JBGS - JBG SMITH: 5G Sold Assets To Amazon And Undervalued REIT

2023-04-03 05:55:29 ET

Summary

• JBG SMITH is a Maryland REIT that owns and operates a portfolio of multi-family and commercial assets in the Washington, DC metropolitan area.
• Management expects payments for lease agreements until 2031. JBG expects to open new assets for lease in 2023 and 2024. As a result, I believe that the NAV may increase.
• I believe that the buildings that obtain 5G broadband communications will likely receive demand from buyers.
• JBG has good long-term growth potential considering its links with Amazon and other large clients.

JBG SMITH Properties ( JBGS ) appears to be betting strongly on leveraging 5G digital infrastructure, and recently sold assets to Amazon ( AMZN ). I do not believe that the market gave a correct price to the shares, which appear to trade very undervalued. Considering the new projects in Water Park and Dining in Park expected to open in 2023 and many new retailers opening in 2024, free cash flow will likely trend north. Even considering risks from the total amount of debt as well as development risks, in my view, JBGS is a must-follow stock.

Product Analysis

JBG SMITH is a Maryland REIT that owns and operates a portfolio of multi-family and commercial assets in the Washington, DC metropolitan area. Its strategy focuses on submarkets with high barriers to entry and vibrant urban services. The company is focused on innovation and leveraging 5G digital infrastructure to create smart, connected living and work spaces. I believe that the company is worth having a look because of its links with Amazon.

Amazon's new headquarters is located in National Landing. We currently have leases with Amazon totaling 1.0 million square feet across six office buildings in National Landing. We sold Amazon two of our National Landing development sites, Metropolitan Park and Pen Place. We are the developer, property manager and retail leasing agent for Amazon's new headquarters at National Landing. Source: Annual Report

The U.S. Government, Amazon, and many other large corporations use some of the assets owned by JBG. In my view, the company is offering something that many other competitors do not.

As of December 31, 2022, JBG SMITH controlled JBG SMITH LP and owned 88.3% of its OP Units. Its portfolio consists of 51 operating assets, and has 20 assets under development with an estimated potential development density of 12.5 million square feet. I believe that it is worth noting that management expects payments for lease agreements until 2031. The fact that many future payments will likely be executed is quite beneficial for the assessment of DCF models.

I also believe that the recent sale of $1.2 billion in assets at competitive valuations to Amazon and Fortress Investment will likely interest investors. I am optimistic because JBG successfully found buyers to reshape its balance sheet. The fact that the company can sign agreements with large groups means that its assets are quite unique.

Besides, JBG expects to open new assets for lease in 2023 and 2024. As a result, I believe that the NAV will increase, which will likely push the stock price north. In the last quarterly report, the company noted that projects in Broke ground on Water Park and Dining in Park are expected to open in the summer of 2023. Besides, many retailers will likely open around 2024.

Finally, in my view and that of management, there is a significant disconnection between the net asset value of the portfolio and the current trading price. Under my own DCF model, I also obtained a result that was significantly higher than the current stock price.

Lastly, with limited transaction volume, exact asset values are difficult to ascertain; nonetheless, we continue to believe that our stock is trading at a material discount to NAV. Source: Quarterly Report

Balance Sheet

JBG Smith reports a solid balance sheet with an asset/liability ratio larger than 2x, growing construction in progress, and some debt. I do not think that investors will likely be afraid of the total amount of debt as JBG reports long term contracts with large corporations and the Government.

Also, management easily finds sources of financing, so I do not believe that the financial situation looks complicated. In the last quarterly report, JGB reported $300 million in new financing at very good conditions considering the current credit environment.

In the last balance sheet, the company reported land and improvements of $1.302 billion and buildings and improvements of $4.310 billion. In total, net real estate stands at close to $4.823 billion combined with cash and cash equivalents of $241 million, restricted cash of $32 million, and tenant and other receivables of $56 million.

With deferred rent receivable worth $170 million and investments in unconsolidated real estate ventures worth $299 million, total assets are equal to $5.903 billion. JBG reports net assets of $3.2 billion, and the market capitalization stands at less than $2, which, in my view, indicates that the stock appears undervalued.

Among the liabilities, the company reported mortgage loans worth $1.890 billion, unsecured term loans of $547 million, accounts payable and accrued expenses worth $138 million, and total liabilities of $2.708 billion.

