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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

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

Graphic

JBG SMITH PROPERTIES

________________________________________________________________________________

(Exact name of Registrant as specified in its charter)

Maryland

81-4307010

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

4747 Bethesda Avenue Suite 200

Bethesda MD

20814

(Address of Principal Executive Offices)

(Zip Code)

Registrant's telephone number, including area code: (240) 333-3600

_______________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, par value $0.01 per share

JBGS

New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of October 30, 2020, JBG SMITH Properties had 132,464,702 common shares outstanding.

JBG SMITH PROPERTIES

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Page

Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2020 and December 31, 2019

3

Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2020 and 2019

4

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2020 and 2019

5

Condensed Consolidated Statements of Equity (unaudited) for the three and nine months ended September 30, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2020 and 2019

8

Notes to Condensed Consolidated Financial Statements (unaudited)

9

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

51

Item 4.

Controls and Procedures

52

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

52

Item 1A.

Risk Factors

53

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

Defaults Upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

58

Signatures

59

2

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

JBG SMITH PROPERTIES

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except par value amounts)

    

September 30, 2020

    

December 31, 2019

ASSETS

 

  

 

  

Real estate, at cost:

 

  

 

  

Land and improvements

$

1,314,106

$

1,240,455

Buildings and improvements

 

4,225,616

 

3,880,973

Construction in progress, including land

 

400,933

 

654,091

 

5,940,655

 

5,775,519

Less accumulated depreciation

 

(1,227,027)

 

(1,119,571)

Real estate, net

 

4,713,628

 

4,655,948

Cash and cash equivalents

 

455,111

 

126,413

Restricted cash

 

37,602

 

16,103

Tenant and other receivables, net

 

47,460

 

52,941

Deferred rent receivable

 

184,394

 

169,721

Investments in unconsolidated real estate ventures

 

463,026

 

543,026

Other assets, net

 

302,014

 

253,687

Assets held for sale

 

74,089

 

168,412

TOTAL ASSETS

$

6,277,324

$

5,986,251

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

 

  

Liabilities:

 

  

 

  

Mortgages payable, net

$

1,690,723

$

1,125,777

Revolving credit facility

 

 

200,000

Unsecured term loans, net

 

397,808

 

297,295

Accounts payable and accrued expenses

 

111,440

 

157,702

Other liabilities, net

 

216,494

 

206,042

Total liabilities

 

2,416,465

 

1,986,816

Commitments and contingencies

 

  

 

  

Redeemable noncontrolling interests

 

490,921

 

612,758

Shareholders' equity:

 

  

 

  

Preferred shares, $0.01 par value - 200,000 shares authorized, none issued

 

 

Common shares, $0.01 par value - 500,000 shares authorized; 132,438 and 134,148 shares issued and outstanding as of September 30, 2020 and December 31, 2019

 

1,325

 

1,342

Additional paid-in capital

 

3,721,059

 

3,633,042

Accumulated deficit

 

(307,975)

 

(231,164)

Accumulated other comprehensive loss

 

(44,650)

 

(16,744)

Total shareholders' equity of JBG SMITH Properties

 

3,369,759

 

3,386,476

Noncontrolling interests in consolidated subsidiaries

 

179

 

201

Total equity

 

3,369,938

 

3,386,677

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

$

6,277,324

$

5,986,251

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

3

JBG SMITH PROPERTIES

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

REVENUE

 

  

 

  

  

 

  

Property rental

$

118,680

$

123,963

$

354,519

$

365,702

Third-party real estate services, including reimbursements

 

26,987

 

34,587

 

83,870

 

91,765

Other revenue

 

5,368

 

8,527

 

15,705

 

25,426

Total revenue

 

151,035

 

167,077

 

454,094

 

482,893

EXPENSES

 

  

 

  

 

 

  

Depreciation and amortization

 

56,481

 

46,862

 

157,586

 

141,576

Property operating

 

37,572

 

35,800

 

105,867

 

100,087

Real estate taxes

 

17,354

 

16,740

 

53,422

 

52,241

General and administrative:

 

  

 

  

 

 

  

Corporate and other

 

11,086

 

11,015

 

