Estate
Real estate is carried at cost, net of accumulated depreciation and amortization. Maintenance and repairs are expensed as incurred and are included in "Property operating expenses" in our statements of operations. As real estate is undergoing redevelopment activities, all property operating expenses directly associated with and attributable to the redevelopment, including interest expense, are capitalized to the extent that we believe such costs are recoverable through the value of the property. The capitalization period ends when the asset is ready for its intended use, but no later than one year from substantial completion of major construction activities. General and administrative costs are expensed as incurred. Depreciation and amortization require an estimate of the useful life of each property and improvement as well as an allocation of the costs associated with a property to its various components. Depreciation and amortization are recognized on a straight‑line basis over estimated useful lives, which range from three to 40 years. Tenant improvements are amortized on a straight‑line basis over the lives of the related leases, which approximate the useful lives of the tenant improvements. When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period.
Construction in progress, including land, is carried at cost, and no depreciation is recorded. Real estate undergoing significant renovations and improvements is considered to be under development. All direct and indirect costs related to development activities are capitalized into "Construction in progress, including land" on our balance sheets, except for certain demolition costs, which are expensed as incurred. Direct development costs incurred include: pre-development expenditures directly related to a specific project, development and construction costs, interest, insurance and real estate taxes. Indirect development costs include: employee salaries and benefits, travel and other related costs that are directly associated with the development. Our method of calculating capitalized interest expense is based upon applying our weighted average borrowing rate to the actual accumulated expenditures if the property does not have property specific debt. If the property is encumbered by specific debt, we will capitalize both the interest incurred applicable to that debt and additional interest expense using our weighted average borrowing rate for any accumulated expenditures in excess of the principal balance of the debt encumbering the property. The capitalization of such expenses ceases when the real estate is ready for its intended use, but no later than one-year from substantial completion of major construction activities.
Our assets and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Estimates of future cash flows are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. An impairment loss is recognized if the carrying amount of the asset is not recoverable and is measured based on the excess of the property’s carrying amount over its estimated fair value. If our estimates of future cash flows, anticipated holding periods, or fair values change, based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our financial statements. Estimates of future cash flows are subjective and are based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with a purchase date life to maturity of three months or less and are carried at cost, which approximates fair value due to their short‑term maturities.
Restricted Cash
Restricted cash consists primarily of proceeds from property dispositions held in escrow, security deposits held on behalf of our tenants and cash escrowed under loan agreements for debt service, real estate taxes, property insurance and capital improvements.

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Investments in Real Estate Ventures
We analyze our real estate ventures to determine whether the entities should be consolidated. If it is determined that these entities are VIEs in which we have a variable interest, we assess whether we are the primary beneficiary of the VIE to determine whether it should be consolidated. We are not the primary beneficiary of entities when we do not have voting control, lack the power to direct the activities that most significantly impact the entity's economic performance, or the limited partners (or non-managing members) have substantive participatory rights. If it is determined that these entities are not VIEs, then the determination as to whether we consolidate is based on whether we have a controlling financial interest in the entity, which is based on our voting interests and the degree of influence we have over the entity. Management uses its judgment when determining if we are the primary beneficiary of, or have a controlling financial interest in, an entity in which we have a variable interest. Factors considered in determining whether we have the power to direct the activities that most significantly impact the entity’s economic performance include voting rights, involvement in day-to-day capital and operating decisions and the extent of our involvement in the entity.

We use the equity method of accounting for investments in unconsolidated real estate ventures when we have significant influence but do not have a controlling financial interest. Significant influence is typically indicated through ownership of 20% or more of the voting interests. Under the equity method, we record our investments in these entities in "Investments in unconsolidated real estate ventures" on our balance sheets, and our proportionate share of earnings or losses earned by the real estate venture is recognized in "Income (loss) from unconsolidated real estate ventures, net" in the accompanying statements of operations. We earn revenues from the management services we provide to unconsolidated entities. These fees are determined in accordance with the terms specific to each arrangement and may include property and asset management fees or transactional fees for leasing, acquisition, development and construction, financing and legal services provided. We account for this revenue gross of our ownership interest in each respective real estate venture and recognize such revenue in "Third-party real estate services, including reimbursements" in our statements of operations when earned. Our proportionate share of related expenses is recognized in "Income (loss) from unconsolidated real estate ventures, net" in our statements of operations.

We may also earn incremental promote distributions if certain financial return benchmarks are achieved upon ultimate disposition of the underlying properties. Promote fees are recognized when certain earnings events have occurred, and the amount is determinable and collectible. Any promote fees are reflected in "Income (loss) from unconsolidated real estate ventures, net" in our statements of operations.

With regard to distributions from unconsolidated real estate ventures, we use the information that is available to us to determine the nature of the underlying activity that generated the distributions. Using the nature of distribution approach, cash flows generated from the operations of an unconsolidated real estate venture are classified as a return on investment (cash inflow from operating activities) and cash flows from property sales, debt refinancing or sales of our investments are classified as a return of investment (cash inflow from investing activities).
On a periodic basis, we evaluate our investments in unconsolidated entities for impairment. We assess whether there are any indicators, including underlying property operating performance and general market conditions, that the value of our investments in unconsolidated real estate ventures may be impaired. An investment in a real estate venture is considered impaired if we determine that its fair value is less than the net carrying value of the investment in that real estate venture on an other-than-temporary basis. Cash flow projections for the investments consider property level factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. We consider various qualitative factors to determine if a decrease in the value of our investment is other-than-temporary. These factors include age of the venture, our intent and ability to retain our investment in the entity, financial condition and long-term prospects of the entity and relationships with our partners and banks. If we believe that the decline in the fair value of the investment is temporary, no impairment charge is recorded. If our analysis indicates that there is an other-than temporary impairment related to the investment in a particular real estate venture, the carrying value of the venture will be adjusted to an amount that reflects the estimated fair value of the investment.

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

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Assets Held for Sale
Assets, primarily consisting of real estate, are classified as held for sale when all the necessary criteria are met. The criteria include (i) management, having the authority to approve action, commits to a plan to sell the property in its present condition, (ii) the sale of the property is at a price reasonable in relation to its current fair value and (iii) the sale is probable and expected to be completed within one year. Real estate held for sale is carried at the lower of carrying amounts or estimated fair value less disposal costs. Depreciation and amortization is not recognized on real estate classified as held for sale.

Deferred Costs
Deferred financing costs consist of loan issuance costs directly related to financing transactions that are deferred and amortized over the term of the related loan as a component of interest expense. Unamortized deferred financing costs related to our mortgages payable and unsecured term loan are presented as a direct deduction from the carrying amounts of the related debt instruments, while such costs related to our revolving credit facility are included in other assets.

Noncontrolling Interests
We identify our noncontrolling interests separately on our balance sheets. Amounts of consolidated net income (loss) attributable to redeemable noncontrolling interests and to the noncontrolling interests in consolidated subsidiaries are presented separately in our statements of operations.
Redeemable Noncontrolling Interests - Redeemable noncontrolling interests consists of OP Units issued in conjunction with the Formation Transaction and our venture partner's interest in 965 Florida Avenue. The OP Units became redeemable for our common shares or cash beginning August 1, 2018, subject to certain limitations. Redeemable noncontrolling interests are generally redeemable at the option of the holder and are presented in the mezzanine section between total liabilities and shareholders' equity on our balance sheets. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized in "Additional paid-in capital." See Note 12 for additional information.
Noncontrolling Interests - Noncontrolling interests represents the portion of equity that we do not own in entities we consolidate, including interests in consolidated real estate ventures.

Derivative Financial Instruments and Hedge Accounting
Derivative financial instruments are used at times to manage exposure to variable interest rate risk. Derivative financial instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
Derivative Financial Instruments Designated as Cash Flow Hedges - Certain derivative financial instruments, consisting of interest rate swap and cap agreements, are designated as cash flow hedges, and are carried at their estimated fair value on a recurring basis. We assess the effectiveness of our cash flow hedges both at inception and on an ongoing basis. If the hedges are deemed to be effective, the fair value is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into "Interest expense" in the period that the hedged forecasted transactions affect earnings. Our cash flow hedges become less than perfectly effective if the critical terms of the hedging instrument and the forecasted transactions do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and interest rates. In addition, we evaluate the default risk of the counterparty by monitoring the creditworthiness of the counterparty.
Derivative instruments and hedging activities require management to make judgments on the nature of its derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported in our statements of operations or as a component of comprehensive income and as a component of shareholders’ equity on our balance sheets.
Derivative Financial Instruments Not Designated as Hedges - Certain derivative financial instruments, consisting of interest rate swap and cap agreements, are considered economic hedges, but not designated as accounting hedges, and are carried at their estimated fair value on a recurring basis. Realized and unrealized gains are recorded in "Interest expense" in our statements of operations in the period in which the change occurs.


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Fair Value of Assets and Liabilities

Accounting Standards Codification ("ASC") 820 ("Topic 820"), Fair Value Measurement and Disclosures, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels:
Level 1 — quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities;
Level 2 — observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and
Level 3 — unobservable inputs that are used when little or no market data is available.
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value.
Revenue Recognition
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. Tenant reimbursements, which vary each period, are non-lease components that are not the predominant activity within the contract. We combine certain lease and non-lease components of our operating leases. Non-lease components are recognized together with fixed base rent in "Property rentals revenue", 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.

