JBG in $8.4bn merger with Vornado spinoff

The Maryland-based private equity real estate company called off an earlier merger with another real estate investment trust when activist investors pushed back against the deal.

The JBG Companies is merging with a spinoff of Vornado Realty Trust, a New York-based real estate investment trust, less than three months after the private equity real estate firm called off a merger with another REIT.

Vornado is spinning off its Washington, DC assets to combine with JBG in a new publicly-traded REIT called JBG Smith Properties, in a deal valued at $8.4 billion, the firms said Monday. The new REIT’s portfolio will comprise 50 office properties, 18 multifamily properties and 11 other properties in the greater Washington, DC area. Vornado shareholders will own about 74 percent of JBG Smith, while JBG limited partners will own 20 percent and JBG management will own about 6 percent. A spokesman for Chevy Chase, Maryland-based JBG declined further comment.

“We all…will worship at the altar of stock price, standing shoulder to shoulder,” said Steven Roth, Vornado’s chief executive and future chairman of JBG Smith, on the firm’s third-quarter earnings call Tuesday. “I believe the new JBG Smith has the potential to be the fastest growing real estate company in the country.”

JBG, founded in 1960, has closed a series of nine value-added funds, the most recent of which closed in 2014 on $680 million, according to its website. The firm has raised a total of $3.6 billion in equity, according to Monday’s investor presentation.

The new REIT will not raise capital for new JBG commingled funds, and JBG’s existing funds will be wound down over the next three to five years, according to an investor presentation. However, JBG Smith plans retain some of the JBG funds’ assets for its own portfolio, said Matt Kelly, a JBG managing partner and the new REIT’s CEO.

“They are in wind-down mode; it’s not a fire sale,” Kelly said on the earnings call. “As assets reach the point in their business plan where it makes sense to sell them, that’s what we’ll do.”

The deal, which has been approved by JBG’s limited partners and does not require Vornado’s shareholder approvals, is expected to close in the second quarter of 2017.

JBG originally said in May that it would go public through a merger with New York REIT (NYRT) that would have created a REIT with 14.5 million square feet of office, retail and residential real estate assets in New York and Washington, DC. After NYRT activist shareholders publicly opposed the merger throughout the summer, the companies called off the proposed $8.4 billion deal in August.

“[JBG] certainly made the right call in terms of finding a very creative and thoughtful path to shoring up their asset base and entering the public REIT market,” Gil Menna, the chair of the real estate group at law firm Goodwin Procter, told PERE.

Before the merger, Vornado was seeking to spin off its Washington, DC assets to focus on its larger, and more profitable, New York City holdings. Menna said JBG wanted to go public and, in an unhealthy market for initial public offerings, a merger with an existing REIT looked to be a better option. On Vornado’s earnings call Tuesday, Roth said that Vornado had previously pulled out of merger talks with JBG, as he did not want to “serve two masters,” referring to Vornado’s shareholders and JBG’s limited partners. He did not explain why Vornado resumed merger talks with JBG after the latter firm’s merger with NYRT fell through.

“JBG Smith will be the largest player in our market,” Kelly said on the earnings call. “We will be a powerhouse of a company with unmatched scale and growth opportunities.”