37,478

 

34,888

Third-party real estate services

 

28,207

 

29,809

 

86,260

 

86,585

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

 

7,133

 

9,549

 

25,432

 

30,203

Transaction and other costs

 

845

 

2,059

 

7,526

 

9,928

Total expenses

 

158,678

 

151,834

 

473,571

 

455,508

OTHER INCOME (EXPENSE)

 

  

 

  

 

  

 

  

Income (loss) from unconsolidated real estate ventures, net

 

(965)

 

(1,144)

 

(17,142)

 

647

Interest and other income (loss), net

 

 

(640)

 

1,021

 

2,363

Interest expense

 

(16,885)

 

(10,583)

 

(44,660)

 

(40,864)

Gain on sale of real estate

 

 

8,088

 

59,477

 

47,121

Loss on extinguishment of debt

 

 

 

(33)

 

(1,889)

Total other income (expense)

 

(17,850)

 

(4,279)

 

(1,337)

 

7,378

INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT

 

(25,493)

10,964

 

(20,814)

 

34,763

Income tax (expense) benefit

 

488

 

(432)

 

3,721

 

689

NET INCOME (LOSS)

 

(25,005)

 

10,532

 

(17,093)

 

35,452

Net (income) loss attributable to redeemable noncontrolling interests

 

2,212

 

(1,172)

 

445

 

(4,271)

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS

$

(22,793)

$

9,360

$

(16,648)

$

31,181

EARNINGS (LOSS) PER COMMON SHARE:

 

  

 

  

 

  

 

  

Basic

$

(0.18)

$

0.06

$

(0.14)

$

0.23

Diluted

$

(0.18)

$

0.06

$

(0.14)

$

0.23

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:

Basic

 

133,620

 

134,127

 

133,924

 

129,527

Diluted

 

133,620

 

134,127

 

133,924

 

129,527

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

4

JBG SMITH PROPERTIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

NET INCOME (LOSS)

$

(25,005)

$

10,532

$

(17,093)

$

35,452

OTHER COMPREHENSIVE INCOME (LOSS):

 

  

 

  

 

  

 

  

Change in fair value of derivative financial instruments

 

(278)

 

(7,014)

 

(39,489)

 

(33,966)

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

 

3,823

 

(211)

 

8,137

 

(2,001)

Other comprehensive income (loss)

 

3,545

 

(7,225)

 

(31,352)

 

(35,967)

COMPREHENSIVE INCOME (LOSS)

 

(21,460)

 

3,307

 

(48,445)

 

(515)

Net (income) loss attributable to redeemable noncontrolling interests

 

2,212

 

(1,172)

 

445

 

(4,271)

Other comprehensive (income) loss attributable to redeemable noncontrolling interests

 

(309)

 

803

 

3,446

 

3,689

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO JBG SMITH PROPERTIES

$

(19,557)

$

2,938

$

(44,554)

$

(1,097)

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

5

JBG SMITH PROPERTIES

Condensed Consolidated Statements of Equity

(Unaudited)

(In thousands)

Accumulated 

Noncontrolling 

Additional 

Other 

Interests in 

Common Shares

Paid-In 

Accumulated 

 

Comprehensive 

Consolidated 

Total 

Shares

Amount

Capital

Deficit

 

Loss

Subsidiaries

Equity

BALANCE AS OF JULY 1, 2020

 

133,708

$

1,338

$

3,742,205

$

(255,162)

$

(47,886)

$

191

$

3,440,686

Net loss attributable to common shareholders and noncontrolling interests

 

 

 

 

(22,793)

 

 

 

(22,793)

Conversion of common limited partnership units to common shares

 

169

 

2

 

4,794

 

 

 

 

4,796

Common shares repurchased

(1,439)

(15)

(38,362)

(38,377)

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

186

186

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

(30,020)

(30,020)

Contributions from (distributions to) noncontrolling interests

 

 

 

 

 

 

(12)

 

(12)

Redeemable noncontrolling interests redemption value adjustment and other comprehensive income allocation

 

 

 

12,236

 

 

(309)

 

 

11,927

Other comprehensive income

 

 

 

 

 

