Matt Kelly - Finding A Smooth "Landing" Path for JBG Smith (#27)

Bio

Matt Kelly is the CEO of JBG SMITH and a member of the Board of Trustees. Prior to the formation of JBG SMITH, Matt served as a Managing Partner of the JBG Companies and a member of the firm’s Executive Committee and Investment Committee and was co-head of JBG’s Investments Group. Prior to joining the JBG Companies in 2004, he was a co-founder of ODAC Inc., a media software company, and worked in private equity and investment banking with Thomas H. Lee Partners in Boston and Goldman Sachs, & Co in New York.

Matt Kelly currently serves on the boards of various industry, civic and philanthropic organizations including the Urban Institute and the Smithsonian National Museum of Natural History. He is Chairman of the Board of the Medstar Washington Hospital Center and serves as an Executive in Residence of the Steers Center at the McDonough School of Business at Georgetown University.

He holds a Bachelor of Arts with honors from Dartmouth College and an Masters of Business Administration from Harvard Business School.

Show Notes

Current Role

Matt Kelly transition to being a public company CEO from a private company partner/leader (2:30)
Oversight and accountability of firm (3:30)
Day to day role making investment decisions has stayed pretty much the same (3:50)
Chief “Cheerleader” is shared among senior team and is now more focused with him during the pandemic (4:20)
Changes were significant (5:30)
- Private to public
- Increased size to 4X larger with assets
- Partnership structure to a REIT
- Combining two big teams
- Approvals?
- Physical location of people
- Integrate accounting & health care systems
- He had never worked for a public company so felt his biggest challenge was to give confidence to the team (6:30)
- Determining “who needed to be in the room” (7:00)
- Brought on a series of new people to help solve issues (7:15)
- Fortunate that almost all new people fit in well and worked out (7:45)
  - Had to rely on people to accommodate all the changes (8:10)
- Balance of leading with confidence without doing it before (8:50)

Personal Background & Education

Raised in the St. Louis area (9:55)
- Father was an Irish immigrant and went to medical school in Ireland, now a psychoanalyst
- Mother from Indiana
- Raised by parents that motivated him to move away (11:00)
Attended Dartmouth College (11:20)
- Quite an adjustment to live in the East and an outdoors environment (12:00)
- Spanish, Biology major initially (14:00)
- Dad told him that he should be “called” to medicine, which he realized he was not “called” (15:00)
  - Dad’s advice- “Study what you want to do and interest you” (15:50)
- Decided to become History major which was his passion (16:15)
- Friends turned him on to business (17:10)
- Interviewed with Goldman Sachs and other banks due to “fascination” with business and learn (18:00)

Matt Kelly’s Career Trajectory

Went to work for Goldman Sachs in NYC (18:30)
- Learned after two weeks he did not want to be an investment banker (19:10)
  - Story about a VP at Goldman who was going through chemotherapy with 3 kids at home and working “all hours” like him and couldn’t believe his priorities (19:25)
  - Realized that a job where you work hard you need to like his co-workers (21:00)
- Stayed two years at GS
Joined Thomas Lee Partners (Private Equity firm) (21:40)
- Moved to Boston doing corporate private equity (22:50)
- Continuation to steep learning curve at GS here at TLP (23:15)
- Met a wife of his boss who had an idea introduced him to new technology for media (23:30)
- Formed a new company to build a software platform bought by Encoda Systems (a company that TLP bought) (25:15)
- Founded during dot com bubble- 2000, but was in a good position there (27:30)
- Not a software guy and was CFO but didn’t understand their business, per se (28:40)
Decided to go to HBS after several years at large PE firms and made him feel “removed” from what he wanted to accomplish (26:30)
- Met Bill Poorvu– Professor who wrote “The Real Estate Game” turned him on to real estate and also introduced him to JBG Companies (29:15)
- Felt strong about the people and culture of JBG (30:20)
- His Dad told him to “solve for the people first” (31:10)
JBG Smith
- Only job where the promises made came true (31:45)
- Gave young people “room to run” so culture was inspiring to him. (33:15)
- “Share the pie would increase the pie”– Whole team gave them the opportunity to grow internally
- Mentors- Rob Stewart, Mike Glosserman, Ben Jacobs, Brian Coulter
- Leaders did not “horde” business and gave them responsibility (35:30)
- Third generation of leadership now (36:30)
- Fund business at JBG started with Ellen Shuman at Yale University (worked for David Swensen) whom Mike Glosserman knew from his research (37:30)
  - Alan Forman, on JBG Smith board, and runs “Real Asset” investments for Yale (37:45)
  - Look for “New Investment Managers” who are small and growing
- JBG Smith’s 3rd Fund where Yale made the largest investment
- Matt Kelly joined when the 4th Fund was open- Yale was the linchpin for the growth of JBG Smith’s fund business (39:00)
  - Importance of alignment (39:50)
  - Fairness was critical (40:10)
- Value partners like employees with a fair and transparent culture (41:00)