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 when the tenant takes possession of the space. 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 revenue" 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, includes property and asset management fees, and transactional fees for leasing, acquisition, development and 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. Development fees are earned from providing services to third-party property owners and our unconsolidated real estate ventures. The performance obligations associated with our development services contracts are satisfied over time and we recognize our development fee revenue using a time based measure of progress over the course of the development project due to the stand-ready nature of the promised services. The transaction prices for our performance obligations that are expected to be completed in greater than twelve months are variable based on the costs ultimately incurred to develop the underlying assets. Judgments impacting the timing and amount of revenue recognized from our development services contracts include the determination of the nature and number of performance obligations within a contract, estimates of total development project costs, from which the fees are typically derived, and estimates of the

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period of time over which the development services are expected to be performed, which is the period over which the revenue is recognized. We recognize development fees earned from unconsolidated joint venture projects to the extent of the third-party partners’ ownership interest.
Third-Party Real Estate Services Expenses
Third-party real estate services expenses include the costs associated with the management services provided to our unconsolidated real estate ventures and other third parties, including amounts paid to third-party contractors for construction management projects. We allocate personnel and other overhead costs using the estimates of the time spent performing services for our third-party real estate services and other allocation methodologies.
Lessee Accounting
We are obligated under non-cancellable operating leases, including ground leases on certain of our properties through 2061. 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. Lease 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 expenses" or "General and administrative expense" depending on the nature of the lease.
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 lease 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 lease 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. 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.
Income Taxes
We have elected to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). Under those sections, a REIT which distributes at least 90% of its REIT taxable income as dividends to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. Prior to the Separation, Vornado operated as a REIT and distributed 100% of its REIT taxable income to its shareholders; accordingly, no provision for federal income taxes has been made in the accompanying financial statements for the periods prior to the Separation. We currently adhere and intend to continue to adhere to these requirements and to maintain our REIT status in future periods.

As a REIT, we can reduce our taxable income by distributing all or a portion of such taxable income to shareholders. Future distributions will be declared and paid at the discretion of the Board of Trustees and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual dividend requirements under the REIT provisions of the Code and such other factors as our Board of Trustees deems relevant.
We also participate in the activities conducted by our subsidiary entities that have elected to be treated as taxable REIT subsidiaries ("TRS") under the Code. As such, we are subject to federal, state, and local taxes on the income from these activities. Income taxes attributable to our TRSs are accounted for under the asset and liability method. Under the asset and liability method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in our financial statements, which will result in taxable or deductible amounts in the future. We provide for a valuation allowance for deferred income tax assets if we believe all or some portion of the deferred tax asset may not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances that causes a change in the estimated ability to realize the related deferred tax asset is included in deferred tax benefit (expense).
Accounting Standards Codification 740 ("Topic 740"), Income Taxes, provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in our financial statements. Topic 740 requires the evaluation of tax positions taken in the course of preparing our tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained

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by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold are recorded as a tax expense in the current year.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by the weighted average common shares outstanding during the period. Unvested share-based compensation awards that entitle holders to receive non-forfeitable dividends, which include long-term incentive partnership units ("LTIP Units"), are considered participating securities. Consequently, we are required to apply the two-class method of computing basic and diluted earnings that would otherwise have been available to common shareholders. Under the two-class method, earnings for the period are allocated between common shareholders and participating securities based on their respective rights to receive dividends. During periods of net loss, losses are allocated only to the extent the participating securities are required to absorb their share of such losses. Diluted earnings (loss) per common share reflects the potential dilution of the assumed exchange of various unit and share-based compensation awards into common shares to the extent they are dilutive.

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

Compensation expense is based on the fair value of our common shares at the date of the grant and is recognized ratably over the vesting period using a graded vesting attribution model. We account for forfeitures as they occur. Distributions paid on unvested OP Units, LTIP Units, LTIP Units with time-based vesting requirements ("Time-Based LTIP Units"), LTIP Units with performance-based vesting requirements ("Performance-Based LTIP Units") are recorded to "Redeemable noncontrolling interests" in our balance sheets.
Recent Accounting Pronouncements
Adoption of Accounting Standards Update 2016-02, Leases ("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.
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 revenue" in our statements of operations. Such amounts were previously separately presented as "Tenant reimbursements" in our 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 revenue deemed improbable of collection. Such amounts were previously recognized within "Property operating expenses" in our 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 "General and administrative expense: corporate and other" in our statements of operations. Internal leasing costs capitalized for the years ended December 31, 2018 and 2017 totaled $6.5 million and $2.9 million.

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Lessor Accounting
The following is a summary of revenue from our non-cancellable leases:
 Year Ended December 31, 2019
 (In thousands)
Property rentals: 
Fixed$458,329
Variable34,944
Total$493,273


As of December 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)
2020 $371,332
2021 297,603
2022 265,150
2023 220,722
2024 191,946
Thereafter 933,143


As of December 31, 2018, future base rental revenue under our non-cancellable operating leases, as determined under ASC 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
As of December 31, 2019, the weighted average discount rate used in calculating lease liabilities for our active operating leases was 5.4%, which had a weighted average remaining lease term of 23.9 years.

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As of December 31, 2019, future minimum lease payments under our non-cancellable operating leases are as follows:
Year ending December 31,Amount
 (In thousands)
2020$5,999
20213,348
20223,064
20232,000
20242,061
Thereafter36,580
Total future minimum lease payments53,052
Imputed interest(24,576)
Total (1)
$28,476
______________
(1) 
The total for operating leases of $28.5 million corresponds to lease liabilities related to operating right-of-use assets, which was included in "Other liabilities, net" as of December 31, 2019. See Note 10 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 year ended December 31, 2019, we incurred $2.3 million of fixed operating and finance lease costs and $1.3 million of variable operating lease costs.

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3.The Combination
In the Combination on July 18, 2017, we acquired the JBG Assets in exchange for approximately 37.2 million common shares and OP Units. The Combination has been accounted for at fair value under the acquisition method of accounting. The following allocation of the purchase price was based on the fair value of the assets acquired and liabilities assumed (in thousands):
Fair value of purchase consideration: 
Common shares and OP Units$1,224,885
Cash20,573
Total consideration paid$1,245,458
  
Fair value of assets acquired and liabilities assumed: 
Land and improvements$338,072
Building and improvements609,156
Construction in progress, including land699,800
Leasehold improvements and equipment7,890
Real estate1,654,918
Cash104,529
Restricted cash13,460
Investments in unconsolidated real estate ventures241,142
Identified intangible assets138,371
Notes receivable (1)
50,934
Identified intangible liabilities(8,687)
Mortgages payable assumed (2)
(768,523)
Capital lease obligations assumed (3)
(33,543)
Lease assumption liabilities (4)
(48,127)
Deferred tax liability (5)
(18,610)
Other liabilities acquired, net(60,048)
Noncontrolling interests in consolidated subsidiaries(3,588)
Net assets acquired1,262,228
Gain on bargain purchase (6)
16,770
Total consideration paid$1,245,458
____________________
(1) 
During the year ended December 31, 2017, we received proceeds of $50.9 million from the repayment of the notes receivable acquired in the Combination.
(2) 
Subject to various interest rate swap and cap agreements assumed in the Combination that are considered economic hedges, but not designated as accounting hedges.
(3) 
In the Combination, 2 ground leases were assumed that were determined to be capital leases. On July 25, 2017, we purchased a land parcel located in Reston, Virginia associated with 1 of the ground leases for $19.5 million.
(4) 
Includes a $14.0 million payment to a tenant, which was paid in 2018, and a $34.1 million lease liability we assumed in relocating a tenant to one of our office buildings. The $34.1 million assumed lease liability was based on the contractual payments we assumed under the tenant’s previous lease, which are partially offset by estimated sub-tenant income we anticipate receiving as we actively pursue a sub-tenant.
(5) 
Related to the management and leasing contracts acquired in the Combination.
(6) 
The Combination resulted in a gain on bargain purchase of $24.4 million for the year ended December 31, 2017 because the fair value of the identifiable net assets acquired exceeded the purchase consideration. As a result of finalizing our fair value estimates used in the purchase price allocation related to the Combination, during the year ended December 31, 2018, we adjusted the fair value of certain assets acquired and liabilities assumed consisting of a decrease of $468,000 to investments in unconsolidated real estate ventures, an increase of $4.7 million to lease assumption liabilities and an increase of $2.4 million to other liabilities acquired, resulting in a reduction of the gain on bargain purchase of $7.6 million for the year ended December 31, 2018. The purchase consideration was based on the fair value of the common shares and OP Units issued in the Combination. We have concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates of fair values were appropriate. 



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The fair value of the common shares and OP Units purchase consideration was determined as follows (in thousands, except exchange ratio and price per share/unit):
Outstanding common shares and common limited partnership units prior to the Combination100,571
Exchange ratio (1)
2.71
Common shares and OP Units issued in consideration37,164
Price per share/unit (2)
$37.10
Fair value of common shares and OP Units issued in consideration$1,378,780
Fair value adjustment to OP Units due to transfer restrictions(43,304)
Portion of consideration attributable to performance of future services (3)
(110,591)
Fair value of common shares and OP Units purchase consideration$1,224,885
____________________
(1) 
Represents the implied exchange ratio of one common share and OP Unit of JBG SMITH for 2.71 common shares and common limited partnership units prior to the Combination.
(2) 
Represents the volume weighted average share price on July 18, 2017.
(3) 
OP Unit consideration paid to certain of the owners of the JBG Assets, which have a fair value of $110.6 million, is subject to post-combination employment with vesting over periods of either 12 or 60 months and amortization is recognized as compensation expense over the period of employment in "General and administrative expense: Share-based compensation related to Formation Transaction and special equity awards" in our statements of operations.
The JBG Assets acquired on July 18, 2017 comprise: (i) 30 operating assets comprising 21 commercial assets totaling 4.1 million square feet (2.4 million square feet at our share) and 9 multifamily assets with 2,883 units (1,099 units at our share); (ii) 11 commercial and multifamily assets under construction totaling over 2.5 million square feet (2.2 million square feet at our share); (iii) 2 near-term development commercial and multifamily assets totaling 401,000 square feet (242,000 square feet at our share); (iv) 26 future development assets totaling 11.7 million square feet (8.5 million square feet at our share) of estimated potential development density; and (v) JBG/Operating Partners, L.P., a real estate services company providing investment, development, asset management, property management, leasing, construction management and other services. Before the Combination, JBG/Operating Partners, L.P. was owned by 20 unrelated individuals, 19 of whom became our employees and 3 of whom serve on our Board of Trustees.
The following is a summary of the fair values of tangible and identified intangible assets and liabilities, which have definite lives:
 Total Fair Value Weighted Average Amortization Period  
  
Useful Life (1)
 (In thousands) (In years)  
Tangible assets:     
Building and improvements$543,584
   3 - 40 years
Tenant improvements65,572
   Shorter of useful life or remaining life of the respective lease
Total building and improvements$609,156
    
Leasehold improvements$4,422
   Shorter of useful life or remaining life of the respective lease
Equipment3,468
   5 years
Total leasehold improvements and equipment$7,890
    
Identified intangible assets:     
In-place leases$60,317
 6.4 Remaining life of the respective lease
Above-market real estate leases11,732
 6.3 Remaining life of the respective lease
Below-market ground leases332
 88.5 Remaining life of the respective lease
Option to enter into ground lease17,090
 N/A Remaining life of contract
Management and leasing contracts (2)
48,900
 7.5 Estimated remaining life of contracts, ranging between 3 - 9 years
Total identified intangible assets$138,371
    
Identified intangible liabilities:     
Below-market real estate leases$8,687
 10.3 Remaining life of the respective lease
____________________
(1) 
In determining these useful lives, we considered the length of time the asset had been in existence, the maintenance history, as well as anticipated future maintenance, and any contractual stipulations that might limit the useful life.

