Author Topic: JBGS - JBG Smith  (Read 9434 times)

thepupil

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JBGS - JBG Smith
« on: September 12, 2020, 10:41:45 AM »
I know, I know, there are enough threads about urban office buildings, urban multi-family, the future of working, living etc.

But I think JBG Smith deserves its own thread as it's a pretty unique opportunity to own one of the largest portfolios of DC metro real estate, with a large long-term development pipeline, concentrated in what I'd consider to be one of the healthiest economies in the United States (Northern Virginia) adjacent/surrounding to the HQ2 of one of the country's most successful companies (Amazon)

For some background, JBG Smith represents the combination of Charles Smith (which was purchased by Vornado a long time ago) and JBG. JBG was a highly successful real estate private equity firm with a laundry list of blue chip endowment LP's. Back before the apocalypse, it was thought that Vornado traded at a discount because of its exposure to one of the worst office markets in the country: Washington DC. Washington DC has had a bad office market for a while. Lots of feds have been encouraged to telecommute long before it was cool, there's a ton of supply, feds had been cutting footprint, etc. Just drive from DC to Dulles and gaze upon all the glassy empty office buildings. DC was dragging down VNO's metrics and it was thought (hilariously in retrospect) that becoming a more pure play NYC company would help

To highlight the high quality of its NYC assets, Vornado contributed its DC assets to a new venture with JBG's assets and JBG Smith (adding the smith to pay tribute to Charles) came to be. so JBG LP's who previously owned interest in a PE fund got a stock, and Vornado shareholders got distributed RemainCo (VNO today) and SpinCo (JBGS).

This all happened in 2017. Here's the 2017 presentation
https://s1.q4cdn.com/569464730/files/doc_presentations/2017/06/1/Investor-Presentation-June-2017.pdf

I think understanding the history / DNA of the company is important. Most of the head honchos came from JBG, a PE firm that had a 17 year history of generating high IRR's gentrifying DC, and obviously REPE pay their people well. Vornado is development oriented, high G&A, not a smooth FFO / share type. If you want low leverage metrics, low g&a, a smooth ride, look elsewhere.

If you want to be the biggest landlord in the capital of the US of A in 10 years and own all the land around Amazon HQ2, read on.

JBGS started its life as a new company in 2017 at about $35; they claimed a NAV of low $40's at the time w/ a "near term development pipeline" to get to $50 and a long term outlook to create $30+ through development since they own the biggest land bank in DC.

What's happened since 2017, other than the stock has declined from $35-->$27

Most importantly, JBGS successfully courted Amazon and the Virginia Tech Innovation campus to its backyard. What was an extremely tired and ugly expanse of crappy office, known as Crystal City, became National Landing, future home to 25,000 well paid Amazon employees and (hopefully) a bunch of other tech companies office space and their employees. There are only 1,000 of them there right now and to be clear JBGS made a little dough on selling AMZN some land, but the immediate effects of this aren't that big. The long-term effects are big though.

On the single family side, the NoVa market has been on fire, pre-covid, during covid, blah blah blah. Try to buy a house in NoVa and you better come with cash, no contingencies, escalation clauses and be prepared to pay more than you'd ever thought you would for a 1960's rambler of minimal aesthetic appeal. There was a bit of a post Amazon craze. Talks of international buyers calling brokers and buying crappy condos in crystal city sight unseen. I don't really know if that's still going on (doubtful) but the overall point is that its a very hot residential market.

As it relates to DC and National Landing multifamily:
Quote
Downtown Class A trades were rare and competitively priced, with average cap rates of 4.4% over the past 12 months. According to CoStar, National Landing is an even more competitive environment with trailing 12-month cap rates averaging 3.7%

Amazon cemented the quality of JBGS's multi-family assets and transformed their concentration in Crystal City office from a weakness to a big strength. DC without Amazon is a pretty healthy economy to start. There's law, think tanks, lobbying, the data center industry, defense, biotech/NIH, great public schools in select districts, some of the country's best private schools. It's a pretty good cocktail of the one of it not the nation's best educated workforces, very high median incomes. Within DC metro, Virginia is a top state for fiscal health, has a decently low (5%) income tax rate, and is more business friendly than DC or the PRMC (People's Republic of Montgomery County), where I live. the overall point is DC is a good economy. National Landing w/ Amazon has the potential to be a decent little tech hub.

So that's all the soft stuff. Next post will where JBGS is today and where they might be going.




