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JBG Smith Stock Reaches Highest Price Since Merger Amid HQ2 Speculation

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JBG Smith's stock price has reached a new high following its Q1 earnings release Wednesday evening, with its strong 2018 growth bucking the trend of what has been a down year for REITs.  

JBG Smith Matt Kelly
JBG Smith CEO Matt Kelly

The Montgomery County-based REIT's share price has risen 8% year to date from $34.49/share to a peak of $37.34/share Thursday morning, its highest value since JBG Smith launched in July from the merger of the JBG Cos. and Vornado's D.C. business. It has risen 17% in the last six weeks since dipping to $31.75/share March 23. 

JBG Smith's growth has been boosted by speculation over Amazon HQ2, with its Crystal City and Potomac Yard portfolio included on the shortlist, and by strong sales and leasing activity.

The company's stock had dropped after its July 18 opening of $36.59 and hovered in the low to mid-30s for months. CEO Matt Kelly said in November he viewed its share price, then $32.66, as undervalued and said investors are getting its potential portfolio growth for free. The REIT has experienced its fastest growth in value over the last three weeks, with its price surpassing $37/share this week. 

In its Q1 earnings release Wednesday, JBG Smith reported funds from operations of $41.2M and annualized net operating income of $371.3M, two key metrics that were both significantly higher than the previous quarter. 

This comes as the U.S. REIT sector has faced headwinds in 2018.

Two indexes that track overall REIT performance, the Dow Jones Equity All REIT Total Return Index and the FTSE Nareit U.S. Real Estate Index, show the sector is down 3% and 4%, respectively, since the start of 2018. The CEO of healthcare REIT Ventas, which has seen its stock drop 32% since September, attributed the decline to the rising interest rate environment. 

JBG Smith Crystal City
A rendering of JBG Smith's redevelopment plans for Crystal City

The first quarter was highlighted by Amazon's January announcement of its 20-city HQ2 shortlist, which included JBG Smith's holdings in Crystal City. In April, A New York-based real estate fund bet on JBG Smith, buying $10M of its stock and attributing it partly to the potential upside of landing HQ2. 

In a letter to investors released with the Q1 earnings Wednesday, Kelly touted the strength of JBG Smith's offering to Amazon and said the company is hopeful, but expecting nothing. He added that the HQ2 search itself has helped boost the company's portfolio. 

"We believe this process has already put us on the map for other potential large technology tenants and has begun to stimulate progress on other long-term infrastructure projects," Kelly said. "We have also noticed heightened tenant interest in Crystal City in the form of increased tour activity."

In a previous investor letter in March, Kelly introduced a new strategy of selling and recapitalizing assets. He said JBG Smith sees D.C. as a seller's market and has identified opportunities to generate $700M of capital. It has already gotten nearly halfway to reaching that mark.

JBG 4747 Bethesda Ave
A rendering of JBG Smith's planned development at 4747 Bethesda Ave.

The REIT last week announced its $140M sale of the Bowen Building in Downtown D.C. to JPMorgan Chase, which plans to use it as a new regional headquarters. In April, it sold two Reston office buildings for $95M to Brookfield Property Partners. In February, it sold a 45% stake in its Dupont Circle office development to a Canadian pension fund for $101M. 

JBG Smith also had a strong quarter of office leasing, closing 38 deals totaling 322K SF. It signed a 35K SF lease in Crystal City with Interstate Hotels & Resorts, which is moving from Ballston. Last week, it landed the U.S. headquarters of French nuclear power company Orano at its Downtown Bethesda development, bringing the project to 77% leased one year ahead of its delivery. 

During the first quarter, JBG Smith completed two developments. It delivered a 291-unit Capitol Riverfront apartment building, which it said is 22.7% leased, and the CEB Tower in Rosslyn, which is 74.6% leased.

The developer says it currently has 10 projects under construction, with its pipeline a roughly even split between office and multifamily. The developer has 17.9M SF in its long-term pipeline, but Kelly said it could sell some of those sites as part of its disposition strategy. The developer has no projects listed in its near-term pipeline, and says it is not expecting any new construction starts in the short term, similar to the cautious approach it has taken on acquisitions. 

"Development is nothing more than buying a building slowly, over time, at cost, so we think about it in a similar manner to acquisitions," Kelly said. "Construction costs and land values continue to rise, and expected rents have not yet caught up enough to produce acceptable development yields to justify new construction at this time."