My Assumptions Include Successful Betting On The 5G Wave

In my view, if the company successfully continues to acquire and operate mixed-use urban properties in submarkets, and selects well-known clients like Amazon, stock demand will likely appear. I also believe that JBG may be able to finance its balance sheet at more competitive conditions, which may lower the cost of capital. I really expect that JBG makes more publicity about its ties with large tech companies.

I think that further investments in next-generation connectivity infrastructure and operating mixed-use assets will likely receive the attention of investors. With the global 5G Infrastructure market expected to grow at a CAGR of close to 36.94% in the coming years, I believe that the buildings that obtain 5G broadband communications will likely receive demand from buyers. In my view, JBG is clearly well positioned as management is signing agreements with large telecom groups.

The global 5G Infrastructure market is poised to grow at a CAGR of 36.94% from 2022 to 2030. Source: 5G Infrastructure Market Size US$ 98.57 Billion By 2030

In addition to other investments that we are making in the submarket, we believe this investment in CBRS spectrum and agreements with AT&T and Federated Wireless will allow us to control the process of attracting and partnering with best-in-class service providers, making National Landing among the first 5G-operable submarkets in the nation. Source: Annual Report

My DCF Model Resulted In A Valuation Of $20 Per Share

Under my assumptions, net income, capex, and D&A will likely increase. As a result, cash from operations will increase, and may do so the FCF.

My numbers include 2031 net income of $1002.2 million, share-based compensation expense of $48.5 million, depreciation and amortization expense of close to $225 million, deferred rent of close to -$45 million, and change because of gain on the sale of real estate of close to $-511.5 million.

I also assumed other non-cash items worth close to $32 million, tenant and other receivables of about $12.5 million, and changes because of other assets of -$12.5 million. With changes in accounts payable and accrued expenses of $138.5 million, the net cash provided by operating activities would be close to $885.5 million. Finally, with development costs and construction in progress close to $-237.5 million, the free cash flow would stand at around $650 million.

If we assume a WACC of 7.055% and an EV/FCF close to 12.5x, the implied enterprise value would be close to 4.5 billion. Besides, with cash and cash equivalents close to $241 million, mortgage loans of 1.890 billion, and unsecured term loans close to $547.5 million, the equity valuation would stand at 2.3 billion. The implied price would be around $20 per share.

Risks

There are several risks that, in my view, investors need to have in mind. First, there are risks from a decline in office demand, a possible recession in the Washington, DC metropolitan area, a decline in federal government spending, or exposure to the operations of Amazon. Under very detrimental conditions, these risk factors may lead to a decline in FCF expectations, which may bring stock price declines and volatility.

There are also risks associated with real estate development, investments in real estate partnerships, reliance on major commercial portfolio tenants, or the potential inconsistency between the actual density of the development pipeline and any development parcel and the estimated potential development density. In my view, if architects and financiers inside JBG fail to forecast the real value of real estate projects, the return on investment would be lower than expected. Management may also have to reduce the value of the portfolio, which would bring the book value per share down.

Finally, risks from the amount of indebtedness, the interest rate, and the possible inability to obtain capital to make investments would cause significant harm to JBG. If management cannot finance future projects at a beneficial interest, the WACC may increase, which will likely reduce the fair value of JBG.

Competitors

The commercial real estate market in which the company operates is highly competitive, and is in constant competition with other commercial real estate acquirers, developers, owners, and operators, including other REITs and private equity investors. These competitors may have greater financial resources or access to capital, which may limit the number of investment opportunities for JBG. Leasing competition is also strong, based on the terms of the lease, the location, the services provided, and the quality of the property to be leased. If competitors offer better lease terms, in better locations, or with higher-quality assets, the company may lose current and potential tenants, and may be pressured to lower rental rates to retain existing tenants.

Conclusion

JBG creates unique and vibrant places for renters and investors, and gives them a competitive edge in the commercial real estate market. While the company faces risks related to its asset portfolio and operating environment, its diversified business model and strong financial track record have helped it overcome challenges in the past. Overall, I believe that JBG has good long-term growth potential considering its links with Amazon and other large clients. New developments expected for 2023 and 2024 will also likely enhance future FCF generation, and may bring demand for the stock. In sum, I do believe that the stock is significantly undervalued, even considering the outstanding risks.

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