« Last Edit: September 12, 2020, 10:47:44 AM by thepupil »


LearningMachine

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Re: JBGS - JBG Smith
« Reply #1 on: September 12, 2020, 10:51:14 AM »
Seeing how much Amazon impacted Seattle real-estate over a decade, and looking at the history of founding lawyers, and how they instilled in the company the DNA to sell the buildings when market is high, to keep operating the buildings when market is low, and to buy land for low prices around metro stations and work on it for years to get entitlements and develop buildings and "place-making" themselves, I invested in this last year sometime after the Amazon announcement.

Those founding lawyers really achieved an amazing result over the decades with this strategy, starting with almost nothing.
« Last Edit: September 12, 2020, 11:47:00 AM by LearningMachine »

thepupil

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Re: JBGS - JBG Smith
« Reply #2 on: September 12, 2020, 11:25:36 AM »
So now for some numbers.

First, I always start with the corporate debt:

As of Q2 2020:
$500mm credit facility
$400mm Term Loan
$900mm corporate debt

$710mm of cash.

So as of Q2 end, JBGS had little corporate net debt. Subsequent to Q2, JBGS borrowed $385mm of Freddie K paper (low cost non-recourse multifamily) against 3 buildings and paid off their credit facility, so we need to deduct $115mm from cash + $385mm to mortgages and get rid of the $500mm credit facility, so now the corporate balance sheet looks like this:

$600mm of cash
$400mm term loan
$200mm of net corporate cash (+ $1 billion of completely undrawn credit facility for liquidity)

$1.7B of mortgages from consolidated assets (including the new Freddie K borrowings)
$0.4B of mortgages from unconsolidated JV's

So all in they've got just under $2 billion of net debt, all of which is non-recourse mortgages. Their most recent letter notes they estimate an additional $400mm of borrowing capacity from their multi-family / development portfolio.

~134mm shares out that own 90% of the OP Units = 148mm shares @ $26.7 = $3.9B of equity

In sum:
$1.9B of debt
$3.9B of equity
$5.8B EV.

For $5.8B we get the operating portfolio + the near term and long term development pipeline.

Office
11.2mm sf, 90% occupied, $230mm annualized NOI.

Multifamily
5600 units, $76mm NOI, 86% /82% because they just contributed some non-leased up assets to this, 93/90% without those.

So ignoring the development pipeline and the high G&A, you are creating the company for about a 5.1% cap rate (300 / 5800 = 5.1%). this isn't that exciting, it's too tight for office and probably too wide for the multi-family (but a value investor wouldn't pay fair market 4 cap for the multi-family). If JBGS only owned its operating portfolio, it'd be like "who cares".

For the development portfolio, I'm just going to quote the company

Quote
Development Portfolio
As of June 30, 2020, our development portfolio consisted of three assets under construction totaling 777,000 square feet and a Future Development Pipeline totaling 16.6 million square feet. Excluding the land at Pen Place held for sale to Amazon, our pipeline was 14.5 million square feet. Of the 777,000 square feet in our Under Construction portfolio, 503,000 square feet is multifamily and 274,000 square feet is commercial, the latter of which is 97.8% pre-leased, primarily to Amazon.

Under Construction
At the end of the second quarter, our three assets under construction had guaranteed maximum price construction contracts in place. These assets have weighted average estimated completion dates of the fourth quarter 2020 and estimated stabilization dates of the fourth quarter of 2021, with a projected NOI yield based on Estimated Total Project Cost of 6.3%. When stabilized, we expect these assets to deliver $22.9 million of annualized NOI.

During the second quarter, we completed 965 Florida, a 433-unit multifamily asset located in the U Street/Shaw submarket, ahead of schedule and under budget. The Whole Foods located on the ground level of the building opened in July. In addition, during the second quarter, we completed the base building work on 1770 Crystal Drive and turned the space over to Amazon to commence its buildout.

Near-Term Development
We did not have any assets in the Near-Term Development pipeline at the end of the second quarter. As a reminder, we only place assets into our Near-Term Development pipeline when they have completed the entitlement process and when we intend to commence construction within 18 months, subject to market conditions.

As discussed last quarter, we obtained the final entitlements for 1900 Crystal Drive in March, securing development rights for approximately 820,000 square feet, including approximately 800 units and approximately 30,000 square feet of retail. We expect to complete design documents in the second half of 2020, at which point we will have a clear sense of expected pricing and the timing of construction commencement. While we are committed to building his asset as part of our National Landing repositioning, we intend to time construction to capture the benefit of an expected, downturn-induced, decline in construction costs.

