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Vornado to spin off its Washington unit in US$8.4b deal

Tuesday, November 1, 2016 - 11:02

[NEW YORK] Vornado Realty Trust said it agreed to spin off its Washington real estate and merge the unit with certain assets of JBG Cos, a development firm based in the area, in a transaction valued at US$8.4 billion.

The combined company, which would be publicly traded, would be the biggest landlord focused on Washington-area real estate, New York-based Vornado said in a statement Monday. It will be known as JBG Smith Properties, combining JBG's name with that of Vornado/Charles A. Smith, as Vornado's Washington-area unit is known.

For Vornado, the transaction would cap a multiyear effort to simplify its operations by selling off businesses it considered outside its core mission of owning New York office and retail properties. The real estate investment trust previously sold shares of the retail chain JC Penney & Co and its stake in distressed commercial mortgage manager LNR Property LLC, and spun off its strip malls into a separate REIT.

"In addition to our irreplaceable portfolio in New York City, Vornado has a fortress balance sheet, significant dividend growth potential driven by recently signed leases, and a unique value-creation opportunity" in its properties around Manhattan's Penn Station commuter hub, Chief Executive Officer Steven Roth said in the statement. He will be chairman of JBG Smith, which he said "will be the market-leading Washington, D.C., powerhouse." Vornado shareholders would own about 74 per cent of the combined company, with JBG limited partners controlling about 20 per cent and JBG management owning 6 per cent, according to the statement. W Matt Kelly, a managing partner of JBG Cos, will be CEO and a member of the board.

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Upon the deal's completion, expected in the second quarter, the company will have 50 office properties with a combined 11.8 million square feet (1.1 million square meters), 18 multifamily properties with 4,451 units, plus 11 other properties totaling about 700,000 square feet, according to the statement. The buildings are spread throughout the Washington metropolitan area, including downtown, Crystal City, Pentagon City, the Rosslyn-Ballston corridor in northern Virginia, and Bethesda, Maryland.

JBG Smith would also have projects under construction and planned for development that could add more than 20 million square feet to its holdings. It would become the US government's biggest landlord, according to the statement.

Vornado had been considering a spinoff of its Washington assets since at least early last year. The REIT's Washington-area offices have been hurt by departures of US Department of Defense tenants under an initiative to move operations onto military bases.

The company's northern Virginia Skyline portfolio and a property called the Fashion Centre are not included in the transaction, according to an investor presentation accompanying the statement. Vornado has struggled to refill the Skyline properties as defense-related operations have moved out.

JBG, based in Chevy Chase, Maryland, ended a merger agreement with New York REIT Inc. in August that would have created a publicly traded landlord with holdings in New York and the Washington area. Dissident shareholders of New York REIT opposed that deal, leaving the company to instead sell individual properties and return proceeds to its investors.

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