3,545

 

 

3,545

BALANCE AS OF SEPTEMBER 30, 2020

 

132,438

$

1,325

$

3,721,059

$

(307,975)

$

(44,650)

$

179

$

3,369,938

BALANCE AS OF JULY 1, 2019

 

134,127

$

1,342

$

3,644,699

$

(184,373)

$

(19,156)

$

346

$

3,442,858

Net income attributable to common shareholders and noncontrolling interests

 

 

 

 

9,360

 

 

 

9,360

Common shares issued pursuant to ESPP

80

80

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

(30,179)

(30,179)

Contributions from (distributions to) noncontrolling interests

 

 

 

 

 

 

(16)

 

(16)

Redeemable noncontrolling interests redemption value adjustment and other comprehensive loss allocation

 

 

 

(1,446)

 

 

803

 

 

(643)

Other comprehensive loss

 

 

 

 

 

(7,225)

 

 

(7,225)

BALANCE AS OF SEPTEMBER 30, 2019

 

134,127

$

1,342

$

3,643,333

$

(205,192)

$

(25,578)

$

330

$

3,414,235

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

6

JBG SMITH PROPERTIES

Condensed Consolidated Statements of Equity

(Unaudited)

(In thousands)

    

Accumulated 

Noncontrolling 

Additional 

Other 

Interests in 

Common Shares

Paid-In 

Accumulated 

 

Comprehensive 

Consolidated 

Total 

Shares

Amount

Capital

Deficit

 

Loss

Subsidiaries

Equity

BALANCE AS OF JANUARY 1, 2020

 

134,148

$

1,342

$

3,633,042

$

(231,164)

$

(16,744)

$

201

$

3,386,677

Net loss attributable to common shareholders and noncontrolling interests

 

 

 

 

(16,648)

 

 

 

(16,648)

Conversion of common limited partnership units to common shares

 

1,112

 

12

 

40,662

 

 

 

 

40,674

Common shares repurchased

(2,857)

(29)

(79,540)

(79,569)

Common shares issued pursuant to ESPP

35

1,320

1,320

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

(60,163)

(60,163)

Contributions from (distributions to) noncontrolling interests

 

 

 

 

 

 

(22)

 

(22)

Redeemable noncontrolling interests redemption value adjustment and other comprehensive loss allocation

 

 

 

125,575

 

 

3,446

 

 

129,021

Other comprehensive loss

 

 

 

 

 

(31,352)

 

 

(31,352)

BALANCE AS OF SEPTEMBER 30, 2020

 

132,438

$

1,325

$

3,721,059

$

(307,975)

$

(44,650)

$

179

$

3,369,938

BALANCE AS OF JANUARY 1, 2019

 

120,937

$

1,210

$

3,155,256

$

(176,018)

$

6,700

$

204

$

2,987,352

Net income attributable to common shareholders and noncontrolling interests

 

 

 

 

31,181

 

 

 

31,181

Common shares issued

11,500

115

472,665

472,780

Conversion of common limited partnership units to common shares

 

1,664

 

17

 

57,301

 

 

 

 

57,318

Common shares issued pursuant to ESPP

26

1,018

1,018

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

(60,355)

(60,355)

Contributions from (distributions to) noncontrolling interests

 

 

 

 

 

 

126

 

126

Redeemable noncontrolling interests redemption value adjustment and other comprehensive loss allocation

 

 

 

(42,907)

 

 

3,689

 

 

(39,218)

Other comprehensive loss

 

 

 

 

 

(35,967)

 

 

(35,967)

BALANCE AS OF SEPTEMBER 30, 2019

 

134,127

$

1,342

$

3,643,333

$

(205,192)

$

(25,578)

$

330

$

3,414,235

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

7

JBG SMITH PROPERTIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Nine Months Ended September 30, 

    

2020

    

2019

OPERATING ACTIVITIES:

 

  

 

  

Net income (loss)

$

(17,093)

$

35,452

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Share-based compensation expense

 

53,183

 

47,432

Depreciation and amortization, including amortization of debt issuance costs

 

160,395

 

144,868

Deferred rent

 

(19,124)

 

(29,164)

