The Combination

On July 18, 2017, we completed the Combination and 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 is based on preliminary estimates and assumptions and is subject to change based on a final determination of the assets acquired and liabilities assumed (in thousands):



Fair value of purchase consideration:
Common shares and OP Units	$	1,224,886
Cash	20,573
Total consideration paid	$	1,245,459

Fair value of assets acquired and liabilities assumed:
Land and improvements	$	342,932
Building and improvements	623,889
Construction in progress, including land	632,664
Leasehold improvements and equipment	7,890
Cash	104,516
Restricted cash	13,460
Investments in and advances to unconsolidated real estate ventures	238,388
Identified intangible assets	146,600
Notes receivable ⁽¹⁾	50,934
Identified intangible liabilities	(8,449		)
Mortgages payable assumed ⁽²⁾	(768,523		)
Capital lease obligations assumed ⁽³⁾	(33,543		)
Deferred tax liability ⁽⁴⁾	(21,476		)
Other liabilities acquired, net	(52,065		)
Noncontrolling interests in consolidated subsidiaries	(3,987		)
Net assets acquired	1,273,230
Gain on bargain purchase ⁽⁵⁾	27,771
Total consideration paid	$	1,245,459

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⁽¹⁾	During the three months ended September 30, 2017, we received proceeds of $50.9 million from the repayment of the notes receivable acquired as part of 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⁾	As part of the Combination, two ground leases were assumed that were capital leases. On July 25, 2017, we purchased a land parcel located in Reston, Virginia associated with one of the ground leases for $19.5 million.


⁽⁴⁾	Related to the management and leasing contracts acquired in the Combination.

⁽⁵⁾

The Combination resulted in a gain on bargain purchase because the estimated fair value of the identifiable net assets acquired exceeded the purchase consideration by $27.8 million. The purchase consideration was based on the fair value of the common shares and OP Units issued in the Combination. We continue to reassess the recognition and measurement of identifiable assets and liabilities acquired and have preliminarily concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates of fair values were appropriate.

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 Combination	100,571
Exchange ratio ⁽¹⁾	2.71
Common shares and OP Units issued in consideration	37,164
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	(43,303		)
Portion of consideration attributable to performance of future services ⁽³⁾	(110,591		)
Fair value of common shares and OP Units purchase consideration	$	1,224,886

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⁽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 an estimated fair value of $110.6 million is subject to post-combination employment with vesting over periods of either 12 or 60 months. In accordance with GAAP, consideration that is subject to future employment is not considered a component of the purchase price for the business combination and amortization is recognized as compensation expense over the period of employment and is included in "General and administrative expense: share-based compensation related to Formation Transaction" in the statements of operations.

The JBG Assets acquired comprise: (i) 30 operating assets comprising 19 office assets totaling approximately 3.6 million square feet (2.3 million square feet at our share), nine multifamily assets with 2,883 units (1,099 units at our share) and two other assets totaling approximately 490,000 square feet (73,000 square feet at our share); (ii) 11 office and multifamily assets under construction totaling over 2.5 million square feet (2.2 million square feet at our share); (iii) two near-term development office and multifamily assets totaling approximately 401,000 square feet (242,000 square feet at our share); (iv) 26 future development assets totaling approximately 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. JBG/Operating Partners, L.P. was owned by 20 unrelated individuals of which 19 became our employees, and three serve on our Board of Trustees.

The fair values of the depreciable tangible and identified intangible assets and liabilities, all of which have definite lives and are amortized, are as follows:



	Total Fair Value		Weighted Average Amortization Period
	Total Fair Value		Weighted Average Amortization Period	Useful Life ⁽¹⁾
	(In thousands)		(In years)
Tangible assets:
Building and improvements	$	559,042		3 - 40 years
Tenant improvements	64,847			Shorter of useful life or remaining life of the respective lease
Total building and improvements	$	623,889
Leasehold improvements	$	4,422		Shorter of useful life or remaining life of the respective lease
Identified intangible assets:
In-place leases	$	59,351	6.4	Remaining life of the respective lease
Above-market real estate leases	11,700		6.3	Remaining life of the respective lease
Below-market ground leases	659		88.5	Remaining life of the respective lease
Option to enter into ground lease	17,090		N/A	Remaining life of contract
Management and leasing contracts ⁽²⁾	57,800		7.4	Estimated remaining life of contracts, ranging between 3 - 8 years
Total identified intangible assets	$	146,600
Identified intangible liabilities:
Below-market real estate leases	$	8,449	10.2	Remaining life of the respective lease

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⁽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.


⁽²⁾	Includesin-place property management, leasing, asset management, and development and construction management contracts.

Transaction costs (such as advisory, legal, accounting, valuation and other professional fees) incurred to effect the Formation Transaction are included in "Transaction and other costs" in our statements of operations. We expensed a total of $121.6 million transaction and other costs, of which $104.1 million and $115.2 million were incurred during the three and nine months ended September 30, 2017, and $1.5 million was incurred for both the three and nine months ended September 30, 2016. For the three and nine months ended September 30, 2017, transaction and other costs include severance and transaction bonus expense of $34.3 million, investment banking fees of $33.6 million, legal fees of $13.1 million and accounting fees of $8.1 million.

The total revenue of the JBG Assets for the three and nine months ended September 30, 2017 included in our statements of operations from the acquisition date was $34.9 million. The net loss of the JBG Assets for the three and nine months ended September 30, 2017 included in our statements of operations from the acquisition date was $7.8 million.

The accompanying unaudited pro forma information for the three and nine months ended September 30, 2017 and 2016 is presented as if the Formation Transaction had occurred on January 1, 2016. This pro forma information is based upon the historical financial statements and should be read in conjunction with our consolidated and combined financial statements and notes thereto included in our Registration Statement on Form 10, as amended, filed with the SEC and declared effective on June 26, 2017. This unaudited pro forma information does not purport to represent what the actual results of our operations would have been, nor does it purport to predict the results of operations of future periods. The unaudited pro forma information for the three and nine months ended September 30, 2017 and 2016 was adjusted to exclude $27.8 million of gain on bargain purchase. The unaudited pro forma information was adjusted to exclude transaction and other costs of $104.1 million and $115.2 million for the three and nine months ended September 30, 2017, respectively, and $1.5 million for the three and nine months ended September 30, 2016.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017			2016
	(In thousands)				(In thousands)
Unaudited pro forma information:
Total revenue	$	160,428	$	170,498	$	481,314		$	492,874
Net income (loss) attributable to JBG SMITH Properties	$	2,283	$	803	$	(13,741	)	$	(26,701	)
Earnings (loss) per common share:
Basic	$	0.02	$	0.01	$	(0.13	)	$	(0.27	)
Diluted	$	0.02	$	0.01	$	(0.13	)	$	(0.27	)