Things went so well for JBG on U Street and in other hot Washington neighborhoods that for the first time in its 56-year history, the company wants to venture outside the D.C. region. Last week, the privately held JBG announced it would acquire the publicly traded New York REIT in a deal that would create a new $8.4 billion public firm spanning the two cities.
Historically New York developers trickle down Interstate-95 to try their hand in Washington; JBG’s move constitutes the opposite.
Since its founding by three partners as a spinoff from a legal practice, JBG has grown into the largest developer in the Washington region, raising more than $3.6 billion from its real estate funds and amassing the rights to 44.6 million square feet. Its rather anonymous Chevy Chase office, where it has 612 employees, is a factory of MBA-educated finance experts fueled with investments from the Yale University endowment.
JBG executives regard themselves as experts in the type of mixed-use, “place making” development that they believe is remaking major American cities throughout the country.
As it did on U Street, JBG in recent years has been buying up large chunks of Metro-accessible neighborhoods, such as Potomac Yard in Alexandria or Twinbrook in Rockville, and moving forward with broad overhauls that blend residential with retail and more. The company even has commissioned more than two dozen murals in the neighborhoods where it invests, with the works serving both aesthetic and business purposes. When it opened a Walmart in Tysons JBG added a metal sculpture in front of the store named “The Thought.”
In New York, JBG would acquire through New York REIT 3.3 million square feet of office and retail properties. Matt Kelly, JBG managing partner, said JBG had prepared to go public and acquire properties on its own but that the New York firm offered a “terrific portfolio of assets” that did not include a lot of “problem properties” and which are managed by a team of outside consultants he hopes to hire.
“We’ve built a really unique skill set in Washington that’s built around mixed-use, place-making type of investing…there are really very few operators that do that,” Kelly said.
Can JBG can have similar success in far more dense and populated New York? Kelly said for all New York’s strengths there was room for improvement.
“Generally speaking New York is one of the most walkable cities in the world,” Kelly said. “But there are neighborhoods all over Manhattan and in the outer boroughs that are really not that well planned from a retail streetscape, walkability perspective, and really aren’t that pleasant or that nice when you think of bringing together all the different uses into a single place.”
New York REIT has been under pressure from investors to boost its share price and although the company’s board approved the deal, the company’s shareholders have not yet weighed in. So far Wall Street has greeted the idea mostly with a frown. After the deal was announced, the company’s stock price dropped 8 percent to $9.08, the largest drop in two years Bloomberg reported, with one analyst writing that “the jury is out and New York REIT’s board owes its shareholders a lot more transparency.”
Kelly would be chief executive of the new company, under the name JBG Realty Trust, with JBG senior executives Michael Glosserman and Rob Stewart serving as co-chairmen. JBG employees would own the largest stake in the new company, 15 percent. The Yale University Investments Office would be second at 10 percent and its director of real estate, Alan S. Forman, would have a seat on the board as well.
Should the deal be finalized, JBG plans to contribute 133 properties, a heavy majority of what it owns, including 28 office buildings, 19 apartment complexes and 15 retail properties plus 61 undeveloped sites or projects under construction. Another 34 properties, many of them hotel or condominium projects that Kelly said don’t fit the company’s new structure, and others that stray from JBG’s focus or urban, accessible neighborhoods would be sold in coming years. Exurban Washington office properties have hampered competitors like Vornado Realty Trust and First Potomac Realty Trust.
Randolph C. Read, current chairman of the board at New York REIT would remain on the new company’s board and said that bringing on JBG’s management team would help revive a stock he said was undervalued.
“We thought that there was a disconnect between the underlying value of our company and where the stock was heading,” he said.
The elder generation of JBG leaders, including Glosserman, timed the market well with portfolio sales near the top of Washington’s real estate cycles in 1998 and 2007. That’s led some observers to wonder if the latest transaction was a means for the new crop of JBG executives to cash in via stock sales. Kelly said just the opposite — that the company’s leadership was ready to “triple down” on investments in new projects.
After completing and selling two U Street apartment complexes for near-record prices, the District apartments and the Louis at 14th apartments, Kelly said it pained him to watch as the new owners reaped more rewards as he and his team added new shops and a movie theater to the neighborhood. He said the new company would allow JBG to maximize its work.
“For the most part it’s a relatively young team and we’re not going anywhere,” he said. “We look at our portfolio right now and we see 20 projects between construction and development that have much, much more value in them.”
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