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JBG Smith Sees D.C. As A Seller's Market, Aims To Generate $700M

The D.C.-area's largest developer is looking to sell or recapitalize several of its assets, telling its investors that now is an ideal time to be a seller in D.C.'s commercial real estate market. 

Jon Peterson Matt Kelly Bob Murphy
Peterson Cos. principal Jon Peterson, JBG Smith CEO Matt Kelly and MRP principal Bob Murphy at a 2017 Bisnow event

JBG Smith has identified opportunities to generate $700M of capital, focusing largely on selling and recapitalizing office assets in areas where it projects slower growth, CEO Matt Kelly told investors in a letter accompanying the REIT's Q4 earnings report released Monday evening. 

"We are pursuing several opportunities to capitalize on today's attractive selling environment where we can achieve or exceed [net asset value] pricing," Kelly wrote in the letter. "The proceeds from these sales should allow us to build capacity to invest in future growth opportunities, both within and outside our future development pipeline, while maintaining prudent leverage levels." 

The REIT is primarily looking to sell office assets, Kelly said, given what he described as "aggressive pricing" in that asset class. D.C.'s investment sales market has been red-hot this year, with a record-breaking deal highlighting a string of nine-figure office sales.

Some local investors have begun to shy away from buying in the D.C. office market because they see foreign investors pushing prices up to inflated levels. Kelly said D.C.'s competitive acquisition market has made JBG Smith think carefully about buying assets and focus more on sales. 

"With private investors accepting rates of return at or below 6%, we believe it is a good time to be a seller in the private market," Kelly said. 

Kelly also said the REIT is pursuing office sales because of its stated goal to shift its portfolio to a 50-50 mix of office and multifamily. He said it is targeting office assets in submarkets where it does not have a large portfolio and where it projects relatively slow growth. 

1920 N St. rendering JBG
A rendering of JBG Smith's planned mixed-use development at 1900 N St. NW

JBG Smith last month sold a 45% stake in its Dupont Circle mixed-use development to Canada Pension Plan Investment Board for $101M. The REIT has not announced any full-building office sales since it was formed from the July merger of The JBG Cos. and Vornado, but The JBG Cos. did sell a trophy office building at 900 16th St. NW for $160M in June.

The new strategy, outlined in the company's first annual report since becoming a publicly traded REIT, represents a shift from previous quarters. Kelly did not detail JBG Smith's intentions to focus heavily on selling assets in his Q3 letter, including a much shorter and more general paragraph on dispositions.

The written letters have taken the place of quarterly earnings calls, the more common practice among public companies that allows investors and analysts to ask questions. JBG Smith declined a request to comment further on its strategy. 

Green Street Advisors Senior Associate Daniel Ismail, who analyzes JBG Smith's stock, said he was not surprised to see the new target of $700M in sales and recapitalizations. 

"Given the firm's current valuation and management's goals of keeping the balance sheet in check, selling assets is the most logical funding option, though the bar should be high for any new development given JBGS' significant NAV discount," Ismail wrote in an email. 

In his Q3 letter, Kelly said he viewed JBG Smith's stock as undervalued, saying investors were getting the REIT's potential portfolio growth for free. He did not address its share price this quarter. It currently sits at $34/share, up from $32.66 at the time of the Q3 release, but still well below its July opening of $36.59. JBG Smith's stock dropped more than 2% during trading Tuesday, following the company's Q4 earnings release. 

The REIT reported a net loss of $16.4M in Q4 and an $86.2M net loss in the second half of 2017. Its net operating income for Q4 was $363.3M, up from $357.5M in Q3.

Ismael said JBG Smith's Q4 results were better than Green Street expected. While its share price has dropped since last summer, Ismael said this is a common trend among office REITs, and JBG Smith has actually outperformed the sector by 5% since July. 

JBG Smith's office and multifamily leasing numbers fell slightly in Q4. Its office portfolio finished the year at 88% leased, down from 88.2% in Q3, and its multifamily portfolio finished at 95.6% leased, down from 96.2%. 

The developer had 10 projects under construction as of Dec. 31. It has four office projects totaling 1.2M SF, five multifamily assets totaling 1,568 units and one additional project, the International Spy Museum in L'Enfant Plaza. 

JBG Smith Crystal City
A rendering of JBG Smith's Alamo Drafthouse-anchored Crystal City development

The development Kelly discussed the most in his letter was JBG Smith's transformation of Crystal City, which he said accounts for 17% of its future development pipeline. He said the company will begin Phase 1, a 120K SF retail development anchored by Alamo Drafthouse, after it receives approval from Arlington County, a process one of its executives said takes far too long at a Bisnow event last week. From there, Kelly said the timing for the rest of the development will depend on market conditions.

JBG Smith's Crystal City portfolio has been included in Northern Virginia's Amazon HQ2 bid, which made the 20-city shortlist in January. Kelly said Crystal City would be an attractive choice for the tech giant because of its existing infrastructure, walkability and relatively low housing costs. 

"Our holdings alone can accommodate Amazon's entire long-term space requirement and we have a cost advantage over our competitors given the existing in-place parking and substantial infrastructure," Kelly said.