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(2) 
Includes in-place property management, leasing, asset management and development management contracts.
The total revenue and net loss of the JBG Assets for the year ended December 31, 2017 included in our statements of operations from the acquisition date was $71.3 million and $23.1 million.

4.    Acquisitions, Dispositions and Assets Held for Sale
Acquisitions
In December 2019, we acquired F1RST Residences, a 325-unit multifamily asset in the Ballpark submarket of Washington, D.C. with approximately 21,000 square feet of street level retail, for $160.5 million through a like-kind exchange agreement with a third-party intermediary. See Note 7 for additional information. The multifamily portion of the building was 91.7% occupied as of December 31, 2019. Transaction costs related to the asset acquisition of $4.7 million were included in the cost of the acquisition.

During the year ended December 31, 2018, we purchased a land parcel and the remaining interest in the West Half real estate venture for an aggregate purchase price of $28.0 million.
Dispositions
The following is a summary of disposition activity for the year ended December 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
July 31, 2019 1600 K Street Commercial Washington, D.C. 82,653
 43,000
 40,134
 8,088
December 18, 2019 Vienna Retail Commercial Vienna, Virginia 8,584
 7,400
 7,005
 4,514
      479,799
 $165,350
 $164,815
 51,635
December 12, 2019 
Central Place Tower (3)
 Commercial Arlington, Virginia       53,356
Total             $104,991
______________
(1) 
The sale also included 894,000 square feet of estimated potential development density. The sale was part of a like-kind exchange. See Note 7 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.
(3) 
Represents the gain, net of certain liabilities, on the sale of a 50.0% interest in the entity that owns Central Place Tower and the remeasurement of our remaining 50.0% interest to fair value. See Note 6 for additional information.

During the year ended December 31, 2018, we sold four commercial assets, a future development asset and the out-of-service portion of a multifamily asset for an aggregate gross sales price of $427.4 million, resulting in gains on sale of real estate of $52.2 million.

Assets Held for Sale

As of December 31, 2019 and 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:

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Assets Segment Location Total Square Feet Assets Held for Sale Liabilities Related to Assets Held for Sale
       (In thousands)
December 31, 2019          
Pen Place (1)
 Other Arlington, Virginia 
 $73,895
 $
Metropolitan Park (1)
 Other Arlington, Virginia 
 94,517
 
      
 $168,412
 $
           
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 Metropolitan Park, land sites 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. In January 2020, we sold the Metropolitan Park land sites to Amazon for the gross sales price of $155.0 million, which represents an $11.0 million increase over the previously estimated contract value as the result of an increase in the approved development density on the sites. The sale was part of a like-kind exchange. See Note 7 for additional information.
(2) 
As noted above, we sold Commerce Executive/Commerce Metro Land in February 2019.

5.    Tenant and Other Receivables, Net
The following is a summary of tenant and other receivables:
 December 31,
 2019 2018
 (In thousands)
Tenants (1)
$37,823
 $31,362
Third-party real estate services14,541
 12,443
Other577
 9,463
Allowance for doubtful accounts (1)

 (6,700)
Total tenant and other receivables, net$52,941
 $46,568

_______________
(1) 
Due to the adoption of Topic 842 as of January 1, 2019, we recognize changes in the assessment of collectability of tenant receivables as adjustments to the specific tenant’s receivable in our balance sheet and to "Property rentals revenue" in our statement of operations. Prior to the adoption of Topic 842, we recorded estimated losses on tenant receivables as an allowance for doubtful accounts in our balance sheets and to "Property operating expenses" in our statements of operations.

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6.    Investments in Unconsolidated Real Estate Ventures
The following is a summary of the composition of our investments in unconsolidated real estate ventures:
  
Ownership
Interest (1)
 December 31,
Real Estate Venture Partners  2019 2018
   (In thousands)
Prudential Global Investment Management ("PGIM") 50.0% $215,624
 $
CPPIB 55.0% 109,911
 97,521
Landmark 1.8% - 49.0% 77,944
 84,320
CBREI Venture 5.0% - 64.0% 68,405
 73,776
Berkshire Group 50.0% 46,391
 43,937
Brandywine 30.0% 13,830
 13,777
CIM Group ("CIM") and Pacific Life Insurance Company
   ("PacLife")
 16.7% 10,385
 9,339
Other   536
 208
Total investments in unconsolidated real estate ventures $543,026
 $322,878
_______________
(1) 
Ownership interests as of December 31, 2019. We have multiple investments with certain venture partners with varying ownership interests.

We provide leasing, property management and other real estate services to our unconsolidated real estate ventures. We recognized revenue, including expense reimbursements, of $28.5 million, $26.1 million and $12.9 million for each of the three years in the period ended December 31, 2019 for such services.
PGIM
In December 2019, we sold a 50.0% interest in a real estate venture that owns Central Place Tower, a 552,000 square foot office building located in Arlington, Virginia, to PGIM for the gross sales price of $220.0 million. Per the terms of the venture agreement, we determined the venture was not a VIE and we do not have a controlling financial interest in the venture. As a result, we deconsolidated our remaining 50.0% interest in the real estate venture and recorded a gain as our unconsolidated interest was increased to reflect its fair value. We recognized an aggregate $53.4 million gain, net of certain liabilities, recorded as "Gain on sale of real estate" in our statement of operations for the year ended December 31, 2019, on the partial sale and remeasurement of our remaining interest in the real estate venture subsequent to the transfer of control.
CPPIB
As of December 31, 2019 and 2018, we had a 0 investment balance in the real estate venture that owns 1101 17th Street and had suspended the equity method of accounting for the venture since June 30, 2018. We will recognize as income any future distributions from the venture until our share of unrecorded earnings and contributions exceeds the cumulative excess distributions previously recognized in income. During the years ended December 31, 2019 and 2018, we recognized income of $6.4 million and $8.3 million related to distributions from this venture, which was included in "Income (loss) from unconsolidated real estate ventures, net" in our statement of operations. During the year ended December 31, 2018, we also recognized the $5.4 million negative investment balance as income within "Income (loss) from unconsolidated real estate ventures, net" in our statement of operations as a result of the venture refinancing a mortgage payable collateralized by the property and eliminating certain principal guaranty provisions that had been included in a prior loan.

In December 2018, our unconsolidated real estate venture with CPPIB sold The Warner, a 583,000 square foot office building located in Washington, D.C., for $376.5 million. In connection with the sale, the unconsolidated real estate venture recognized a gain on sale of $32.5 million, of which our proportionate share was $20.6 million, which was included in "Income (loss) from unconsolidated real estate ventures, net" in our statement of operations for the year ended December 31, 2018. Additionally, in connection with the sale, our unconsolidated real estate venture repaid the related mortgage payable of $270.5 million.
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 committed to contribute approximately $101.3 million to the venture for a 45.0% interest, which reduced our ownership interest from 100.0% at the real estate venture's formation to 55.0% as CPPIB's contributions were funded.

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CIM and PacLife
In January 2018, we invested $10.1 million for a 16.67% interest in a real estate venture with CIM and PacLife, which purchased the 1,152-key Wardman Park hotel, located adjacent to the Woodley Park Metro Station in northwest Washington, D.C. Prior to the acquisition by this venture, the JBG Legacy Funds owned a 47.64% interest in the Wardman Park hotel. The JBG Legacy Funds did not receive any proceeds from the sale, as the net proceeds were used to satisfy the prior mortgage debt. A third-party asset manager oversees the hotel operations on behalf of the venture and our involvement will increase only to the extent a land development opportunity becomes the primary business plan for the asset.
JP Morgan

In August 2018, JP Morgan, our former partner in the real estate venture that owned the Investment Building, a 401,000 square foot office building located in Washington, D.C., acquired our 5.0% interest in the venture for $24.6 million, resulting in a gain of $15.5 million, which was included in "Income (loss) from unconsolidated real estate ventures, net" in our statement of operations for the year ended December 31, 2018.
 
The following is a summary of the debt of our unconsolidated real estate ventures:
  
Weighted Average Effective
Interest Rate
(1)
 December 31,
   2019 2018
    (In thousands)
Variable rate (2)
 4.10% $629,479
 $461,704
Fixed rate (3)
 3.98% 561,236
 665,662
Unconsolidated real estate ventures - mortgages payable   1,190,715
 1,127,366
Unamortized deferred financing costs   (2,859) (1,998)
Unconsolidated real estate ventures - mortgages payable, net (4)
   $1,187,856
 $1,125,368
______________
(1) 
Weighted average effective interest rate as of December 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 19 for additional information on guarantees of the debt of certain of our unconsolidated real estate ventures.