(Income) loss from unconsolidated real estate ventures, net

 

17,142

 

(647)

Amortization of market lease intangibles, net

 

(356)

 

(486)

Amortization of lease incentives

 

5,144

 

4,344

Loss on extinguishment of debt

 

33

 

1,889

Gain on sale of real estate

 

(59,477)

 

(47,121)

Losses on operating lease and other receivables

 

14,750

 

1,281

Return on capital from unconsolidated real estate ventures

 

3,697

 

1,836

Other non-cash items

 

265

 

70

Changes in operating assets and liabilities:

 

  

 

  

Tenant and other receivables

 

(4,757)

 

(9,077)

Other assets, net

 

(11,566)

 

(13,858)

Accounts payable and accrued expenses

 

1,366

 

(17,171)

Other liabilities, net

 

(15,747)

 

(7,009)

Net cash provided by operating activities

 

127,855

 

112,639

INVESTING ACTIVITIES:

 

  

 

  

Development costs, construction in progress and real estate additions

 

(245,456)

 

(294,355)

Deposits for real estate and other acquisitions

 

(25,274)

 

(9,125)

Proceeds from sale of real estate

 

154,493

 

157,810

Distributions of capital from unconsolidated real estate ventures

 

70,818

 

7,557

Investments in unconsolidated real estate ventures

 

(12,277)

 

(7,325)

Net cash used in investing activities

 

(57,696)

 

(145,438)

FINANCING ACTIVITIES:

 

  

 

  

Finance lease payments

 

(3,281)

 

(103)

Borrowings under mortgages payable

 

580,105

 

Borrowings under revolving credit facility

 

500,000

 

Borrowings under unsecured term loans

 

100,000

 

Repayments of mortgages payable

 

(6,680)

 

(482,810)

Repayments of revolving credit facility

 

(700,000)

 

Debt issuance costs

 

(14,856)

 

(515)

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

 

 

472,780

Proceeds from common stock issued pursuant to ESPP

 

887

 

747

Common shares repurchased

(74,434)

Dividends paid to common shareholders

 

(90,347)

 

(99,654)

Distributions to redeemable noncontrolling interests

 

(11,333)

 

(13,564)

Distributions to noncontrolling interests

(23)

(19)

Contributions from noncontrolling interests

 

 

125

Net cash provided by (used in) financing activities

 

280,038

 

(123,013)

Net increase (decrease) in cash and cash equivalents and restricted cash

 

350,197

 

(155,812)

Cash and cash equivalents and restricted cash as of the beginning of the period

 

142,516

 

399,532

Cash and cash equivalents and restricted cash as of the end of the period

$

492,713

$

243,720

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AS OF END OF THE PERIOD:

 

  

Cash and cash equivalents

$

455,111

$

230,147

Restricted cash

 

37,602

 

13,573

Cash and cash equivalents and restricted cash

$

492,713

$

243,720

SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:

 

  

Cash paid for interest (net of capitalized interest of $11,545 and $23,211 in 2020 and 2019)

 

40,744

 

38,563

Accrued capital expenditures included in accounts payable and accrued expenses

 

51,092

 

99,876

Write-off of fully depreciated assets

 

29,393

 

49,319

Conversion of common limited partnership units to common shares

 

40,674

 

57,318

Recognition (derecognition) of operating lease right-of-use assets

(13,151)

35,318

Recognition (derecognition) of liabilities related to operating lease right-of-use assets

(13,151)

37,922

Recognition of finance lease right-of-use assets

 

42,354

 

Recognition of liabilities related to finance lease right-of-use assets

 

40,684

 

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

 

4,603

 

4,629

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

8

JBG SMITH PROPERTIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.Organization and Basis of Presentation

Organization

JBG SMITH Properties ("JBG SMITH") is a Maryland real estate investment trust ("REIT"), which owns and operates a portfolio of high-growth commercial and multifamily assets, many of which are amenitized with ancillary retail. JBG SMITH's portfolio reflects its 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 National Landing where it serves as the exclusive developer for Amazon’s new headquarters. Substantially all of JBG SMITH's assets are held by, and its operations are conducted through, JBG SMITH Properties LP ("JBG SMITH LP"), its operating partnership. As of September 30, 2020, JBG SMITH, as its sole general partner, controlled JBG SMITH LP and owned 90.4% of its common limited partnership units ("OP Units"). 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.