Amazon Deal

Amazon HQ2 Win (41:20)
- Original plan was that land in National Landing was a long term play until the Amazon deal (43:20)
- HQ2 accelerated the development potential substantially. (43:00)
- Literally doubling or even tripling the employment market that currently exists (44:10)
- Tax dollars brought in that will create the new improvements of infrastructure changes (44:50)
  - New Metro Entrance (45:00)
  - Lowering of US Rte. 1 to street level (45:20)
  - Walking bridge to Reagan National Airport
- Investors initially skeptical prior to the HQ2 deal, and now it makes it valid (45:55)
- Biggest challenge- Matt not a patient person by nature, but realized that this was a “massive undertaking” (4MM s.f.) and yet this deal took less time than a 200,000 s.f. lease (46:55)
  - “Speculation Station”- apprehension before the announcement of the HQ2 win (48:10)
  - Amazon not “conventional” and were never too clear on their plan (49:00)
  - Twenty “What if?” scenarios- Matt wanted people to plan to lose. (49:50)
  - Managing expectations (50:45)
  - Huge opportunity cost risk- Between $10-15MM of leases were at risk (51:50)
  - PBS example for relocation (53:50)

Pandemic Influence on Business

Pandemic impact on company (55:20)
- Leverage was lower in this crisis (55:50)
- Credit is abundant (56:20)
- Office values down- how does pandemic affect office demand? (56:45)
  - Executive committee of JBG Smith all want to work at the office 5 days a week (none at home) (57:20)
  - Miss camaraderie (58:15)
  - Take time to understand it such that investment activity will be stunted, as a result (58:50)
- Multifamily pricing will get even more aggressive, so that market will stay strong (59:00)
- Retail will be reshuffled a bit- nosedive accelerating (59:20)
- This recession will take a long time to recover- many years ahead (59:55)
- Real unemployment has not really happened yet (1:00:30)
- Pivoted away from hospitality (1:01:00)
  - Rationale based on non-alignment of interests between owners and operators of hotels
  - Hotel development can be subsidized which creates too much supply (1:02:30)
  - Need to have scale (1:03:00)

Current Business Issues and ESG Strategy

Quarterly Statement Questions
- Retail strategy is focused on retail as an amenity to other services (1:04:00)
  - Terrible time now
  - Work through the other side of the pandemic (1:04:30)
- Sold Office assets in CBD
- Migration from office into multifamily eventual as office sales continue and residential construction and acquisitions
- 2/3 of pipeline is National Landing for Amazon
- Amazon is 1/3 of all online sales
- Will Amazon be JBG Smith’s exit?
  - JBG Smith will do the right thing in the long run
  - Thrive on change
ESG Policy
- Themes get lumped together (1:09:00)
- Inclusiveness has to be everywhere (1:10:00)
  - Needs to reflect the labor force
  - Takes time- Plan years in advance
- Real Estate is a relationship business (1:11:30)
  - People are comfortable with who they are themselves
  - Need to overcome natural biases
  - Companies that are more conscious about diversity are more successful (1:12:30)
  - Plan is to reflect the labor force as a whole from the board on down (1:13:30)
- BLM Movement (1:14:50)
  - Awareness raised by Black executives sharing stories about relationships with policemen
  - Hope that it remains an important issue (1:16:00)
  - Needs to be discussed (1:16:45)

Inspirations & Impacts

People Who Inspire Matt Kelly (1:17:30)
- Ernest Shackleton– Managed to lead men out of chaos of a failed attempt to cross Antarctica (1:18:00)
  - Inspired by taking on risk and managing through it
- His mentors at JBG (Rob Stewart & Mike Glosserman) who taught him how to share partnership interests (1:19:15)
Biggest Win- Amazon deal was by far the biggest and had the most “eyes” on it (1:20:00)
Failures- Process of becoming a public company (1:21:00)
- Started to exercise with Vornado in 2013 and it failed after 18 months (1:21:15)
- Then attempted to do it themselves (1:21:45)
- Tried once again to merge with another company and failed (1:22:10)
- Believed a public company made sense for an ongoing strategy (1:22:30)
Vornado deal came back and they then executed (1:23:00)
- 6 weeks after Vornado merger the Amazon deal arose
- Learned a lot about the team (1:25:40)
Amazon team told Matt Kelly that they chose this market due to its impressive opportunities for employment
- Doing the deal with one development partner was ideal for Amazon
- Arlington County facilitated quite a bit
Billboard question- “Be Kind to One Another” (1:29:20)

Postscript

Tom Amos joins again for his commentary with me.
Matt Kelly took the time to be present and never felt rushed. Tom was inspired by Matt Kelly’s presence (1:32:00)
Tom Amos discusses the Amazon deal and compares Atlanta’s perspective with the DC region’s perspective (1:33:00)
Incentive package for Amazon-
- 25,000 jobs
- $23MM incentive from transient occupancy tax
- Virginia Tech- new campus
- Funding for infrastructure (US. Rte. 1)
Recitation of Bob Smith’s original acquisition to create Crystal City (1:36:00)
John Coe’s career (1:37:00)