Vornado to Spin Off DC Portfolio in $8.4B Merger with JBG

By Gail Kalinoski

Atlantic Plumbing, a mixed-use property under construction by The JBG Cos. in Washington, D.C.

Washington—Calling it a “key milestone” in its value creation strategy, Vornado Realty Trust is spinning off its Washington, D.C.-area portfolio and merging it with The JBG Cos. in what will be a regional commercial real estate “powerhouse” worth $8.4 billion.

In the tax-free spin-off, Vornado will merge the business known as Vornado/Charles E. Smith with the operating company and certain assets of JBG, a leading Washington, D.C., real estate company that controls more than 22 million square feet of urban-infill commercial and multifamily properties and a valuable land bank for future development. The combined company will be named JBG Smith Properties and will the largest, market-leading, best-in-class, pure-play Washington, D.C., real estate company with 79 assets, including 50 office properties totaling about 11.8 million square feet. It will also own 18 multifamily properties with 4,451 residential units and 11 other properties in some of the region’s top submarkets including Crystal City, Pentagon City, the Rosslyn-Ballston Corridor, all in Virginia, and Bethesda, Md.

Vornado Chairman & CEO Steven Roth noted that the company had been looking to streamline for several years and felt the best strategy was to separate the New York assets from the Washington, D.C., properties. But it also did not want to sell the D.C. portfolio, which has been struggling in recent years because of federal cutbacks in office leasing, “at the bottom.” During the company’s third-quarter earnings conference call Tuesday with analysts, Roth called the tax-free spin-off “the perfect solution.”

When the transaction is completed in the second quarter of 2017, Vornado will be split among three separate REITs – Vornado, which will have the New York City office and retail assets along with the 1.8 million-square-foot office building 555 California St. in San Francisco and the 3.7 million-square-foot theMart in Chicago; Urban Edge Properties, a shopping center spin-off; and JBG Smith.

“This is a great deal for Vornado and its shareholders,” Roth said during the analyst conference call. “It was very carefully constructed. It is transformative and it accomplishes many of our most important goals.”

Following the spin-off, 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 and about 3.1 million square feet of high street retail in 72 properties along with the San Francisco and Chicago properties.

“The main event for us is our flagship New York business, which is more than four times the size of Washington,” Roth told the analysts. “Separating Washington from New York will daylight New York’s treasure trove of assets and superior financial performance.”

But he made sure to promote the new combined company noting, “JBG Smith will be the market-leading powerhouse with an unrivaled portfolio and substantial growth opportunities.”

In addition to its strong Class A portfolio of office, multifamily and mixed-use properties, JBG has a pipeline of projects under construction and land for future development that could add another 20 million square feet to JBG Smith.

Matt Kelly, JBG managing partner who will become the JBG Smith CEO, said his company has become “trendsetters” in the market by creating mixed-use projects with amenities that are attractive to tenants.

“Since 2000 we have acquired over 19 million square feet and have developed almost 18 million square feet across all product types,” Kelly said during the conference call. “JBG Smith will be the largest player in our market with some of the best existing assets and a market-leading development pipeline.”

He said JBG, which has been in business for over 50 years, has a track record in delivering mixed-use value creation. Kelly said it would be particularly helpful to revitalize the Crystal City submarket, where Vornado has seen occupancy drop at its office properties due to government cutbacks.

Before agreeing to the deal with Vornado, JBG had been in talks in May to merge with New York REIT, Inc., which would have created one of the largest U.S. REITs owning premier office and mixed-use properties in infill locations in New York and Washington, D.C., but that deal fell through after resistance from New York REIT shareholders. The Vornado/JBG merger would not need shareholder approval.

The deal calls for Vornado shareholders to own approximately 74 percent of the combined company. JBG limited partners are expected to own approximately 20 percent and JBG management would own about 6 percent.

JBG Smith will be led by JBG’s senior management, which has a strong track record of execution through numerous cycles in the Washington, D.C., market. The combined company will manage the JBG funds’ assets that are not part of the merger.

Roth will be chairman of the Board of Trustees that will have 12 members – each company will designate six members. Joining Kelly on the board from JBG will be Managing Partner Rob Stewart, who will become executive vice chairman of the board, and Managing Partner Michael Glosserman. Mitchell Schear, current president of Vornado/Charles E. Smith, will also be on the board.

From JBG, David Paul will be president & COO; James Iker will be CIO; and Brian Coulter and Kai Reynolds will be co-chief development officers.

From Vornado/Charles E. Smith, Schear will also be a member of the Executive Committee; Patrick Tyrrell will be chief administrative officer; Jim Creedon will be executive vice president responsible for office leasing; and Laurie Kramer will be executive vice president and focus on integrating the teams.

Advising Vornado on the deal are Goldman, Sachs & Co. and Morgan Stanley & Co., along with Sullivan & Cromwell LLP and Roberts and Holland law firms. BofA Merrill Lynch is financial advisor and Hogan Lovells US LLP the legal advisor to JBG.