The JBG Companies has finally found a path to public status after years of searching for the right route.
The Chevy Chase, Maryland-based private equity real estate company is merging with a spinoff of Vornado Realty Trust, a New York-based real estate investment trust. The $8.4 billion deal, which is expected to close in the second quarter of 2017, will create a new publicly-traded REIT called JBG Smith Properties.
The deal allows Vornado to spin off its smaller DC holdings to focus on its New York business and bringing to a close JBG’s two-year battle to become a public company, this time without controversy. The firm first began pursuing an initial public offering in 2014, similar to New York-based Paramount Group’s record-setting $2.3 billion offering. When volatile markets caused JBG to shelve its IPO, the firm instead opted in May to do a reverse merger with New York REIT, another New York-based REIT in what would have been another $8.4 billion deal.
In PERE’s July issue, we analyzed the prospects for that reverse merger, writing that it was “proving more difficult than executives expected.” JBG did not expect the depth of shareholder concern, with activists writing public statements condemning the deal because they sought a higher value for the REIT through a liquidation or other options instead of a merger.
Additionally, NY REIT’s leadership also had ties to an accounting scandal at another REIT. The companies called off the proposed merger in August.
“The lesson learned is, ‘Who the hell are you doing business with?’ JBG went into a contentious situation in the first round – NY REIT had activism around it and a lot of noise,” one executive who worked on JBG’s first merger attempt told PERE. “Doing business with Vornado is so different.”
Vornado is considered a top REIT in the industry and consequently a considerably less controversial choice with which to enter into a merger for JBG. New York real estate magnate Steve Roth took Vornado public in 1990 and continues to act as chairman. The REIT originally looked at buying JBG before the NY REIT deal was announced, but Roth backed off because JBG wanted to keep its commingled fund structure. 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.
“I simply couldn’t get comfortable with serving two masters – their private limited partners and our public shareholders,” Roth said on Vornado’s third-quarter earnings call. “This time around, we have it exactly correct. There will be no new funds and the existing funds will run off. We all, the management, the board and shareholders, will all worship at the altar of stock price, standing shoulder-to-shoulder.”
The new REIT’s portfolio will comprise 50 office properties, 18 multifamily assets and 11 other properties in the greater Washington, DC area, according to an investor presentation. Vornado shareholders will own about 74 percent of JBG Smith, while JBG limited partners will own 20 percent and JBG management the rest.
JBG Smith 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 to retain some of the JBG funds’ assets for its own portfolio, said Matt Kelly, a JBG managing partner and the new REIT’s chief executive.
“[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, chairman of the real estate group at law firm Goodwin Procter, told PERE.
The deal has been approved by JBG’s limited partners and does not require Vornado’s shareholder approvals. At long last, JBG is emerging from its winding road to going public, but in doing so, is leaving the fund management business behind.