The following is a summary of the financial information for our unconsolidated real estate ventures:
 December 31,
 2019 2018
Combined balance sheet information:(In thousands)
Real estate, net$2,493,961
 $2,050,985
Other assets, net (1)
291,092
 169,264
Total assets$2,785,053
 $2,220,249
    
Borrowings, net$1,187,856
 $1,125,368
Other liabilities, net (1)
168,243
 94,845
Total liabilities1,356,099
 1,220,213
Total equity1,428,954
 1,000,036
Total liabilities and equity$2,785,053
 $2,220,249
______________
(1) 
On January 1, 2019, our unconsolidated real estate ventures adopted Topic 842, which required the ventures to record operating right-of-use assets totaling $52.4 million and related lease liabilities totaling $44.1 million.


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 Year Ended December 31,
 2019 2018 2017
Combined income statement information:(In thousands)
Total revenue$266,653
 $300,032
 $135,256
Operating income (1)
18,041
 56,262
 14,741
Net loss(32,507) (1,155) (7,593)
______________
(1) 
Includes gain on sale of The Warner of $32.5 million recognized by our unconsolidated real estate venture with CPPIB during the year ended December 31, 2018.

7.    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 December 31, 2019 and 2018, we had 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 December 31, 2019 and 2018, the net carrying amounts of our investment in these entities were $242.9 million and $232.8 million, which are included in "Investments in unconsolidated real estate ventures" in our balance sheets. Our equity in the income of unconsolidated VIEs is included in "Income (loss) from unconsolidated real estate ventures, net" in our statements of operations. Our maximum loss exposure in these entities is limited to our investments, construction commitments and debt guarantees. See Note 19 for additional information.

Consolidated VIEs

JBG SMITH LP is our most significant consolidated VIE. We hold the majority limited partnership 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 limited partners (including by such a limited partner unilaterally). Because the noncontrolling interest holders do not have these rights, the operating partnership is a VIE. As general partner, we have the power to direct the core activities of the operating partnership that most significantly affect its performance, and through our majority interest in the operating partnership have both the right to receive benefits from and the obligation to absorb losses of the operating partnership. Accordingly, we are the primary beneficiary of the operating partnership and consolidate the operating partnership in our financial statements. As we conduct our business and hold our assets and liabilities through the operating partnership, the total assets and liabilities of the operating partnership comprise substantially all of our consolidated assets and liabilities.
In conjunction with the acquisition of F1RST Residences, located in the Ballpark submarket of Washington, D.C. in December 2019, we entered into a like-kind exchange agreement with a third-party intermediary. As of December 31, 2019, 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, 2019 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 had the power to direct the activities that most significantly impacted its economic performance and the obligation to absorb losses, as well as the right to receive benefits, that could have been 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 as the like-kind exchange agreement was completed with the sale of the

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Metropolitan Park land sites in January 2020.

In conjunction with the acquisition of Potomac Yard Land Bay H, located in Alexandria, Virginia in December 2018, we entered into a like-kind exchange agreement with a third-party intermediary. As of December 31, 2018, 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 had the power to direct the activities that most significantly impacted its economic performance and the obligation to absorb losses, as well as the right to receive benefits, that could have been 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 as the like-kind exchange agreement was completed with 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 December 31, 2019, excluding the operating partnership, we consolidated 2 VIEs with total assets and liabilities of $136.8 million and $11.8 million. As of December 31, 2018, excluding the operating partnership, we consolidated 2 VIEs with total assets and liabilities of $94.8 million and $43.4 million.

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8.    Other Assets, Net
The following is a summary of other assets, net:
  December 31,
  2019 2018
  (In thousands)
Deferred leasing costs $205,830
 $202,066
Accumulated amortization (79,814) (72,465)
Deferred leasing costs, net $126,016
 $129,601
Lease intangible assets, net 23,644
 34,390
Other identified intangible assets, net 48,620
 55,469
Operating right-of-use assets, net (1)
 19,865
 
Prepaid expenses 12,556
 6,482
Deferred financing costs on credit facility, net 3,071
 4,806
Deposits 3,210
 3,633
Derivative agreements, at fair value 
 10,383
Other 16,705
 20,230
Total other assets, net $253,687
 $264,994

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

The following is a summary of the composition of lease intangible assets, net:
 December 31,
 2019 2018
 (in thousands)
Lease intangible assets: 
In-place leases$33,812
 $38,216
Above-market real estate leases8,635
 9,414
Below-market ground leases
 2,215
Total lease intangibles assets42,447
 49,845
Accumulated amortization:   
In-place leases15,231
 11,602
Above-market real estate leases3,572
 2,405
Below-market ground leases
 1,448
Total accumulated amortization18,803
 15,455
Lease intangible assets, net$23,644
 $34,390


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The following is a summary of the composition of other identified intangible assets, net:
 December 31,
 2019 2018
 (in thousands)
Other identified intangible assets: 
Option to enter into ground lease$17,090
 $17,090
Management and leasing contracts48,900
 48,900
Other166
 166
Total other identified intangibles assets66,156
 66,156
Accumulated amortization:   
Management and leasing contracts17,385
 10,297
Other151
 390
Total accumulated amortization17,536
 10,687
Other identified intangible assets, net$48,620
 $55,469


The following is a summary of amortization expense related to lease and other identified intangible assets:
 Year Ended December 31,
 2019 2018 2017
 (in thousands)
In-place lease amortization (1)
$7,375
 $11,807
 $10,216
Above-market real estate lease amortization (2)
1,730
 2,390
 1,428
Below-market ground lease amortization (3)

 85
 87
Management and leasing contract amortization (1)
7,088
 7,088
 3,209
Other amortization(240) 191
 14
Total lease and other identified intangible asset
   amortization expense
$15,953
 $21,561
 $14,954

___________________________________________
(1) Amounts are included in "Depreciation and amortization expense" in our statements of operations.
(2) Amounts are included in "Property rentals revenue" in our statements of operations.
(3) Amounts are included in "Property operating expenses" in our statements of operations.

The following is a summary of the estimated amortization of lease and other identified intangible assets for the next five years and thereafter as of December 31, 2019:
Year ending December 31, Amount
  (in thousands)
2020 $12,949
2021 9,993
2022 8,999
2023 8,510
2024 7,973
Thereafter 6,750
Total (1)
 $55,174
___________________________________________
(1) Estimated amortization related to the option to enter into ground lease is not included within the amortization table above as the ground lease does not have a definite start date.



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9.    Debt
Mortgages Payable
The following is a summary of mortgages payable:
  
Weighted Average
Effective
Interest Rate
(1)
 December 31,
   2019 2018
    (In thousands)
Variable rate (2)
 3.36% $2,200
 $308,918
Fixed rate (3)
 4.29% 1,125,648
 1,535,734
Mortgages payable   1,127,848
 1,844,652
Unamortized deferred financing costs and premium/
  discount, net
   (2,071) (6,271)
Mortgages payable, net   $1,125,777
 $1,838,381
__________________________ 
(1) 
Weighted average effective interest rate as of December 31, 2019.
(2) 
Includes a variable rate mortgage payable with an interest rate cap agreement as of December 31, 2018.
(3) 
Includes variable rate mortgages payable with interest rates fixed by interest rate swap agreements.
As of December 31, 2019 and 2018, the net carrying value of real estate collateralizing our mortgages payable, excluding assets held for sale, totaled $1.4 billion and $2.3 billion. Our mortgages payable 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 mortgages payable are recourse to us. See Note 19 for additional information. As of December 31, 2019, we were not in default under any mortgage loan.
During the year ended December 31, 2019, aggregate borrowings under mortgages payable totaled $2.2 million related to construction draws. During the year ended December 31, 2019, we repaid mortgages payable with an aggregate principal balance of $709.1 million. The loss on the extinguishment of debt was $5.8 million for the year ended December 31, 2019, of which $2.9 million related to our repayment of various mortgages payable and $2.9 million related to the termination of various interest rate swaps in connection with the repayment of the loan encumbering Central Place Tower. In February 2020, we entered into a mortgage loan with a principal balance of $175.0 million collateralized by 4747 and 4749 Bethesda Avenue.
During the year ended December 31, 2018, aggregate borrowings totaled $118.1 million, of which $47.5 million related to the principal balance on a new mortgage payable collateralized by 1730 M Street and the remainder related to construction draws under mortgages payable. During the year ended December 31, 2018, we repaid mortgages payable with an aggregate principal balance of $298.1 million, which resulted in a loss on the extinguishment of debt of $5.2 million.
As of December 31, 2019 and 2018, we had various interest rate swap and cap agreements on certain of our mortgages payable with an aggregate notional value of $867.6 million and $1.3 billion. During the year ended December 31, 2019, in connection with the repayment of the loan encumbering Central Place Tower, we terminated various interest rate swaps with an aggregate notional value of $220.0 million. During the year ended December 31, 2018, we entered into various interest rate swap and cap agreements on certain of our mortgages payable with an aggregate notional value of $381.3 million. See Note 17 for additional information.
Credit Facility
As of December 31, 2019, our $1.4 billion credit facility consisted of a $1.0 billion revolving credit facility maturing in July 2021, with 2 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. Effective as of July 17, 2019, the credit facility was amended to extend the delayed draw period of our Tranche A-1 Term Loan to July 2020. In December 2019, we drew $200.0 million under the revolving credit facility, which was repaid in 2020.