We are continuing to advance the approximately 2,100 units in the next tranche of multifamily development opportunities in National Landing, all of which are within a half mile of Amazon’s new headquarters. These entitlement processes have continued to move forward in Arlington County during the pandemic, and we expect the first of these developments to receive final site plan approval in late 2020 or early 2021. The commencement of construction on these opportunities will be subject to the same capital allocation discipline governing all our new investments.

Future Development Pipeline
As of June 30, 2020, our Future Development Pipeline comprised 16.6 million square feet, with an Estimated Total Investment per square foot of approximately $44.92. Excluding the land at Pen Place under firm contract to Amazon, our Future Development Pipeline was 14.5 million square feet with an Estimated Total Investment per square foot of approximately $46.37. At the end of the second quarter, 54.5% of this pipeline was in National Landing, 20.9% was in DC, 15.6% was in Reston, and the remaining 9.0% was in other Virginia and Maryland submarkets. Our DC holdings are concentrated in the emerging growth submarkets of Union Market and the Ballpark, and our Reston holdings include what we believe is one of the most attractive development sites on the Metro, adjacent to Reston Town Center.

Over the course of 2020, we expect to continue to advance the entitlement and design of approximately 10.2 million square feet, which represents approximately 70% of our Future Development Pipeline. This includes 6.5 million square feet in National Landing, representing approximately 93% of our Estimated Potential Development Density in the submarket. We continue to seek opportunities to monetize our Future Development Pipeline, either through internal development, land sales, ground lease structures, and in cases where continued control is important, recapitalizations with third-party capital. These potential structures would be most applicable to opportunities where we can achieve mark-ups on our land, thereby preserving our own capital capacity for other, higher-return opportunities.





thepupil

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Re: JBGS - JBG Smith
« Reply #3 on: September 12, 2020, 11:41:47 AM »
So what's it worth?

The short answer is I don't really know.

I know that

- they have tons of liquidity to self-fund development or make acquisitions.
- they were pre-covid putting forth a $550mm 2024 NOI target, haircut that, push it back, do whatever
- they will likely generate lots of low-cost non-recourse multi-family debt ($400mm), multi-family financing rates are at all time lows
- they would probably claim a mid $40's NAV, which is consistent with their decision to issue $500mm @ $42 to further build their war chest.
- they've been net sellers for most of their public life and achieved NAV or NAV+ on asset sales
- they have started buying back stock.

I don't view this as deep value, so much as I view this as a long-term bet on DC/National Landing.

I would note that my largest asset (my house) is also a long-term bet on DC, so that is a factor for me in terms of personal sizing.

I think one has to be patient, there will be shitty headlines, it trades at like 27x FFO and has a 3.5% divvy yield so it's not like it's an income play.

I just think in 10 years you're going to have
more sf / share
more units / share
more scale / g&a leverage
the mix will shift toward multi-family vs office

I am not too big into JBGS but expect it to take share over time in the pupilpropertyportfolio.
« Last Edit: September 12, 2020, 11:48:56 AM by thepupil »

CorpRaider

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Re: JBGS - JBG Smith
« Reply #4 on: September 12, 2020, 11:51:30 AM »
Seeing how much Amazon impacted Seattle real-estate over a decade, and looking at the history of founding lawyers, and how they instilled in the company the DNA to sell the buildings when market is high, to keep operating the buildings when market is low, and to buy land for low prices around metro stations and work on it for years to get entitlements and develop buildings and "place-making" themselves, I invested in this last year sometime after the Amazon announcement.

Those founding lawyers really achieved an amazing result over the decades with this strategy, starting with almost nothing.

Yeah I found that focus on the walkability/transit/place making and the use of the touchstone of replacement value and focus on long-term NAV growth attractive as well. 

Thanks pupil.  As u noted they bought back some stonk earlier this year at ~$29 avg price.  The already showed some (imop) unusual capital allocation acumen (or at least effort) by issuing at $42 and buying at $29, in the last ~18 months.  Very much not behaving like a "we like our stock at any price" type outfit. 

