Mr. Vornado (VNO) Exits Washington – JBG Smith Properties Spinoff On Track For Q2

New York, New York. It’s a tune Vornado Realty Trust (VNO) shareholders should get used to humming once the company’s upcoming Washington DC property spinoff is completed. The spinoff will actually be executed via Reverse Morris Trust, with the company spinning out its properties into a separate entity and subsequently merging them into the privately held JBG Properties. It’s worth noting that while JBG will be contributing certain assets to the company, it will not be including all of its properties. The new entity will be called JBG Smith Properties and will trade on the public markets under the ticker ‘JBGS’. The ‘Smith’ is Vornado’s contribution and comes from Vornado’s current DC business which is known as Vornado/Charles E. Smith.

Here is what the new JBG Smith Properties will look like:

  • Vornado shareholders are expected to own approximately 74% of the combined company, JBG limited partners are expected to own approximately 20%, and JBG management is expected to own approximately 6% (all percentages subject to closing adjustments).

  • JBG SMITH will be led by JBG’s senior management team which has a proven track record of superior execution in the Washington, DC market over the long term and through numerous cycles.

  • The combined company’s portfolio will consist of 50 office properties totaling approximately 11.8 million square feet, 18 multifamily properties with 4,451 residential units, and 11 other properties totaling approximately 0.7 million square feet. These assets are located in premier submarkets within the Washington, DC metropolitan area, concentrated in Downtown District of Columbia, Crystal City and Pentagon City, the Rosslyn-Ballston Corridor, Reston, and Bethesda.

  • Importantly, JBG SMITH will have a pipeline of projects under construction and land for future development that could add over 20 million square feet to the portfolio, positioning the company for strong growth and attractive shareholder returns.

  • JBG SMITH will be the largest landlord to the U.S. Government in the nation’s capital.

  • The Company will be well capitalized, have substantial liquidity and a strong balance sheet.

  • The combination is expected to result in approximately $35 million of synergies producing an overhead structure in line with best-in-class peers.

  • The new company will continue to manage the JBG funds’ assets that are not being contributed for customary fees. The company will not raise new investment funds.

It seems like a lot of thought went into equitably allocating the leadership positions. The 12 member board will be evenly split with six appointees each from Vornado and JBG. The Chairman, Stephen Roth, is Vornado’s CEO, but the Vice Chairman will be from JBG. W. Matt Kelly, a JBG Managing Partner, will be CEO. Although the company initially said it would fill the CFO post from the ‘outside’, Vornado announced earlier this week that its current CFO, Stephen Theriot, will take on that role. According to Mr. Roth (during the Q4 conference call), ‘both the Vornados and the JBGers, have reached the conclusion that the best and most qualified individual to build and integrate financial systems and controls, which meet our zero tolerance requirements’ was Mr. Theriot. Very nice and the end result is that the #1 and #2 positions at the board and company are split up evenly. With 74% of the shares, VNO shareholders should be dominant going forward, but that doesn’t mean much in the index fund day and age. The big 3 own over 25% of VNO’s shares!

The DC Market has been hit hard by a cutback in government spending, but the spinoff will be one of the largest players in the market. The issues in the DC market came up during Vornado’s Q4 call, but management insists the company is ‘dressed for success’:

John W. Guinee

Second question, a reference to JBG having to build it to be a very, very fast growing, maybe the fastest growing in the country. As we all know, and D.C. is bouncing along the bottom at best. And usually, REIT stocks do well when there’s a perception of great internal growth, which leads to high multiples, low NAVs, leads to a high stock price and a low cost of capital. How does JBG come out of the box with a low cost of capital, given the underlying, fairly weak fundamentals in the greater D.C. marketplace?

Steven Roth

John, there’s 2 parts of that question. And the JBG management team will handle all of that in short order, but let me give you my version of it. Number one, JBG has 23 million square feet of density, of development rights in their portfolio that they will own at launch in all the best submarkets. So JBG has its growth all set out for it in land, which will stand to double the size of its portfolio. So without doing a single external acquisition, this business can double, and we are planning for it to double in 7, 8, 9 years from internal growth, from development on land sites that it already owns, okay? So we think that’s extraordinary and the sites are just incredible. Now with respect to your comment about the — what’s going on in the D.C. market, obviously, office development in D.C. is somewhat challenged because of demand, et cetera. So — and while there are a decent number of office sites in there, for example, 1700 M Street and there’s many others, most of this 20-odd-million feet of development will be skewed towards apartments. Apartments are easier to develop, they rent better, they have a perfect elasticity of demand, they finance better, and they create extraordinary values. So you can expect that over time, JBG will become the — probably the most active residential developer in the city and surrounds and will do — with unbelievably modern, perfectly designed product that we are very excited about.