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Based on the terms as of December 31, 2019, the interest rate for the credit facility varies based on a ratio of our total outstanding indebtedness to a valuation of certain real property and assets and ranges (a) in the case of the revolving credit facility, from LIBOR plus 1.10% to LIBOR plus 1.50%, (b) in the case of the Tranche A-1 Term Loan, from LIBOR plus 1.20% to LIBOR plus 1.70% and (c) in the case of the Tranche A-2 Term Loan, effective as of July 17, 2019, from LIBOR plus 1.15% to LIBOR plus 1.70%, reflecting a 40 basis points reduction from the prior credit facility. There are various LIBOR options in the credit facility, and we elected the one-month LIBOR option as of December 31, 2019. We were not in default under our credit facility as of December 31, 2019. In January 2020, the credit facility was amended to extend the maturity date of the revolving credit facility from July 2021 to January 2025, and to reduce its range of interest rates by five basis points to LIBOR plus 1.05% to 1.50%.
As of December 31, 2019 and 2018, we had interest rate swaps with an aggregate notional value of $100.0 million, which mature in January 2023 and effectively convert the variable interest rate applicable to our Tranche A-1 Term Loan to a fixed interest rate, providing weighted average base interest rates under the facility agreements of 2.12% per annum for both periods. As of December 31, 2019, we had interest rate swaps with an aggregate notional value of $137.6 million, which effectively convert the variable interest rate applicable to a portion of the outstanding balance of our Tranche A-2 Term Loan to a fixed interest rate, providing a weighted average base interest rate under the facility agreements of 2.59% per annum.
The following is a summary of amounts outstanding under the credit facility:
  Effective December 31,
  
Interest Rate (1)
 2019 2018
    (In thousands)
Revolving credit facility (2) (3) (4)
 2.86% $200,000
 $
       
Tranche A-1 Term Loan (5)
 3.32% $100,000
 $100,000
Tranche A-2 Term Loan (5)
 3.74% 200,000
 200,000
Unsecured term loans   300,000
 300,000
Unamortized deferred financing costs, net   (2,705) (2,871)
Unsecured term loans, net   $297,295
 $297,129
__________________________ 
(1) 
Interest rate as of December 31, 2019.
(2) 
As of December 31, 2019 and 2018, letters of credit with an aggregate face amount of $1.5 million and $5.7 million were provided under our revolving credit facility.
(3) 
As of December 31, 2019 and 2018, net deferred financing costs related to our revolving credit facility totaling $3.1 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. In January 2020, the credit facility was amended to extend the maturity date of the revolving credit facility from July 2021 to January 2025, and to reduce its range of interest rates by five basis points to LIBOR plus 1.05% to 1.50%.
(5) 
The interest rate includes the impact of interest rate swap agreements.
Principal Maturities
Principal maturities of debt outstanding as of December 31, 2019, including mortgages payable, revolving credit facility and the term loans, are as follows:
Year ending December 31, Amount
  (In thousands)
2020 $99,341
2021 296,227
2022 107,500
2023 273,961
2024 334,290
Thereafter 516,529
Total $1,627,848



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10.    Other Liabilities, Net
The following is a summary of other liabilities, net:
 December 31,
 2019 2018
 (In thousands)
Lease intangible liabilities$38,577
 $40,179
Accumulated amortization(26,253) (26,081)
Lease intangible liabilities, net$12,324
 $14,098
Prepaid rent23,612
 21,998
Lease assumption liabilities17,589
 23,105
Lease incentive liabilities20,854
 9,317
Lease liabilities related to operating right-of-use assets (1)
28,476
 
Finance lease liability (2)

 15,704
Security deposits16,348
 17,696
Environmental liabilities17,898
 17,898
Ground lease deferred rent payable (3)

 3,510
Net deferred tax liability5,542
 6,878
Dividends payable34,012
 45,193
Derivative agreements, at fair value17,440
 1,723
Other11,947
 4,486
Total other liabilities, net$206,042
 $181,606

__________________________ 
(1) 
Related to our adoption of Topic 842 on January 1, 2019. See Note 2 for additional information.
(2) 
In December 2019, we sold a 50.0% interest in Central Place Tower, which resulted in the deconsolidation of the entity that was the lessee to our sole finance lease. See Note 6 for additional information.
(3) 
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.
Amortization expense included in "Property rentals revenue" in our statements of operations related to lease intangible liabilities for each of the three years in the period ended December 31, 2019 was $2.5 million, $2.6 million and $2.3 million.
The following is a summary of the estimated amortization of lease intangible liabilities for the next five years and thereafter as of December 31, 2019,:
Year ending December 31, Amount
  (in thousands)
2020 $2,017
2021 1,800
2022 1,781
2023 1,773
2024 1,755
Thereafter 3,198
Total $12,324

11.     Income Taxes

We have elected to be taxed as a REIT, and accordingly, we have incurred 0 federal income tax expense related to our REIT subsidiaries except for our TRSs. Due to the passage of federal tax reform legislation, which was signed into law on December

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22, 2017 and which we refer as the 2017 Tax Act, our TRSs were required to decrease the net deferred tax liability, which resulted in a net tax benefit of $3.9 million during the year ended December 31, 2017. The recorded tax charges in 2017 for the impact of the 2017 Tax Act were made using the current available information and technical guidance on the interpretations of the 2017 Tax Act. As permitted by Securities and Exchange Commission Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we subsequently finalized our accounting analysis based on the guidance, interpretations and data available as of December 31, 2018. We did not have any changes to our 2017 estimate related to the 2017 Tax Act and therefore, it had no impact to our 2018 financial statements.

Our financial statements include the operations of our TRSs, which are subject to federal, state and local income taxes on their taxable income. As a REIT, we may also be subject to federal excise taxes if we engage in certain types of transactions. Continued qualification as a REIT depends on our ability to satisfy the REIT distribution tests, stock ownership requirements and various other qualification tests. As of December 31, 2019, our TRSs have an estimated federal and state net operating loss of $3.6 million, which will expire in 2038 and 2039. The net basis of our assets and liabilities for tax reporting purposes is approximately $55.9 million higher than the amounts reported in our balance sheet as of December 31, 2019.

The following is a summary of our income tax benefit:
 Year Ended December 31,
 2019 2018 2017
 (in thousands)
Current tax benefit (expense)$(34) $20
 $(496)
Deferred tax benefit1,336
 718
 10,408
Income tax benefit$1,302
 $738
 $9,912


As of December 31, 2019 and 2018, we have a net deferred tax liability of $5.5 million and $6.9 million primarily related to the management and leasing contracts assumed in the Combination, partially offset by deferred tax assets associated with tax versus book differences, related general and administrative expenses and the net operating loss remaining from 2018 and 2017. We are subject to federal, state and local income tax examinations by taxing authorities for 2016 through 2019.
 December 31,
 2019 2018
 (in thousands)
Deferred tax assets:   
Accrued bonus$721
 $
Net operating loss915
 2,326
Deferred revenue626
 998
Bad debt expense
 583
Charitable contributions435
 
Other217
 198
Total deferred tax assets2,914
 4,105
Valuation allowance(523) (469)
Total deferred tax assets, net of valuation allowance2,391
 3,636
Deferred tax liabilities:   
Management and leasing contracts(7,412) (9,905)
Other(521) (609)
Total deferred tax liabilities(7,933) (10,514)
Net deferred tax liability$(5,542) $(6,878)


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During the year ended December 31, 2019, our Board of Trustees declared cash dividends totaling $0.90 of which $0.333 was taxable as ordinary income for federal income tax purposes, $0.342 were capital gain distributions and the remaining $0.225 will be determined in 2020. During the year ended December 31, 2018, our Board of Trustees declared cash dividends totaling $1.00 (regular dividends of $0.90 per common share and a special dividend of $0.10 per common share) of which $0.531 was taxable as ordinary income for federal income tax purposes and $0.469 were capital gain distributions. During the year ended December 31, 2017, our Board of Trustees declared cash dividends of $0.45 per common share of which $0.385 was taxable as ordinary income for federal income tax purposes and $0.065 were capital gains distributions.
12.    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 years ended December 31, 2019 and 2018, unitholders redeemed 1.7 million and 3.0 million OP Units, which we elected to redeem for an equivalent number of our common shares. As of December 31, 2019, outstanding OP Units totaled 15.2 million, representing a 10.1% ownership interest in JBG SMITH LP. On our balance sheets, our OP Units and certain vested LTIPs are presented at the higher of their redemption value or their carrying value, with such adjustments recognized in "Additional paid-in capital." Redemption value per OP Unit is equivalent to the market value of one of our common shares at the end of the period. In 2020, as of the date of this filing, unitholders redeemed 733,851 OP Units, which we elected to redeem for an equivalent number of our common shares.
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 after delivery. As of December 31, 2019, we held a 95.0% ownership interest in the real estate venture.
The following is a summary of the activity of redeemable noncontrolling interests:
 Year Ended December 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(57,318) 
 (57,318) (109,208) 
 (109,208)
LTIP Units issued in lieu of
  cash bonuses (1)
3,954
 
 3,954
 
 
 
Net income attributable to
  redeemable noncontrolling
  interests
8,566
 7
 8,573
 6,641
 69
 6,710
Other comprehensive income (loss)(2,584) 
 (2,584) 1,384
 
 1,384
Contributions (distributions)(15,325) 71
 (15,254) (18,737) 500
 (18,237)
Share-based compensation expense63,264
 
 63,264
 52,190
 
 52,190
Adjustment to redemption value53,983
 
 53,983
 16,172
 
 16,172
Balance as of end of period$606,699
 $6,059
 $612,758
 $552,159
 $5,981
 $558,140

__________________________ 
(1) 
See Note 13 for additional information.

13.     Share-Based Payments and Employee Benefits

OP UNITS

The acquisition of JBG/Operating Partners, L.P. in the Combination, resulted in the issuance of 3.3 million OP Units to the former owners with an estimated grant-date fair value of $110.6 million. The OP Units are subject to post-combination vesting over

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periods of either 12 or 60 months based on continued employment. The significant assumptions used to value the OP Units included expected volatility (18.0% to 27.0%), risk-free interest rates (1.3% to 1.5%) and post-vesting restriction periods (1 year to 3 years). Compensation expense for these OP Units is recognized over the graded vesting period. See Note 3 for additional information.
The following is a summary of the OP Units activity:
 Unvested Shares Weighted Average Grant-Date Fair Value
Unvested at December 31, 20182,999,987
 $33.39
Vested(127,735) 33.39
Unvested at December 31, 20192,872,252
 33.39


The total-grant date fair value of the OP Units that vested for each of the three years in the period ended December 31, 2019 was $4.3 million, $3.2 million and $7.2 million.