We were organized for the purpose of receiving, via the spin-off on July 17, 2017 (the "Separation"), substantially all of the assets and liabilities of Vornado Realty Trust's ("Vornado") Washington, D.C. segment. On July 18, 2017, we acquired the management business and certain assets and liabilities of The JBG Companies ("JBG") (the "Combination"). The Separation and the Combination are collectively referred to as the "Formation Transaction."

As of September 30, 2020, our Operating Portfolio consisted of 64 operating assets comprising 43 commercial assets totaling 13.3 million square feet (11.2 million square feet at our share) and 21 multifamily assets totaling 7,800 units (5,999 units at our share). Additionally, we have (i) two under-construction assets comprising one wholly owned commercial asset totaling 274,000 square feet and one multifamily asset totaling 322 units (161 units at our share); (ii) 10 wholly owned near-term development assets totaling 5.6 million square feet of estimated potential development density; and (iii) 28 future development assets totaling 14.2 million square feet (11.5 million square feet at our share) of estimated potential development density.

We derive our revenues primarily from leases with commercial and multifamily tenants, which include fixed and percentage 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, the Washington Housing Initiative ("WHI"), Amazon.com, Inc. ("Amazon") and the legacy funds formerly organized by JBG (the "JBG Legacy Funds").

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not contain certain information required in annual financial statements and notes as required under GAAP. In our opinion, all adjustments considered necessary for a fair presentation have been included, and all such adjustments are of a normal recurring nature. All intercompany transactions and balances have been eliminated. The results of operations for the three and nine months ended September 30, 2020 and 2019 are not necessarily indicative of the results that may be expected for a full year. These condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission.

The accompanying condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries and other entities, including JBG SMITH LP, in which we have a controlling financial interest. See Note 5 for additional information on our variable interest entities ("VIEs"). The portions of the equity and net income (loss) of

9

consolidated subsidiaries that are not attributable to JBG SMITH are presented separately as amounts attributable to noncontrolling interests in our condensed consolidated financial statements.

References to our financial statements refer to our condensed consolidated financial statements as of September 30, 2020 and December 31, 2019, and for the three and nine months ended September 30, 2020 and 2019. References to our balance sheets refer to our condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019. References to our statements of operations refer to our condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019. References to our statements of comprehensive income (loss) refer to our condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019. References to our statements of cash flows refer to our condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019.

Income Taxes

We have elected to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). Under those sections, a REIT which distributes at least 90% of its REIT taxable income as dividends to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We intend to adhere to these requirements and maintain our REIT status in future periods. We also participate in the activities conducted by subsidiary entities which have elected to be treated as taxable REIT subsidiaries under the Code. As such, we are subject to federal, state and local taxes on the income from these activities.

The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") that was enacted on March 27, 2020 includes several significant tax provisions that could impact us and our taxable REIT subsidiaries ("TRSs"). These changes include:

the elimination of the taxable income limit for net operating losses ("NOLs") for all taxable years beginning before January 1, 2021, thereby permitting corporate taxpayers to use NOLs to fully offset taxable income (although we, as a REIT, will continue to only be able to use NOLs against taxable income remaining after taking into account any dividends paid deduction);
the ability for our TRSs to utilize carryback NOLs arising in 2018, 2019 and 2020 to the five taxable years preceding the taxable year of the loss;
an increase of the business interest limitation under Section 163(j) of the Code from 30% to 50% for taxable years beginning in 2019 and 2020, and the addition of an election by taxpayers to use their 2019 adjusted taxable income as their adjusted taxable income in 2020 for purposes of applying the limitation; and
a "technical correction" amending Section 168(e)(3)(E) of the Code to add "qualified improvement property" to "15-year property" and assigning a class life of 20-years under Section 168(g)(3)(B) of the Code to qualified improvement property under Section 168(e)(3)(E)(vii) of the Code.

