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 its former owners with an estimated grant-date fair value of $110.6 million. The OP Units were subject to post-combination vesting over 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 table presents information regarding the OP Units activity:



	Unvested Shares		Weighted Average Grant-Date Fair Value
Unvested at December 31, 2017	3,086,962		33.49
Vested	(86,975	)	37.10
Unvested at December 31, 2018	2,999,987		33.39

The total-grant date fair value of the OP Units that vested during the years ended December 31, 2018 and 2017 was $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 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, 2018, there were 4.8 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. In 2018, we granted 93,784 Formation Awards based on an aggregate notional value of approximately $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. Compensation expense for these awards is being recognized over a five-year period. The significant assumptions used to value the awards included:



	Year Ended December 31,
	2018	2017
Expected volatility	27.0% to 29.0%	26.0	%
Dividend yield	2.5% to 2.7%	2.3	%
Risk-free interest rate	2.8% to 3.0%	2.3	%
Expected life	7 years	7 years

The following table presents information regarding the Formation Awards activity:



	Unvested Shares		Weighted Average Grant-Date Fair Value
Unvested at December 31, 2017	2,673,814		$	8.84
Granted	93,784		7.73
Vested	(39,970	)	8.32
Forfeited	(72,234	)	8.84
Unvested at December 31, 2018	2,655,394		8.81

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

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

On July 18, 2017, we granted a total of 47,166 fully vested LTIP Units to the seven independent 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.

In May 2018, as part of their annual compensation, we granted a total of 25,770 fully vested LTIP Units to non-employee trustees with an aggregate grant-date fair value of approximately $794,000.

During the years ended December 31, 2018 and 2017, we granted 367,519 and 302,518 Time-Based LTIP Units to management and other employees with a weighted average grant-date fair value of $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.

Additionally, during the year ended December 31, 2018, related to our successful pursuit of Amazon HQ2, 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. Vesting of the Special Time-Based LTIP Units is conditioned on Amazon entering into definitive lease or asset purchase documentation with JBG SMITH prior to the fourth anniversary of the grant date; if such condition is satisfied, then 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") during the years ended December 31, 2018 and 2017 was $25.5 million and $13.7 million. Net income and net loss is allocated to each of the Granted LTIPs. 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 significant assumptions used to value these awards included:



	Year Ended December 31,
	2018	2017
Expected volatility	20.0% to 22.0%	17.0% to 19.0%
Risk-free interest rate	1.9% to 2.6%	1.3% to 1.5%
Post-grant restriction periods	2 to 3 years	2 to 3 years

The following table presents information regarding Granted LTIP activity:



	Unvested Shares		Weighted Average Grant-Date Fair Value
Unvested at December 31, 2017	332,207		$	33.68
Granted	749,880		34.01
Vested	(110,723	)	32.91
Forfeited	(8,702	)	32.51
Unvested at December 31, 2018	962,662		34.03

The total-grant date fair value of the Granted LTIPs that vested during the years ended December 31, 2018 and 2017 was $3.6 million and $2.5 million.

Performance-Based LTIP and Special Performance-Based LTIP Units

During the years ended December 31, 2018 and 2017, we granted 567,106 and 605,072 Performance-Based LTIP Units to management and other employees under the Plan. Also, during the year ended December 31, 2018, related to our successful pursuit of Amazon HQ2, 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. 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. Vesting of the Special Performance-Based LTIP Units is conditioned on Amazon entering into definitive lease or asset purchase documentation with JBG SMITH prior to the fourth anniversary of the grant date; if such condition is satisfied, then fifty 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 grant-date fair value of the Performance-Based LTIP and Special Performance-Based LTIP Units granted during the years ended December 31, 2018 and 2017 was $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 significant assumptions used to value both the Performance-Based LTIP and Special Performance-Based LTIP Units included:



	Year Ended December 31,
	2018	2017

Expected volatility	19.9% to 26.0%	18.0	%
Dividend yield	2.5% to 2.7%	2.3	%
Risk-free interest rate	2.3% to 3.0%	1.5	%

The following table presents information regarding the Performance-Based LTIP and Special Performance-Based LTIP Units activity:



	Unvested Shares		Weighted Average Grant-Date Fair Value
Unvested at December 31, 2017	604,522		$	15.95
Granted	1,078,661		19.52
Forfeited	(25,605	)	16.29
Unvested at December 31, 2017	1,657,578		18.27

JBG SMITH 2017 Employee Share Purchase Plan

The JBG SMITH 2017 ESPP authorizes 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 shares 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 20,178 common shares for $597,000 during the year ended December 31, 2018. Compensation expense for the year ended December 31, 2018 was $144,000 valued using the Black-Scholes model. The significant assumptions used to value the ESPP common shares included expected volatility (21.0%), dividend yield (2.5%), risk-free interest rate (2.0%) and expected life (six months). As of December 31, 2018, there were 2.0 million common shares authorized and available for issuance under the ESPP.

Share-Based Compensation Expense

Share-based compensation expense is summarized as follows:



	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Time-Based LTIP Units	$	10,095		$	2,211		—
Performance-Based LTIP Units	5,271			1,172			—
LTIP Units	794			—			—
Other equity awards ⁽¹⁾	3,826			1,526			4,502
Share-based compensation expense - other	19,986			4,909			4,502
Formation Awards	5,606			5,169			$	—
OP Units ⁽²⁾	29,455			21,467			—
LTIP Units ⁽²⁾	277			2,615			—
Special Performance-Based LTIP Units	323			—			—
Special Time-Based LTIP Units	369			—			—
Share-based compensation related to Formation Transaction and special equity awards ⁽³⁾	36,030			29,251			—
Total share-based compensation expense	56,016			34,160			4,502
Less amount capitalized	(3,341		)	(467		)	—
Share-based compensation expense	$	52,675		$	33,693		$	4,502

^{______________________________________________}

⁽¹⁾

For the year ended December 31, 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 2019, related to 2018 service, in the form of fully vested LTIP Units. For the years ended December 31, 2017 and 2016, represents share-based compensation expense related to equity awards prior to the Formation Transaction.


⁽²⁾	Represents share-based compensation expense for LTIP Units and OP Units subject to post-Combination employment obligations.


⁽³⁾	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, 2018, we had $119.0 million of total unrecognized compensation expense related to unvested share-based payment arrangements (unvested OP Units, Formation Awards, Time-Based LTIP Units, Special Time-Based LTIP Units, Performance-Based LTIP Units and Special Performance-Based LTIP Units). This expense is expected to be recognized over a weighted average period of 2.8 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, 2018 were $1.8 million, $3.6 million and $2.4 million.