JBG SMITH 2017 Omnibus Share Plan
 
On June 23, 2017, our Board of Trustees adopted the JBG SMITH 2017 Omnibus Share Plan (the "Plan"), effective as of July 17, 2017, and authorized the reservation of 10.3 million of our common shares pursuant to the Plan. As of December 31, 2019, there were 3.9 million common shares available for issuance under the Plan.
Formation Awards
Pursuant to the Plan, on July 18, 2017, we granted 2.7 million formation awards ("Formation Awards") based on an aggregate notional value of approximately $100 million divided by the volume-weighted average price on July 18, 2017 of $37.10 per common share. In 2018, we granted 93,784 Formation Awards based on an aggregate notional value of $3.2 million divided by the volume-weighted average price on the date of issuance of $34.40 per common share.
The Formation Awards are structured in the form of profits interests in JBG SMITH LP that provide for a share of appreciation determined by the increase in the value of a common share at the time of conversion over the volume-weighted average price of a common share at the time the formation unit was granted. The Formation Awards, subject to certain conditions, generally vest 25% on each of the third and fourth anniversaries and 50% on the fifth anniversary, of the date granted, subject to continued employment with JBG SMITH through each vesting date.
The value of vested Formation Awards is realized through conversion of the award into a number of LTIP Units, and subsequent conversion into a number of OP Units determined based on the difference between the volume-weighted average price of a common share at the time the Formation Award was granted and the value of a common share on the conversion date. The conversion ratio between Formation Awards and OP Units, which starts at zero, is the quotient of (i) the excess of the value of a common share on the conversion date above the per share value at the time the Formation Award was granted over (ii) the value of a common share as of the date of conversion. Like options, Formation Awards have a finite 10-year term over which their value is allowed to increase and during which they may be converted into LTIP Units (and in turn, OP Units). Holders of Formation Awards will not receive distributions or allocations of net income or net loss prior to vesting and conversion to LTIP Units.
The aggregate grant-date fair value of the Formation Awards granted during the years ended December 31, 2018 and 2017 was $725,000 and $23.7 million estimated using Monte Carlo simulations. No Formation Awards were granted during the year ended December 31, 2019. Compensation expense for these awards is being recognized over a five-year period. The following is a summary of the significant assumptions used to value the Formation Awards:
 Year Ended December 31,
 2018 2017
Expected volatility27.0% to 29.0% 26.0%
Dividend yield2.5% to 2.7% 2.3%
Risk-free interest rate2.8% to 3.0% 2.3%
Expected life7 years 7 years

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The following is a summary of the Formation Awards activity:
 Unvested Shares Weighted Average Grant-Date Fair Value
Unvested at December 31, 20182,655,394
 $8.81
Vested(160,746) 8.84
Forfeited(9,702) 8.55
Unvested at December 31, 20192,484,946
 8.81


The total-grant date fair value of the Formation Awards that vested during the years ended December 31, 2019 and 2018 was $1.4 million and $333,000.

LTIP, Time-Based LTIP and Special Time-Based LTIP Units

During the years ended December 31, 2019 and 2018, as part of their annual compensation, we granted a total of 50,159 and 25,770 fully vested LTIP Units to non-employee trustees with an aggregate grant-date fair value of $1.8 million and $794,000. The LTIP Units may not be sold while such non-employee trustee is serving on the Board.
On July 18, 2017, we granted a total of 47,166 fully vested LTIP Units to the 7 independent trustees in the notional amount of $250,000 each. On the same date, we also granted 59,927 LTIP units to a key employee of which 50% vested immediately and the remaining 50% vests ratably from the 31st to the 60th month following the grant date.
During each of the three years in the period ended December 31, 2019, we granted 351,982, 367,519 and 302,518 Time-Based LTIP Units to management and other employees with a weighted average grant-date fair value of $34.26, $31.48 and $33.71 per unit that vest over four years, 25.0% per year, subject to continued employment. Compensation expense for these units is being recognized over a four-year period.
During the year ended December 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 their cash bonus paid in 2019, related to 2018 service, as LTIP Units.

Additionally, during the year ended December 31, 2018, related to our successful pursuit of Amazon's additional headquarters in National Landing, we granted 356,591 Special Time-Based LTIP Units to management and other employees with a weighted average grant-date fair value of $36.84 per unit. The Special Time-Based LTIP Units vest 50% on each of the fourth and fifth anniversaries of the grant date, subject to continued employment. Compensation expense for these units is being recognized over a five-year period.

The aggregate grant-date fair value of the LTIP, Time-Based LTIP and Special Time-Based LTIP Units granted (collectively "Granted LTIPs") for each of the three years in the period ended December 31, 2019 was $17.0 million, $25.5 million and $13.7 million, valued using Monte Carlo simulations. Holders of the Granted LTIPs have the right to convert all or a portion of vested units into OP Units, which are then subsequently exchangeable for our common shares. Granted LTIPs do not have redemption rights, but any OP Units into which units are converted are entitled to redemption rights. Granted LTIPs, generally, vote with the OP Units and do not have any separate voting rights except in connection with actions that would materially and adversely affect the rights of the Granted LTIPs. The following is a summary of the significant assumptions used to value the Granted LTIPs:

 Year Ended December 31,
 2019 2018 2017
  
Expected volatility18.0% to 24.0% 20.0% to 22.0% 17.0% to 19.0%
Risk-free interest rate2.3% to 2.6% 1.9% to 2.6% 1.3% to 1.5%
Post-grant restriction periods2 to 3 years 2 to 3 years 2 to 3 years

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The following is a summary of the Granted LTIP activity:
 Unvested Shares Weighted Average Grant-Date Fair Value
Unvested at December 31, 2018962,662
 $34.03
Granted493,777
 34.40
Vested(360,703) 33.15
Forfeited(393) 34.52
Unvested at December 31, 20191,095,343
 34.35

The total-grant date fair value of the Granted LTIPs that vested for each of the three years in the period ended December 31, 2019 was $12.0 million, $3.6 million and $2.5 million. In 2020, we issued 471,598 LTIP Units to management and employees with an estimated aggregate grant-date fair value of $18.3 million.
Performance-Based LTIP and Special Performance-Based LTIP Units
During each of the three years in the period ended December 31, 2019, we granted 478,411, 567,106 and 605,072 Performance-Based LTIP Units to management and other employees. During the year ended December 31, 2018, related to our successful pursuit of Amazon's additional headquarters at our properties in National Landing, we granted 511,555 Special Performance-Based LTIP Units to management and other employees.
Performance-Based LTIP Units, including the Special Performance-Based LTIP Units, are performance-based equity compensation pursuant to which participants have the opportunity to earn LTIP Units based on the relative performance of the total shareholder return ("TSR") of our common shares compared to the companies in the FTSE NAREIT Equity Office Index, over the defined performance period beginning on the grant date, inclusive of dividends and stock price appreciation.
Our Performance-Based LTIP and Special Performance-Based LTIP Units have a three-year performance period. NaN 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. NaN percent of any Special Performance-Based LTIP Units that are earned at the end of the three-year performance period vest on the fourth anniversary of the date of grant and the remaining 50% on the fifth anniversary of the date of grant, subject to continued employment.
The aggregate grant-date fair value of the Performance-Based LTIP and Special Performance-Based LTIP Units granted for each of the three years in the period ended December 31, 2019 was $9.3 million, $21.1 million and $9.7 million, valued using Monte Carlo simulations. Compensation expense for the Performance-Based LTIP Units is being recognized over a four-year period, while compensation expense for the Special Performance Based LTIP Units is being recognized over a five-year period. The following is a summary of the significant assumptions used to value both the Performance-Based LTIP and Special Performance-Based LTIP Units:
 Year Ended December 31,
 2019 2018 2017
  
Expected volatility19.0% to 23.0% 19.9% to 26.0% 18.0%
Dividend yield2.3% to 2.5% 2.5% to 2.7% 2.3%
Risk-free interest rate2.3% to 2.6% 2.3% to 3.0% 1.5%

The following is a summary of both the Performance-Based LTIP and Special Performance-Based LTIP Units activity:
 Unvested Shares Weighted Average Grant-Date Fair Value
Unvested at December 31, 20181,657,578
 $18.27
Granted478,411
 19.49
Forfeited(18,054) 18.00
Unvested at December 31, 20192,117,935
 18.55



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In 2020, we issued 593,100 Performance-Based LTIP Units to management and employees with an estimated aggregate grant-date fair value of $11.1 million.
JBG SMITH 2017 ESPP
The JBG SMITH 2017 ESPP authorized the issuance of up to 2.1 million common shares. The ESPP provides eligible employees an option to purchase, through payroll deductions, our common shares at a discount of 15.0% of the closing price of a common share on relevant determination dates, provided that the fair market value of common shares, determined as of the first day of the relevant offering period, purchased by any eligible employee may not exceed $25,000 in any calendar year. The maximum aggregate number of common shares reserved for issuance under the ESPP will automatically increase on January 1 of each year, unless the Compensation Committee of the Board of Trustees determines to limit any such increase, by the lesser of (i) 0.10% of the total number of outstanding common shares on December 31 of the preceding calendar year or (ii) 206,600 common shares.
Pursuant to the ESPP, employees purchased 47,022 and 20,178 common shares for $1.5 million and $597,000 during the years ended December 31, 2019 and 2018. The following is a summary of the significant assumptions used to value the ESPP common shares using the Black-Scholes model:
 Year Ended December 31,
 2019 2018
Expected volatility18.0% to 28.0% 21.0%
Dividend yield2.6% to 3.5% 2.5%
Risk-free interest rate2.2% to 2.4% 2.0%
Expected life6 months 6 months

As of December 31, 2019, there were 2.0 million common shares available for issuance under the ESPP.