John W. Guinee


Steven Roth

Now one last thing, with respect to cost of capital. Our job in launching JBG is to launch it so that it is absolutely dressed for success. So we will launch JBG as we did with UE and as we run our own Vornado business with a balance sheet, which has the capital in place to accomplish its business plan, which is basically to perform that development that we just talked about, over a finite and predictable period of time.

The other side of the spinoff is that it finally creates a NYC-focused Vornado, a goal which the company has been pursuing for quite some time. Here is what the parent company will look like after the spinoff:

Vornado will be a best-in-class, highly focused, New York-centric office and high street retail REIT that will own 18.7 million square feet of Class A Manhattan office properties in the best submarkets; the largest, highest-quality and unique Manhattan high street retail portfolio, encompassing 3.1 million square feet in 72 properties; and prime franchise assets in San Francisco (the 1.8 million square foot 555 California Street) and Chicago (the 3.7 million square foot theMART).

Steven Roth, Chairman and Chief Executive Officer of Vornado, said, “In addition to our irreplaceable portfolio in New York City, Vornado has a fortress balance sheet, significant dividend growth potential driven by recently signed leases, and a unique value creation opportunity from our Penn Plaza holdings.”

The slim down focus is part of Mr. Roth’s efforts to boost Vornado’s share price and one of the first steps was the 2015 spinoff of its strip mall properties into Urban Edge Properties (UE). Not everyone is convinced that this was really necessary and during the call there was another interesting back and forth with Stifel’s John Guinee:

John W. Guinee

Joe — Steve had mentioned that the JBG spin is going to provide daylight to a treasure trove of New York City value. Not sure really why it takes the spin to do this, but can you kind of tell us — I’m looking specifically at Page 39 of your supplemental, which talks about $5 billion or $6 billion worth of development and redevelopment on one page. How you’re going to upgrade the disclosure and help provide more daylight to this treasure trove?

Steven Roth

John, we’re sitting here and we’re speechless.

John W. Guinee

You don’t have to answer the question. It doesn’t need to be answered.

Steven Roth

Well, the first thing is, is the investors reward focused companies, investors reward companies that are simpler, that have a business plan that is understandable and executable, and that have management that is laser-like focused on a simple business. So we believed that our stock price — it’s no secret that we were not happy with our stock price, and so we set about a program a few years ago to fix that by doing what we thought was the right thing, which was simplifying the business and separating the business into a couple of different segments, actually 3 now — 3 separate companies: UE; Urban Edge; and what we call RemainCo, so that investors could make their own decisions about each of those, and we had really, really talented, world-class management teams focused on those 3 separate businesses, and we think we’ve accomplished that. Now with respect to Page 39, I mean, we have in process the developments that are listed there. The 220 and the 3 Chelsea assets, there is one asset that’s not shown there, which is 260 Eleventh, which is a great asset that will be — that we’re designing now and will be a 300,000 square foot close plus creative asset on 26th and 27th Street on Eleventh Avenue, we think that’s great. And then in the Penn Plaza District, we intend to, and aspire to do an enormous amount of activity, which we think will be great and will be financially rewarding to our investors. So that’s the story.

John W. Guinee


Steven Roth

By the way, we don’t stop there. We’re in the market every day to continue to invest and continue to grow. And we have the balance sheet that’s built for growth.

Leaving management speechless – that’s impressive! New York’s real estate market seems to operate in its own universe and each of its individual ecosystems – residential, commercial, retail by neighborhood – has its unique features. Vornado’s Q4 earnings were disappointing and they do have a significant amount of NYC leases (sqft wise) coming up in 2018 vs. 2017. It will also be interesting to see how the entire sector performs in a rising interest rate environment.

Despite the questions, Mr. Roth confirmed that the spinoff is on track to be completed at the end of Q2 so investors looking for New York or Washington DC real estate exposure will have some good options in the next few months.

Disclosure: Author holds no position in any stock mentioned.