JUL 19, 2017 @12:50 PM
On July 17, 2017, Vornado Realty Trust (NYSE: VNO, $77.59, Market Capitalization: $14.7 billion) completed the tax-free spin-off of JBG SMITH Properties (NYSE: JBGS, $37.24, Market Capitalization: $3.5 billion) and both stocks started regular way trading on July 18, 2017. Vornado opened the day at $78.45 per share, achieved intra-day high of $79.33 per share and closed 1% lower at $77.59 per share from previous close. On the other hand, JBG SMITH opened at $36.59 per share, recovered from intraday low of $35.48 per share and closed the day at an intra-day high of $37.24 per share. Post spin-merger, JBGS became the largest, market-leading, pure-play Washington, DC real estate company and lead by JBG’s senior management team. On the other hand, Vornado now operates New York-centric office and high street retail REIT that own 17.1 million sq ft of Class A Manhattan office properties in the best submarkets, encompassing 2.9 million sq ft in 70 properties on the best streets.
On January 24, 2017, JBG SMITH Properties fi led an initial Form-10 with SEC followed by latest amended on June 27, 2017. On July 17, 2017, Vornado completed the tax-free spin-off of JBG SMITH. On July 18, 2017, both the stocks started regular-way trading on NYSE under the tickers VNO and JBGS, respectively. The spin-off ratio was 1:2, implying that VNO shareholders received one JBG SMITH share for every two VNO shares held as of the record date July 7, 2017. Vornado shareholders own ~73% of the combined company, while JBG Limited Partners own ~21% and JBG management is expected to own ~6%. Previously, on July 6, 2017, Vornado and JBG SMITH commenced when-issued trading under the ticker VNO-W and JBGS-W, respectively, on the NYSE.
Post spin-off, JBGS replaced Chico’s FAS, Inc. in S&P MidCap 400 Index, while VNO continues to be part of S&P 500 Index.
We raise our target price to $75.00 per share (previously $71.00) on VNO (Stub), refl ecting a 3% downside from current levels and retain our Hold rating on the stock, given continued weakness in local retail market and low rental spreads. Despite concerns over execution as a stand-alone company, we remain bullish given its strong fundamentals. We raise our target price on JBGS to $48.00 per share (previously $39.00) to mirror the lower share count and reiterate our Buy rating on the stock.
Investment Thesis
Over the past few years Vornado has exited from multiple non-core assets to transform from a diversifi ed REIT to a New York focused offi ce and retail REIT. The JBG SMITH spin-off is the culmination of this strategy. We believe the transaction will enable management of both the companies to focus on their respective geographies and will help them gain operating efficiency through lower management costs and will boost the tenant base by making the portfolio properties more desirable. Vornado’s assets have high barrier to entry locations which makes them more compelling and premium rental properties.Being the largest publicly held REIT in the US, Vornado is a trusted real estate operator in the marketplace to lease, acquire, develop, finance and manage million square foot properties. Post the spin-off, the company has simplified portfolio that will derive development of strategic assets and redevelopment of existing properties to extract value for investors. The recent shift in demand for products, new constructions and high quality assets bode well for VNO’s portfolio. However high pricing for retail assets has resulted in a slowdown in the retail space demand and the turn-around time for deals has increased. Another key aspect to remain watchful about is the rental spreads which have been lagging expectations across its office and retail assets for a couple of quarters and would slowdown rental growth in the future.
JBG SMITH’s property portfolio should remain well supported from the ongoing upturn in economic activities in the region. The company’s high quality real-estate portfolio would be the most attractive metro-served, urbaninfill submarkets which are expected to create significant tenant demand. The company’s multifamily focused future development pipeline is expected to balance the office and multifamily concentration in the portfolio. We are encouraged by the recent leasing activities in DC region and expect a steady market; however we remain concerned about weak mark-to-market conditions. Another key aspect to remain observant is the company’s premium asking rent may come under pressure from recent surge in supply. Nonetheless, the company will have a well-capitalized balance sheet and access to a broad range of funding sources which will allow them to fund significant growth opportunities while maintaining prudent leverage levels with significant liquidity.
Valuation
We value VNO (Stub) based on our estimates of 2017E adjusted EBITDA and sales. Although positioning in the most liquid real estate market and recently signed leases are expected to benefit in the short-term, fundamental weakness in retail segment and concerns around rental spread are expected to moderate the AFFO growth in future. We value the company using a blended EV/Adjusted EBITDA 2017E of 18.0x and EV/Sales 2017E of 11.0x, which are at a premium to its peer median, given VNO’s attractive portfolio commanding premium rentals and presence in high-barrier locations. We believe VNO (Stub) is reasonably valued at current levels.
We value JBG SMITH (JBGS) using a blended EV/EBITDA 2017E of 20.0x and EV/Sales 2017E of ~12.0x, in line with the peer group median multiples. We turn a bit cautious over JBGS’ ability to deliver results on a stand-alone basis and hence, lower our 2017E sales and EBITDA. Despite being more conservative, JBGS’ valuation jumps to $48.00 per share (previously $39.00) to adjust for the reduction in the share count. JBGS has a high-quality real estate portfolio, prime locations with 98% of the portfolio assets being metro served and near-full occupancy for its assets and we continue to be bullish on the stock.
JBGS has joined S&P MidCap 400 Index after successful completion of its spin-off from VNO, which could lead to near-term selling pressure.
Company Description
Vornado Realty Trust (Parent)
Vornado Realty Trust (VNO) is a fully integrated, publicly owned Real Estate Investment Trust. The firm owns, manages and leases real estate assets in across local markets in the US. It conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P., a Delaware limited partnership (the “Operating Partnership”). The company operates in business segments: New York, Washington, DC and Other. The company’s other investment included The Mart, 555 California Street and Vornado Capital Partners Real Estate Fund. VNO is the general partner and investment manager of Vornado Capital Partners Real Estate Fund.
JBG SMITH Properties (Spin-Off)
JBG SMITH Properties (JBGS) is the largest, market-leading, best-in-class, pure-play Washington, DC real estate company. It is specialized in high-quality, mixed-use (office, multifamily and retail) assets in urban infill locations. The company holds, directly or indirectly; 68 operating assets totaling ~20.2 million square feet which comprised of 50 office properties aggregating over 14.1 million square feet, 14 multifamily properties with 6,016 units and 4 other properties aggregating over 0.8 million square feet. It also holds eight office and multifamily assets under construction totaling over 1.6 million square feet, five near-term development office and multifamily assets of more than 1.3 million square feet and 44 future development assets totaling over 22.1 million square feet.