Share-Based Compensation Expense

The following is a summary of share-based compensation expense:
 Year Ended December 31,
 2019 2018 2017
 (In thousands)
Time-Based LTIP Units$11,386
 $10,095
 $2,211
Performance-Based LTIP Units8,716
 5,271
 1,172
LTIP Units1,000
 794
 
Other equity awards (1)
4,535
 3,826
 1,526
Share-based compensation expense - other 
25,637
 19,986
 4,909
Formation Awards5,734
 5,606
 5,169
OP Units (2)
29,826
 29,455
 21,467
LTIP Units (2)
456
 277
 2,615
Special Performance-Based LTIP Units (3)
2,843
 323
 
Special Time-Based LTIP Units (3)
3,303
 369
 
Share-based compensation related to
   Formation Transaction and special equity
   awards (4)
42,162
 36,030
 29,251
Total share-based compensation expense67,799
 56,016
 34,160
Less amount capitalized(2,526) (3,341) (467)
Share-based compensation expense$65,273
 $52,675
 $33,693

______________________________________________ 
(1) 
For the years ended December 31, 2019 and 2018, primarily includes compensation expense for certain executives who have elected to receive all or a portion of any cash bonus that may be paid in the subsequent year related to past service in the form of fully vested LTIP Units and related to our ESPP. For the year ended December 31, 2017, represents share-based compensation expense related to equity awards prior to the Formation Transaction.

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(2) 
Represents share-based compensation expense for LTIP Units and OP Units subject to post-Combination employment obligations.
(3) 
Represents equity awards issued related to our successful pursuit of Amazon's additional headquarters in National Landing.
(4) 
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 December 31, 2019, we had $77.4 million of total unrecognized compensation expense related to unvested share-based payment arrangements, which is expected to be recognized over a weighted average period of 2.2 years.

Employee Benefits

We have a 401(k) defined contribution plan covering substantially all of our officers and employees which permits participants to defer compensation up to the maximum amount permitted by law. We provide a discretionary matching contribution. Employees’ contributions vest immediately and our matching contributions vest after one year. Our contributions for each of the three years in the period ended December 31, 2019 were $2.0 million, $1.8 million and $3.6 million.

14.     Transaction and Other Costs

The following is a summary of transaction and other costs:
 Year Ended December 31,
 2019 2018 2017
 (In thousands)
Relocation of corporate headquarters (1)
$10,900
 $
 $
Demolition costs (2)
5,432
 
 
Formation transaction and integration costs (3)
5,252
 15,907
 127,739
Completed, potential and pursued transaction expenses651
 9,008
 
Other (4)
1,000
 2,791
 
Transaction and other costs$23,235
 $27,706
 $127,739

__________________________ 
(1) 
In November 2019, we relocated our corporate headquarters. Upon the relocation of our corporate headquarters, we incurred an impairment charge on the right-of-use assets for leases related to our former corporate headquarters as well as other costs. See Note 17 for more information.
(2) 
Related to 1900 Crystal Drive.
(3) 
For the year ended December 31, 2019 includes integration and severance costs. For the year ended December 31, 2018 includes transition services provided by our former parent, and integration and severance costs. For the year ended December 31, 2017 includes severance and transaction bonus expense of $40.8 million, investment banking fees of $33.6 million, legal fees of $13.9 million and accounting fees of $10.8 million.
(4) 
For the year ended December 31, 2019 represents a contribution to the Washington Housing Conservancy. For the year ended December 31, 2018 represents costs related to the successful pursuit of Amazon's additional headquarters at our properties in National Landing.


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15.     Interest Expense

The following is a summary of interest expense:
 Year Ended December 31,
 2019 2018 2017
 (In thousands)
Interest expense$79,234
 $91,651
 $69,178
Amortization of deferred financing costs3,217
 4,661
 3,011
Net loss (gain) on derivative financial instruments
not designated as cash flow hedges:
     
Net unrealized50
 (926) (1,348)
Net realized
 (135) 27
Capitalized interest(29,806) (20,804) (12,727)
Interest expense$52,695
 $74,447
 $58,141


16.     Shareholders' Equity and Earnings (Loss) Per Common Share

Shareholders' Equity
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 offering expenses, of $472.8 million.

Earnings (Loss) Per Common Share
The following is a summary of the calculation of basic and diluted earnings (loss) per common share and a reconciliation of the amounts of net income (loss) available to common shareholders used in calculating basic and diluted earnings per common share to net income (loss):
 Year Ended December 31,
 2019 2018 2017
 (In thousands, except per share amounts)
Net income (loss)$74,144
 $46,613
 $(79,084)
Net (income) loss attributable to redeemable
   noncontrolling interests
(8,573) (6,710) 7,328
Net loss attributable to noncontrolling interests
 21
 3
Net income (loss) attributable to common shareholders65,571
 39,924
 (71,753)
Distributions to participating securities(2,489) (2,599) (1,655)
Net income (loss) available to common shareholders
  — basic and diluted
$63,082
 $37,325
 $(73,408)
      
Weighted average number of common shares
   outstanding — basic and diluted
130,687
 119,176
 105,359
      
Earnings (loss) per common share:     
Basic$0.48
 $0.31
 $(0.70)
Diluted$0.48
 $0.31
 (0.70)

The effect of the redemption of OP Units and Time-Based LTIP Units that were outstanding as of December 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 at an identical proportion to the common shareholders, the gains attributable and their equivalent weighted average OP Unit

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and Time-Based LTIP Unit impact are excluded from net income 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 4.7 million, 3.9 million and 3.3 million for each of the three years in the period ended December 31, 2019, were excluded from the calculation of diluted earnings per common share as they were antidilutive, but potentially could be dilutive in the future.

17.    Fair Value Measurements

Fair Value Measurements 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 December 31, 2019 and 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 $(17.7) million and $8.3 million as of December 31, 2019 and 2018 and was recorded in "Accumulated other comprehensive income (loss)" in our balance sheets, of which a portion was reclassified to "Redeemable noncontrolling interests." Within the next 12 months, we expect to reclassify $5.5 million as an increase to interest expense. The net unrealized (loss) gain on our derivative financial instruments not designated as cash flow hedges was $(50,000), $926,000 and $1.3 million for each of the three years in the period ended December 31, 2019, and was recorded in "Interest expense" in our statements of operations and "Net unrealized loss (gain) on ineffective derivative financial instruments" in our statements of cash flows. 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 is a summary of assets and liabilities measured at fair value on a recurring basis:
 Fair Value Measurements
 Total Level 1 Level 2 Level 3
December 31, 2019(In thousands)
Derivative financial instruments designated as cash flow hedges:       
Classified as liabilities in "Other liabilities, net"$17,440
 
 $17,440
 
        
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 December 31, 2019 and 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 gains and losses included in "Other comprehensive income (loss)'' in our statements of comprehensive income (loss) for each of the three years in the period ended December 31, 2019 were attributable to the net change in unrealized gains or losses related to the interest rate swaps that were outstanding during those periods, none of which were reported in our statements of operations as the interest rate swaps were documented and qualified as hedging instruments.


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Fair Value Measurements on a Nonrecurring Basis

Fair value measurements on a nonrecurring basis consist of the right-of-use asset related to our former corporate office lease, which we measured for impairment upon relocation to our new corporate headquarters in November 2019. Prior to the relocation, we leased office space in a building we owned through one of our unconsolidated real estate ventures. With the adoption of Topic 842 in January 2019, we recorded a right-of-use asset based on the expected future use of our former headquarters. Upon the relocation of our corporate headquarters, we impaired the right-of-use asset due to our change in use of the asset. The fair value of the right-of-use asset subsequent to the relocation was based on Level 3 inputs, including estimated sublease income and our incremental borrowing rate. For the year ended December 31, 2019, we incurred an impairment charge of $10.2 million and certain additional expenses related to the relocation of our corporate headquarters. There were no other assets measured at fair value on a nonrecurring basis as of December 31, 2019 and 2018. See Note 14 for more information.

Financial Assets and Liabilities Not Measured at Fair Value
As of December 31, 2019 and 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:
 December 31, 2019 December 31, 2018
 
     Carrying
      Amount (1)
 Fair Value 
     Carrying
      Amount (1)
 Fair Value
 (In thousands)
Financial liabilities:       
Mortgages payable$1,127,848
 $1,162,890
 $1,844,652
 $1,870,078
Revolving credit facility200,000
 200,177
 
 
Unsecured term loans300,000
 300,607
 300,000
 300,727

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

The fair values of the mortgages payable, revolving credit facility and unsecured term loans were determined using Level 2 inputs of the fair value hierarchy.

18.    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. We defined our reportable segments to be aligned with our method of internal reporting and the way our Chief Executive Officer, who is also our Chief Operating Decision Maker ("CODM"), makes key operating decisions, evaluates financial results, allocates resources and manages our business. Accordingly, we aggregate our operating segments into 3 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.

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 revenue, 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 both disclosed separately in our statements of operations. The following represents the components of revenue from our third-party real estate services business:

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 Year Ended December 31,
 2019 2018 2017
 (In thousands)
Property management fees$22,437
 $24,831
 $16,022
Asset management fees14,045
 14,910
 10,083
Leasing fees7,377
 6,658
 3,639
Development fees15,655
 7,592
 3,653
Construction management fees1,669
 2,892
 2,220
Other service revenue4,269
 2,801
 712
Third-party real estate services revenue,
   excluding reimbursements
65,452
 59,684
 36,329
Reimbursements revenue (1)
55,434
 39,015
 26,907
Third-party real estate services revenue,
   including reimbursements
$120,886
 $98,699
 $63,236
_________________
(1) 
Represents reimbursement of expenses incurred by us on behalf of third parties, including allocated payroll costs and amounts paid to third-party contractors for construction management projects.

Management company assets primarily consist of management and leasing contracts with a net book value of $31.5 million and $38.6 million and are classified in "Other assets, net" in our balance sheets as of December 31, 2019 and 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.

