Share-Based Payments and Employee Benefits

OP UNITS

In the Combination, 3.3 million OP Units were issued with an estimated grant-date fair value of $110.6 million, subject to post-combination employment with vesting over periods of either 12 or 60 months. The fair value of these OP Units was estimated based on the post-vesting restriction periods of the OP Units. The significant assumptions used to value the OP Units included expected volatilities (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 table presents information regarding the OP Units activity during the year ended December 31, 2017:



	Unvested Shares		Weighted Average Grant-Date Fair Value
Unvested at January 1, 2017	—		$	—
Granted	3,280,900		33.71
Vested	(193,938	)	37.10
Unvested at December 31, 2017	3,086,962		33.49

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 approximately 10.3 million of our common shares pursuant to the Plan. On July 10, 2017, our then sole-shareholder approved the Plan. As of December 31, 2017, there were 6.6 million common shares available for issuance under the Plan.

Formation Awards

Pursuant to the Plan, on July 18, 2017, we granted approximately 2.7 million Formation Awards based on an aggregate notional value of approximately $100.0 million divided by the volume-weighted average price on July 18, 2017 of $37.10 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 $37.10 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 closing of the Combination, 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 $37.10 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. This is similar to a "cashless exercise" of stock options, whereby the holder receives a number of shares equal in value to the difference between the full value of the total number of shares for which the option is being exercised and the total exercise price. 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 grant-date fair value of the Formation Awards was $23.7 million or $8.84 per unit estimated using Monte Carlo simulations. The significant assumptions used to value the awards included expected volatility (26.0%), dividend yield (2.3%), risk-free interest rate (2.3%) and expected life (7 years). Compensation expense for these awards is being recognized over a five-year period.

The following table presents information regarding the Formation Awards activity during the year ended December 31, 2017:



	Unvested Shares		Weighted Average Grant-Date Fair Value
Unvested at January 1, 2017	—		$	—
Granted	2,680,552		8.84
Forfeited	(6,738	)	8.84
Unvested at December 31, 2017	2,673,814		8.84

LTIP and Time-Based LTIP Units

On July 18, 2017, we granted a total of 47,166 fully vested LTIP Units to the seven non-employee trustees in the notional amount of $250,000 each. The LTIP Units may not be sold while such non-employee trustee is serving on the Board. 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. These LTIP Units had an aggregate grant-date fair value of $3.5 million.

On August 1, 2017, we granted 302,518 Time-Based LTIP Units to management and other employees under our Plan. The Time-Based LTIP units vest in four equal installments on August 1 of each year, subject to continued employment. These Time-Based LTIP Units were valued at a weighted average grant-date fair value of $33.71 per unit. Compensation expense for these units is being recognized over a four-year period.

The fair value of LTIP and Time-Based LTIP Units was estimated based on the post-vesting restriction periods. The significant assumptions used to value the units included expected volatilities (17.0% to 19.0%), risk-free interest rates (1.3% to 1.5%) and post-vesting restriction periods (2 years to 3 years). Net income and net loss is allocated to each LTIP and Time-Based LTIP Unit. LTIP and Time-Based LTIP Unit holders have the right to convert all or a portion of vested units into OP Units, which are then subsequently exchangeable for our common shares. LTIP and Time-Based LTIP Units do not have redemption rights, but any OP Units into which units are converted are entitled to redemption rights. LTIP and Time-Based LTIP Units, 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 LTIP and Time-Based LTIP Units.

The following table presents information regarding the LTIP and Time-Based LTIP Units activity during the year ended December 31, 2017:



	Unvested Shares		Weighted Average Grant-Date Fair Value
Unvested at January 1, 2017	—		$	—
Granted	409,611		33.41
Vested	(77,129	)	32.26
Forfeited	(275	)	33.71
Unvested at December 31, 2017	332,207		33.68

Performance-Based LTIP Units

On August 1, 2017, we granted 605,072 Performance-Based LTIP Units to management and other employees under the Plan. Performance-Based LTIP Units are performance-based equity compensation pursuant to which participants have the opportunity to earn Performance-Based 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 three-year performance period beginning on the August 1, 2017 grant date, inclusive of dividends and stock price appreciation. Fifty percent of any Performance-Based LTIP Units that are earned vest at the end of the three-year performance period and the remaining 50% on the fourth anniversary of the date of grant, subject to continued employment. Net income and net loss are allocated to each Performance-Based LTIP Unit. The grant-date fair value of the Performance-Based LTIP Units was $9.7 million or $15.95 per unit estimated using Monte Carlo simulations. The significant assumptions used to value the Performance-Based LTIP Units include expected volatility (18.0%), dividend yield (2.3%) and risk-free interest rates (1.5%). Compensation expense for these units is being recognized over a four-year period.

The following table presents information regarding the Performance-Based LTIP Units activity during the year ended December 31, 2017:



	Unvested Shares		Weighted Average Grant-Date Fair Value
Unvested at January 1, 2017	—		$	—
Granted	605,072		15.95
Forfeited	(550	)	15.95
Unvested at December 31, 2017	604,522		15.95

Share-Based Compensation Expense

Share-based compensation expense for each of the three years in the period ended December 31, 2017 is summarized as follows:



	Year Ended December 31,
	2017			2016		2015
	(In thousands)
Formation Awards	$	5,169		$	—	$	—
LTIP Units	2,615			—		—
OP Units ⁽¹⁾	21,467			—		—
Share-based compensation related to Formation Transaction ⁽²⁾	29,251			—		—
Time-Based LTIP Units that vest over four years	2,211			—		—
Performance-Based LTIP Units	1,172			—		—
Other equity awards ⁽³⁾	1,526			4,502		4,506
Share-based compensation expense - other⁽⁴⁾	4,909			4,502		4,506
Total share-based compensation expense	34,160			4,502		4,506
Less amount capitalized	(467		)	—		—
Net share-based compensation expense	$	33,693		$	4,502	$	4,506

^{______________________________________________}


⁽¹⁾	Represents share-based compensation expense for OP Units subject to post-combination employment. See Note 3 for additional information.


⁽²⁾	Included in "General and administrative expense: Share-based compensation related to Formation Transaction" in the accompanying statements of operations.


⁽³⁾	Represents share-based compensation expense related to equity awards prior to the Formation Transaction.


⁽⁴⁾	Included in "General and administrative expense" in the accompanying statements of operations.

As of December 31, 2017, we had $124.9 million of total unrecognized compensation expense related to unvested share-based payment arrangements (unvested OP Units, Formation Awards, Time-Based LTIP Units and Performance-Based LTIP Units). This expense is expected to be recognized over a weighted average period of 3.3 years.

Employee Benefits

We have a 401(k) defined contribution plan (the "401(k) 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 over five years. Our contributions for each of the three years in the period ended December 31, 2017 were $3.6 million, $2.4 million, $2.3 million.