JBG SMITH: Upside Hinges On Multifamily Development, Fed Rate Cuts

Core Viewpoint - JBG SMITH Properties has underperformed the Vanguard Real Estate Index Fund ETF in 2024, with a loss of nearly 6% compared to a 2% return in the benchmark ETF, but is expected to outperform due to a focus on multifamily properties and potential benefits from Fed rate cuts [2] Company Overview - JBG SMITH Properties is an office REIT with significant multifamily exposure, primarily in the DC metro area, where the commercial portfolio contributes 55% of adjusted net operating income (NOI) and the multifamily portfolio contributes 45% [3] - The commercial portfolio has a heavy reliance on government tenants, accounting for 25.6% of annualized rent, and government contractors at 25.5% [3] - A major multifamily development project is set to be completed by Q3 2025, with $667 million already invested and an expected 5.8% NOI yield [3] Operational Overview - The company reported a Core FFO of $0.18/share in Q2 2024, a 50% year-over-year decline, attributed to lower occupancy in the commercial portfolio (80.6%, down 3.4% Y/Y) and increased interest expenses [4] - Occupancy in the multifamily portfolio improved to 94.3%, up 0.6% Y/Y, while annualized NOI for the stable portfolio was $284 million, down 3% Y/Y [4] Capital Structure - As of Q2 2024, JBG SMITH had a net debt of $2.52 billion, representing 61% of the company's $4.13 billion enterprise value, which is high given the NOI performance but positions the company to benefit from anticipated Fed rate cuts [5] - The weighted average interest rate was 4.88%, with 29% of the debt at a floating rate and 71% fixed [5] Market-implied Cap Rate - The market-implied cap rate is calculated at 7.94% based on an annualized NOI of $284 million and an incremental contribution of $44 million from the development portfolio, which will lower to 7.75% after accounting for additional investments [6] Valuation - Adjusting for the incremental earnings from the development project, the run-rate core FFO could reach approximately $0.28/share, leading to an annualized core FFO of $1.12/share, which would be reasonable if the commercial portfolio stabilizes [7] - Post-completion of the multifamily project, the commercial portfolio's share of NOI is expected to decrease to 49%, while multifamily will account for 51% [7] Conclusion - Despite poor operating results in Q2 2024, JBG SMITH is positioned to benefit from upcoming Fed rate cuts, with a significant portion of its enterprise value funded by debt, and the multifamily portfolio's importance is set to increase as new projects are finalized [10]