JBG Smith Posts $19M Loss Ahead Of Big Amazon, GSA Departures

D.C.-area real estate investment trust JBG Smith posted an $18.6M loss in the fourth quarter as it stares down large upcoming lease expirations in its office portfolio. 

Despite landing the Amazon HQ2 project — JBG Smith sold the sites to the tech giant for its new campus and landed a contract to develop it — the developer's efforts to reposition its portfolio in the National Landing area has so far failed to shield it from the disruption to the larger office market.

The REIT's net loss last quarter was smaller than its $56.4M loss in Q4 2021, and it ended 2022 with a positive net income of $85.4M, a reversal after posting full-year net losses in 2020 and 2021. In its quarterly investor letter released along with its earnings report Tuesday, CEO Matt Kelly expressed optimism that JBG Smith’s fortunes would improve this year as it completes its multiyear transition to a majority multifamily portfolio.

“The next two years are prime time for National Landing, which means they are prime time for JBG SMITH,” Kelly said in the letter. “While the exact trajectory of the office and debt markets is impossible to predict, we are well positioned to maximize value whatever the climate.”

The landlord's two largest tenants, Amazon and the General Services Administration, are both shrinking the footprints they lease from the developer. As of Dec. 31, the federal government accounted for 26.4% of the square footage and 23.2% of the annual rent in JBG Smith's portfolio. Amazon accounted for 13.4% of JBG Smith's rental income and occupied 14.1% of its square footage.

JBG Smith revealed in its report that two civilian GSA tenants are scheduled to vacate their offices in the National Landing area this year, adding 112K SF of vacancy to the owner's books. The REIT declined to provide additional details on the location of those offices. 

The GSA is likely to continue to reduce its footprint as more leases roll, as the federal government looks to cut costs and increase efficiency across its leased office portfolio.

JBG Smith sold the Metropolitan Park and Pen Place sites to Amazon for its HQ2 campus for $155M and $198M, respectively, and it is serving as the development partner for the campus, but the leases Amazon signed with the REIT are nearing their expirations. 

This year, Amazon is slated to vacate three spaces totaling 300K SF across JBG Smith-owned properties, including 1800 South Bell St. As it shifts some operations into the new buildings that are scheduled to deliver this summer, Amazon has an additional 87K SF of lease expirations in 2023 for which neither party has announced plans. 

The landlord still sees value to be gleaned from the rest of its lease expirations scheduled for this year. About 90% of JBG Smith's non-Amazon tenants in National Landing with 2023 lease expirations are government contractors, and the landlord anticipates that proximity to the Pentagon will persuade such tenants to maintain at least a portion of their footprint.

Nearly 70% of JBG Smith's portfolio is now in National Landing, as it has sold off some assets in other parts of the region, but it still owns several office buildings in D.C.'s struggling central business district. Its D.C. portfolio has lost office occupancy over the last year, falling from 70.5% at the end of 2021 to 65.2% at the end of 2022. 

The REIT's portfoliowide office occupancy rose by three percentage points over the last year to 85.1%. It has lease expirations this year representing 12% of its office and retail square footage, and another 19.4% of its commercial portfolio has 2024 expirations. 

JBG Smith has looked to reposition its office assets to continue to attract new demand. The entitlement process is already underway to redevelop 1800 South Bell St., a property one block from the Crystal City Metro station.  

One bright spot for JBG Smith has been its multifamily portfolio, where rents were up 9.7% overall in the fourth quarter. The developer leveraged that portfolio to fund its office holdings, securing a $187M loan on the 433-unit The Wren at 965 Florida Ave. NW to pay off debt on a 505K SF office building at 2121 Crystal Drive.

Across asset classes, property rental revenue was down 1.6% from 2021 to 2022. Commercial revenue fell by $50.2M, while multifamily revenue increased by $40.2M.

JBG Smith completed $1.2B in asset sales in 2022. It is planning to continue offloading assets this year as it looks to become a majority-multifamily REIT while retaining select office holdings near HQ2.

"Our team continues to diligently survey the market for opportunities to sell the limited number of non-core office and land assets we have remaining,” Kelly said. “Curbed lending activity has significantly slowed down the pace of sales, and we expect this reduced level of activity to continue into 2023."

CORRECTION, FEB. 22, 4:30 P.M. ET: A previous version of this story misstated the square footage of Amazon's lease expirations. This story has been updated.