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Matt Kelly: JBG Smith Stock Undervalued, Investors Getting Portfolio Growth 'For Free'

The D.C. region's largest developer, and newest public REIT, has watched its stock drop roughly 10% since it began trading in July, but its CEO believes investors are not looking at the big picture.

JBG Smith Matt Kelly
JBG Smith CEO Matt Kelly

JBG Smith CEO Matt Kelly, in the company's Q3 earnings release Monday evening, said its stock price does not take into account the value of its properties under construction and in its near- and long-term development pipelines. At the time of the release, JBG Smith traded at $32.66 per share, down from its July 18 opening of $36.59.  

"Our perspective is that, at the current price, investors are getting most of the components of potential growth in our portfolio for free," Kelly said in a letter to investors. "That's zero value for a growth portfolio that we believe has the potential to create approximately $100M of [net operating income] when stabilized." 

The REIT reported a Q3 net loss of $69.8M, or roughly $0.61 per share, in its first full quarter since the JBG-Vornado/Charles E. Smith merger closed and it became a publicly traded entity. JBG Smith did not hold an earnings call following the release, as many public companies do, but Kelly wrote a nine-page letter to shareholders along with the release. The letter did not address the quarterly net loss.

"It is not uncommon for a fledgling REIT to underperform in its initial months in the market as public market investors are still trying to get comfortable with the company and its strategy," Green Street Advisors Senior Analyst Jed Reagan, who follows JBG Smith, said. "In this case, D.C. metro office fundamentals remain weak, which may be hurting JBGS’ relative performance."  

Despite the loss, JBG Smith's net operating income of $362.2M was up 2.3% from Q2. It also reported occupancy gains in both its office and multifamily portfolios.

The market appeared to react positively to the REIT's Q3 earnings release. JBG Smith's stock has risen steadily since the market opened Tuesday. As of 2 p.m EST it traded at $33/share, up 2.01% from the day's open. 

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

The REIT signed a total of 206K SF of office leases across its portfolio during Q3, not including the deal to move its own HQ to its development at 4747 Bethesda Ave. Those leases included four new tenants in Crystal City totaling 33,400 SF. 

The landlord is anticipating two large upcoming law firm vacancies in its CBD office portfolio. Paul Hastings plans to leave its 126K SF space in JBG Smith's Bowen Building at 875 15th St. NW in 2020 when it moves to Tishman Speyer's 2050 M St. NW. JBG Smith also expects Baker Botts to leave 155K SF vacant in the Warner Building at 1299 Pennsylvania Ave. NW in 2020, although the firm has not announced a new lease.

The REIT has nine projects under construction, including one that broke ground in Q3. Kelly told investors it began construction on Phase 2 of Stonebridge at Potomac Town Center in Woodbridge, where it signed an Alamo Drafthouse Cinema in April. The developer also told investors it plans to break ground in Q1 on 965 Florida Ave. NW, a 433-unit mixed-use project in Shaw where it signed Whole Foods as the anchor. 

Alamo Drafthouse Crystal City Retail JBG Smith
A rendering of the Alamo Drafthouse and surrounding retail JBG Smith is planning in Crystal City

The primary focus of JBG Smith's future development pipeline continues to be its planned transformation of Crystal City. Kelly detailed the plans in his letter to investors, highlighting the finalized Alamo Drafthouse lease and the zoning application JBG Smith recently filed for the first phase of the redevelopment. 

"Since closing, and more specifically since the filing of the zoning application, we have received incredibly positive feedback on our plans from existing and prospective office and retail tenants, tenant brokers, county officials and other stakeholders in the local marketplace," Kelly said. "As an early indicator of this response, we have seen an increase in leasing tour activity since closing and we are on track for a strong finish to the year." 

Kelly devoted a section of his letter to Amazon HQ2, laying out why he believes Crystal City is a strong contender for landing the tech giant's 8M SF campus. He said the submarket's accessibility to transit, combined with its existing infrastructure and amenity base, make it more attractive than more suburban locations. 

The timeline for the rest of JBG Smith's long-term development pipeline, including its three-building Lacebark Alley project in NoMa, remains unclear. The developer said Crystal City is the only piece of its long-term pipeline it is committed to building. It said it is continuing to advance entitlements on other projects, though it is may sell any of those parcels if it is able to get enough value out of them. 

The REIT has also been active in the financing market in recent months. After Q3 ended, it closed on a $110M refinancing deal for Atlantic Plumbing, its mixed-use project in Shaw. It also closed a $78M loan on 1235 South Clark, an office building in Crystal City. During Q3 it landed a $145M construction loan for West Half, a 465-unit multifamily development near Nationals Park it plans to deliver in 2019.