During the nine months ended September 30, 2020, as a result of the CARES Act, we made adjustments to the net deferred tax liability amounts, which relate to "qualified improvement property" owned by our TRSs.

2.Summary of Significant Accounting Policies

Significant Accounting Policies

There were no material changes to our significant accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

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 and holding periods used in assessing impairment; (ii) the determination of useful lives for tangible and intangible assets; and (iii) the assessment of the collectability of receivables,

10

including deferred rent receivables. Due to the current pandemic of the novel coronavirus, or COVID-19, commencing in March 2020, authorities in jurisdictions where our properties are located issued stay-at-home orders and restrictions on travel and permitted businesses operations. The effects of COVID-19 have most significantly impacted the operations of many of our retail tenants, which generated approximately 7% of our revenue for the year ended December 31, 2019, revenue from our multifamily assets, our commercial parking revenue and our interest in the operations of the Crystal City Marriott and The Marriott Wardman Park hotels. The extent to which COVID-19 impacts us and our tenants will depend on future developments, which are highly uncertain. At this time, there are no outstanding stay-at-home orders in jurisdictions where our properties are located; however, the extent and duration of restrictions on travel and permitted businesses operations and other effects of COVID-19 on us and our tenants have affected estimates used in the preparation of the underlying cash flows used in assessing our long-lived assets for impairment and the assessment of the collectability of receivables from tenants, including deferred rent receivables. We have made what we believe to be appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent these estimates differ from actual results, our consolidated financial statements may be materially affected.

Recent Accounting Pronouncements

Reference Rate Reform

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2020-04, Reference Rate Reform ("Topic 848"). Topic 848 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in Topic 848 is optional and may be elected over the period March 12, 2020 through December 31, 2022 as reference rate reform activities occur. During the nine months ended September 30, 2020, we elected to apply the hedge accounting expedients related to (i) the assertion that our hedged forecasted transactions remain probable and (ii) the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of our derivatives, which will be consistent with our past presentation. We will continue to evaluate the impact of the guidance and may apply other elections, as applicable, as additional changes in the market occur.

COVID-19 Lease Modification Accounting Relief

Due to the business disruptions and challenges severely affecting the global economy caused by COVID-19, we have provided rent deferrals and other lease concessions to certain tenants. In April 2020, the FASB issued a Staff Q&A that allows lessors to elect not to evaluate whether lease-related relief provided to mitigate the economic effects of COVID-19 is a lease modification under Accounting Standards Codification Topic 842, Leases ("Topic 842") if certain criteria are met. This election allows us to bypass a lease-by-lease analysis, and instead choose whether to apply the lease modification accounting framework, with such election applied consistently to leases with similar characteristics and circumstances. We have elected to apply the lease modification policy relief and have accounted for lease-related relief provided to mitigate the economic effects of COVID-19 as lease modifications under Topic 842, regardless of whether the right to such relief was embedded within the terms of the lessee’s lease. During the three and nine months ended September 30, 2020, we entered into rent deferral agreements with certain tenants, many of which were placed on the cash basis of accounting, resulting in the deferral to future periods of $1.2 million and $2.4 million of rent that had been contractually due in the second and third quarters. We are in the process of negotiating additional rent deferrals and other lease concessions with some of our tenants, which have been considered when establishing credit losses against billed and deferred rent receivables.

During the three and nine months ended September 30, 2020, we recorded $3.2 million and $7.9 million of credit losses against billed rent receivables and $935,000 and $4.5 million against deferred (straight-line) rent receivables. These losses are due to the effects of COVID-19 primarily on retail tenants, that are unable to pay rent while businesses are closed or not operating at full capacity. During the second quarter of 2020, we also recorded $2.4 million of reserves against receivables from a parking operator that filed for bankruptcy protection. Additionally, during the second quarter of 2020, we determined that our investment in the venture that owns The Marriott Wardman Park hotel was impaired due to a decline in the fair value of the underlying asset and recorded an impairment charge of $6.5 million (see Note 4 for additional information).

11

3.Disposition and Assets Held for Sale

Disposition

The following is a summary of disposition activity for the nine months ended September 30, 2020:

Gain on