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JBG Smith CEO Matt Kelly On How The Crisis Affects Amazon, Coworking And Its Capital Markets Strategy

JBG Smith, one of the D.C. area's largest real estate companies and the developer behind Amazon HQ2, is planning to pivot its capital markets strategy as the economic crisis brings down property prices.

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JBG Smith CEO Matt Kelly speaking at Bisnow's Amazon HQ2-Apalooza in February 2019.

JBG Smith CEO Matt Kelly said Tuesday on a Bisnow webinar that he expects the REIT will become a net buyer in the coming years as more attractive opportunities arise.

"We were net sellers for several years, and it's still a bit early to see what kind of impact this is going to have on pricing, but we do expect that pricing will correct," Kelly said. "Pricing was very aggressive and frothy for a long while, so we do expect in the coming years we will be net buyers and net builders of new construction assets, especially on the multifamily side." 

Kelly told investors in March 2018 the company planned to generate $700M through asset sales because it viewed D.C. as a seller's market. It then met that goal with a series of asset sales and told investors in August it identified opportunities to sell another $375M of assets. 

The strategy of selling properties came after The JBG Cos. merged with Vornado's D.C. arm and became a publicly traded company, JBG Smith, in 2017. But prior to that, JBG had been one of the region's most active buyers and developers. 

"In the aftermath of the global financial crisis, JBG was one of the most active acquirers and builders in the marketplace, and we expect we will assume a similar posture in the years to come, because these tend to be when the better buying opportunities come about," Kelly said.

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JBG Smith CEO Matt Kelly on Bisnow's Town Hall webinar.

While the crisis caused by the coronavirus may present buying opportunities, it is also creating near-term challenges for many real estate companies as they work with tenants in their portfolio that are struggling to pay the rent.

Kelly said JBG Smith has had conversations with office tenants that are hurting, and it is working to help them survive through the crisis. But he said a large portion of its office portfolio is composed of tenants that are insulated from the crisis, including the federal government, government contractors and Amazon

The pandemic hasn't slowed the development of Amazon's second headquarters in Northern Virginia. Amazon moved hundreds of employees into leased space from JBG Smith in National Landing last year, and in January the team began construction on the first phase of HQ2 development, two 22-story office towers. Because Virginia has deemed construction an essential business and allowed it to continue, Kelly said work on the project has not slowed.

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A rendering of the first phase of the Amazon HQ2 development, seen from 15th and Eads streets.

With its e-commerce business benefiting from an increase in delivery orders during the pandemic, plus its Amazon Web Services arm benefiting from a surge in internet traffic, Amazon is poised to grow during the crisis. It stock price is at an all-time high as most stock indexes are down more than 10% on the year.

Amazon announced Monday it reached its March 16 goal of making 100,000 full- and part-time hires, and it said it plans to create an additional 75,000 jobs. Kelly said this hiring is likely to benefit HQ2. 

"They were always planning on fairly considerable scale at HQ2, but one has to believe that if they're planning on growing faster, then we should see the scale of that ramp up faster," Kelly said."It's reasonable to expect that they're likely to grow more, not less, as a result of this." 

JBG Smith does have some exposure to the types of tenants that are not expected to whether the storm as easily as Amazon, such as coworking providers and retail businesses.

The REIT has nine leases with coworking providers totaling 525K SF, comprising 3.5% of its operating portfolio, it said in a November earnings reportWeWork and WeLive combine for about 2.5% of its total operating portfolio. 

"This crisis has been very hard on [coworking] operators, they're much closer to retail and hotel than other forms of commercial space, and it's been really hard on all of them," Kelly said. "We think there will be a shakeout and a rightsizing, but it will continue to exist as an important part of the office ecosystem."

JBG Smith owns about 1.3M of retail space, compared to 10.8M SF of office space, according to its February earnings report, but Kelly said its importance in JBG Smith's portfolio goes beyond revenue.

"Retail is important to our business. It's actually a relatively small percentage of the company, but it's outsized in importance because of the importance of retail in placemaking," Kelly said. "It is a big part of placemaking, which is a lot of what we do." 

Kelly said the REIT is working with struggling retail tenants to defer rent and find agreements that work for the businesses on a case-by-case basis, but declined to get into specifics.

In addition to managing the company's operating portfolio, Kelly is also navigating the challenge of being a public company during an economic crisis. JBG Smith's stock price opened Tuesday at $32.56/share, down from its recent high of $42.19/share on Feb. 19. 

Kelly said people have been paying attention to the stock price, but he said he is not concerned because the value of JBG Smith's underlying real estate portfolio remains strong. 

"It can be scary to see the stock bouncing around like it does, so we tell people, 'Just don't pay attention to that, you're not selling your stock right now, so don't worry about it,'" Kelly said. "And in the long-term, if the government keeps printing money, real estate should appreciate in value."