That's what I kind of mentally derived:  we're looking at 500/6000 in a few years "and it should grow over time" and should get some premium/lower cap rate b/c of the DC market/exposure to amazon and transition from looking like an office developer to more like EQR (high end multifam) + getting it for less than they were buying back during covid crash = buy some.
« Last Edit: September 16, 2020, 03:30:19 PM by CorpRaider »

lnofeisone

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Re: JBGS - JBG Smith
« Reply #5 on: September 13, 2020, 04:56:13 AM »
Pupil - thanks for sharing. I've had 1 share of JBG since they went public but never got comfortable buying it. And now I'm trying to sort through the whole death of the office. My (very much anecdotal) observations:

1) One thing that really attracts me to JBG is the fact that most of the things that they own outright are on the metro lines (including National Landing and McLean). Some of the things they manage aren't exactly on the metro line (e.g., Georgetown - The foundry and the CW office on Wisconsin) but that's not a deal breaker.
2) I work(ed...before COVID) in one of the buildings that's managed by JBG for a bit. Of the times we had to interact with JBG, everything was flawless and frictionless. They understood what the ask was and really worked with us to get it done. Totally different experience than what we endured with another large DC operator.

One item that (minorly) concerns me is the speed of their shift towards multifamily. It looks like National Landing is their crown jewel and just needs time to work out. The other parts of their portfolio are in very much areas of gentrification (just look across the street at 965 Florida Ave and I get that Howard is right there too but the area isn't exactly inviting to everyone) so the opportunity is there but might take a while to work out. So basically, sit and wait type of thing.

thepupil

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Re: JBGS - JBG Smith
« Reply #6 on: September 13, 2020, 09:05:42 AM »
Good point, what JBGS calls “growing emerging sub markets” is real estate speak for “risky” gentrification development.

I think the scale and balance sheet are a helpful risk mitigant. Compared to, for example, what FRPH is doing at Rhode Island Avenue where they are mostly in the common/pref and concentrated in that project and their stable asset base is concentrated in Dock79 (fully levered) and the Maren (just coming online). It’s hard to see owning 400 units above a new Whole Foods, goes completely terribly.
Not hating on FRPH and they mitigate risk with their huge cash pile.

One note on the valuation above, they’re set to get $150mm for their second AMZN site in 2021; decent chunk of cash relative to market cap/EV; It’s on the books for $75mm; so you convert $75mm of land to $150mm of cash which then goes to develop, at a conservative leverage level at least $300mm of property (likely more). That’s basically JBGS in a nutshell, capital recycling and upgrading assisted by AMZN/ general DC economy over the next 5-10 years.

Let’s put on my compounder bro hat and throw out a 2030 projection. $600mm NOI at 5% cap rate $12B EV with not too much share growth, maintaining the dividend, $4B net debt, $8B equity, 7%/ year appreciation, 3% carry= 10% / year without taking a huge amount of risk. Considering they were shooting for $550 NOI in 2024, $600 in 2030 doesn’t seem super crazy. I ultimately think they’ll do better, but just throwing out a straw man. I haven’t quite formed an asset by asset view here and plan on just kind of watching how it develops as projects come on line.

Also, on the anecdote side, I had  a consultant friend who said that JBG Smith was a great landlord and really went out of their way with respect to service. All that g&a is going somewhere! Lol.

 
« Last Edit: September 13, 2020, 09:21:39 AM by thepupil »

LearningMachine

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Re: JBGS - JBG Smith
« Reply #7 on: September 13, 2020, 10:22:09 AM »
Also, on the anecdote side, I had  a consultant friend who said that JBG Smith was a great landlord and really went out of their way with respect to service. All that g&a is going

Beyond location for new buildings and existing buildings there, this is why Amazon picked them to build and manage their buildings after they are built as well.
« Last Edit: September 13, 2020, 10:25:24 AM by LearningMachine »

lnofeisone

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Re: JBGS - JBG Smith
« Reply #8 on: September 15, 2020, 03:52:22 AM »
Also, on the anecdote side, I had  a consultant friend who said that JBG Smith was a great landlord and really went out of their way with respect to service. All that g&a is going somewhere! Lol.

Am I that friend?  ;D

BG2008

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Re: JBGS - JBG Smith
« Reply #9 on: September 15, 2020, 06:46:39 AM »
Also, on the anecdote side, I had  a consultant friend who said that JBG Smith was a great landlord and really went out of their way with respect to service. All that g&a is going

Beyond location for new buildings and existing buildings there, this is why Amazon picked them to build and manage their buildings after they are built as well.

My experience has been that NYC landlords are generally asshole because they can get away with it.  I have been flabbergasted by the "conciergeness" of DC's multi-family buildings.  It's quite heavy on the service, amenities, in addition to the location and shelter.  In NYC, we basically tell our tenants to take a hike if they want.  If you want concierge level service, you are looking at paying more than $5,000-6,000 in Manhattan and over $3,500 in Queens, and over $4,000 in Brooklyn for that type of product.