The following is the reconciliation of net income attributable to common shareholders to consolidated NOI:
 Year Ended December 31,
 2019 2018 2017
 (In thousands)
Net income (loss) attributable to common shareholders$65,571
 $39,924
 $(71,753)
Add:     
Depreciation and amortization expense191,580
 211,436
 161,659
General and administrative expense:     
Corporate and other46,822
 33,728
 39,350
Third-party real estate services113,495
 89,826
 51,919
Share-based compensation related to Formation
   Transaction and special equity awards
42,162
 36,030
 29,251
Transaction and other costs23,235
 27,706
 127,739
Interest expense52,695
 74,447
 58,141
Loss on extinguishment of debt5,805
 5,153
 701
Reduction of gain (gain) on bargain purchase
 7,606
 (24,376)
Income tax benefit(1,302) (738) (9,912)
Net income (loss) attributable to redeemable noncontrolling
interests
8,573
 6,710
 (7,328)
Less:     
Third-party real estate services, including reimbursements
120,886
 98,699
 63,236
Other revenue (1)
7,638
 6,358
 5,167
Income (loss) from unconsolidated real estate ventures, net(1,395) 39,409
 (4,143)
Interest and other income, net5,385
 15,168
 1,788
Gain on sale of real estate104,991
 52,183
 
Net loss attributable to noncontrolling interests
 21
 3
Consolidated NOI$311,131
 $319,990
 $289,340
__________________________ 

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(1) 
Excludes parking revenue of $26.0 million, $25.7 million and $23.1 million for each of the three years in the period ended December 31, 2019.

The following 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.
 Year Ended December 31, 2019
 Commercial Multifamily Other Total
 (In thousands)
Property rentals revenue$383,311
 $116,330
 $(6,368) $493,273
Other property revenue25,593
 380
 
 25,973
Total property revenue408,904
 116,710
 (6,368) 519,246
Property expense:     
 
Property operating113,177
 35,236
 (10,791) 137,622
Real estate taxes50,115
 15,021
 5,357
 70,493
Total property expense163,292
 50,257
 (5,434) 208,115
Consolidated NOI$245,612
 $66,453
 $(934) $311,131

 Year Ended December 31, 2018
 Commercial Multifamily Other Total
 (In thousands)
Property rentals revenue$404,826
 $108,989
 $(368) $513,447
Other property revenue25,216
 368
 94
 25,678
Total property revenue430,042
 109,357
 (274) 539,125
Property expense:       
Property operating118,288
 31,502
 (1,709) 148,081
Real estate taxes53,324
 14,280
 3,450
 71,054
Total property expense171,612
 45,782
 1,741
 219,135
Consolidated NOI$258,430
 $63,575
 $(2,015) $319,990

 Year Ended December 31, 2017
 Commercial Multifamily Other Total
 (In thousands)
Property rentals revenue$361,121
 $91,294
 $(874) $451,541
Other property revenue22,776
 275
 18
 23,069
Total property revenue383,897
 91,569
 (856) 474,610
Property expense:     
 
Property operating97,701
 24,623
 (3,488) 118,836
Real estate taxes50,546
 11,030
 4,858
 66,434
Total property expense148,247
 35,653
 1,370
 185,270
Consolidated NOI$235,650
 $55,916
 $(2,226) $289,340


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The following is a summary of certain balance sheet data by segment:
 Commercial Multifamily Other Total
December 31, 2019(In thousands)
Real estate, at cost$3,415,294
 $1,998,297
 $361,928
 $5,775,519
Investments in unconsolidated real estate ventures396,199
 107,882
 38,945
 543,026
Total assets (1)
3,361,122
 1,682,872
 942,257
 5,986,251
December 31, 2018       
Real estate, at cost$3,634,472
 $1,656,974
 $501,288
 $5,792,734
Investments in unconsolidated real estate ventures177,173
 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 4 for additional information.

19.    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 a portion of the first loss on the above limits and 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 mortgages payable secured by our properties, a revolving credit facility and unsecured term loans, contains 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 December 31, 2019, we have construction in progress that will require an additional $196.9 million to complete ($160.1 million related to our consolidated entities and $36.8 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.
Environmental Matters
Most of our assets have been subject, at some point, to environmental assessments that are intended to evaluate the environmental condition of the subject and surrounding assets. 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 both December 31, 2019 and 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.

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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 borrowings, (2) provide customary environmental indemnifications and nonrecourse carve-outs (e.g., guarantees against fraud, misrepresentation and bankruptcy) in connection with borrowings or (3) provide guarantees to lenders and other third parties for the completion of development projects. We customarily have agreements with our outside venture 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. At times, we also have agreements with certain of our outside venture partners whereby we agree to either indemnify the partners and/or the associated ventures with respect to certain contingent liabilities associated with operating assets or to reimburse our partner for its share of any payments made by them under certain guarantees. Guarantees (excluding environmental) customarily terminate either upon the satisfaction of specified circumstances or repayment of the underlying debt. Amounts that we may be required to pay in future periods in relation to guarantees associated with budget overruns or operating losses are not estimable.
We also may guarantee portions of the principal, interest and other amounts in connection with the borrowings of our consolidated entities. As of December 31, 2019, the aggregate amount of principal payment guarantees was $8.3 million for our consolidated entities.
As of December 31, 2019, we have additional capital commitments and certain recorded guarantees to our unconsolidated real estate ventures totaling $57.7 million. As of December 31, 2019, we had no principal payment guarantees related to our unconsolidated real estate ventures.
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 determined not to be 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.
20.Transactions with Vornado and Related Parties
Transactions with Vornado
As described in Note 1, the accompanying financial statements present the operations of the Vornado Included Assets as carved-out from the financial statements of Vornado for all periods prior to July 17, 2017.
In connection with the Formation Transaction, we entered into an agreement with Vornado under which Vornado provided operational support for a period that ended July 18, 2019. 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 $3.6 million and $2.2 million for the years ended December 31, 2018 and 2017. Charges for these services for 2019 were de minimis.
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 was $2.0 million, $2.1 million and $779,000 for each of the three years in the period ended December 31, 2019.
We have agreements with Building Maintenance Services ("BMS"), a wholly owned subsidiary of Vornado, to supervise cleaning, engineering and security services at our properties. We paid BMS $21.8 million, $20.9 million and $13.6 million for each of the three years in the period ended December 31, 2019, which are included in "Property operating expenses" in our statements of operations.
In connection with the Formation Transaction, we have a Tax Matters Agreement with Vornado. See Note 19 for additional information.
Certain centralized corporate costs borne by Vornado for management and other services including, but not limited to, accounting, reporting, legal, tax, information technology and human resources have been allocated to the assets in our financial statements based on either actual costs incurred or a proportion of costs estimated to be applicable to the Vornado Included Assets based on key metrics including total revenue. The total amounts allocated for the year ended December 31, 2017 were $13.0 million. These allocated amounts are included as a component of "General and administrative expense: Corporate and other" expenses in our statement of operations and do not necessarily reflect what actual costs would have been if the Vornado Included Assets were a separate standalone public company.

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In August 2014, we completed a $185.0 million financing of the Universal Buildings, a 687,000 square foot office complex located in Washington, D.C. In connection with this financing, pursuant to a note agreement dated August 12, 2014, we used a portion of the financing proceeds and made an $86.0 million loan to Vornado at LIBOR plus 2.90% due August 2019. At the Separation, Vornado repaid the outstanding balance of the loan and related accrued interest. We recognized interest income of $1.8 million for the year ended December 31, 2017.
In connection with the development of The Bartlett, prior to the Separation, we entered into various note agreements with Vornado whereby we could borrow up to a maximum of $170.0 million. Vornado contributed these note agreements along with accrued and unpaid interest to JBG SMITH at the Separation. We incurred interest expense of $4.1 million for the year ended December 31, 2017.
In June 2016, the $115.0 million mortgage payable (including $608,000 of accrued interest) secured by the Bowen Building, a 231,000 square foot office building located in Washington, D.C., was repaid with the proceeds of a $115.6 million draw on our former parent's revolving credit facility. We repaid our former parent with amounts drawn under our revolving credit facility at the Combination. We incurred interest expense related to the mortgage payable of $1.3 million for the year ended December 31, 2017.
We had 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. Additionally, in March 2017, Vornado amended Mr. Schear’s employment agreement to provide for the payment of severance, bonus and post-employment services. A total of $16.4 million was expensed in connection with the Separation for the year ended December 31, 2017.
Transactions with the JBG Legacy Funds and the Washington Housing Initiative ("WHI")
Our third-party asset management and real estate services business provides fee-based real estate services to third parties, the JBG Legacy Funds and the WHI. 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, the general partner and managing member interests in the JBG Legacy Funds that were held by certain former JBG executives (and who became members of our management team and/or Board of Trustees) were not 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 entitle them to receive cash payments if the fund or real estate venture achieves certain return thresholds.
The WHI was launched by us and the Federal City Council in June 2018 as a scalable market-driven model that uses private capital to help address the scarcity of housing for middle income families. To date, the WHI Impact Pool ("Impact Pool") completed closings of capital commitments totaling $104.8 million, which included a commitment from us of $10.2 million. We are the manager for the Impact Pool, which is the social impact investment vehicle of the WHI. 
The third-party real estate services revenue, including expense reimbursements, from the JBG Legacy Funds and the Impact Pool was $36.5 million, $33.8 million and $19.9 million for each of the three years in the period ended December 31, 2019. As of December 31, 2019 and 2018, we had receivables from the JBG Legacy Funds and the Impact Pool totaling $6.2 million and $3.6 million for such services.
We rented our corporate offices from an unconsolidated real estate venture and made payments totaling $5.0 million, $4.9 million and $2.2 million for each of the three years in the period ended December 31, 2019. In November 2019, we relocated our corporate headquarters. See Note 17 for additional information.


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21.     Quarterly Financial Data (unaudited)
2019
First Quarter (1)
 Second Quarter 
Third Quarter (2)