Veris Residential, Inc. Q1 FY2023 Earnings Call

Good morning, and welcome to Veris Residential Inc.'s First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would like to turn the conference over to Taryn Fielder. Please go ahead.

Good morning, everyone, and welcome to the Veris Residential First Quarter 2023 Earnings Conference Call. I would like to remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to the company's press release and the annual and quarterly reports filed with the SEC for risk factors that impact the company. With that, I would like to hand the call over to Mahbod Nia, Veris Residential's Chief Executive Officer. Mahbod?

Good morning, and welcome to our first quarter 2023 earnings call. I'm joined today by our CFO, Amanda Lombard. We had a positive start to 2023, underpinned by continued strength in the performance of our multifamily portfolio and momentum in our strategic transformation. We closed on the sale of Harborside 1, 2, 3 despite an extremely challenging transaction market, particularly for office. Closing the Harborside 1, 2, 3 transaction represents a significant milestone in the company's continued evolution and concludes over $2 billion of non-strategic asset sales since the beginning of 2021, which, combined with the successful development and stabilization of four new multifamily buildings and one acquisition during this period, have transformed Veris Residential from primarily an office company to a pure-play multifamily company with 99% of our NOI being derived from Class A multifamily properties. As of March 31, our 7,681-unit multifamily portfolio, which now includes Haus25 and Same Store 6,691-unit multifamily portfolio, were 95.9% and 96% occupied, respectively. Following a seasonally slower start to the year, we've seen demand accelerating ahead of what we anticipate will be another busy leasing season. The Same Store portfolio achieved a blended net rental growth rate of almost 11% during the first quarter, moderating as expected, but remaining extremely robust. In particular, our Jersey City and Port Imperial assets, which represent approximately 72% of the portfolio, continued to outperform with a 13% blended net rental growth rate achieved in the first quarter. Despite the strong rental growth, Class A rents in these submarkets remain approximately 40% below average comparable Manhattan rents. The broader North Jersey region has become one of the best performing multifamily markets in the country over the last year, driven by robust demand, combined with extremely limited new supply, which only accounted for 0.3% of total inventory at the beginning of the year. This sustained revenue growth, coupled with stable controllable expenses compared to the first quarter of 2022, contributed to a 16% growth in Same Store NOI. Since the beginning of the year, we've closed on over $500 million of non-strategic asset sales, releasing approximately $380 million of net proceeds and providing substantial liquidity as we enter the final phase of the company's transformation. In February, we completed our previously announced sale of the Port Imperial hotels for $97 million, marking our exit from the hotel segment. As previously referenced, earlier this month, we completed the sale of Harborside 1, 2, 3 for $420 million. Navigating these complex dispositions amidst ongoing market volatility is a true testament to the strength and unwavering commitment of the Veris Residential team. I'm extremely proud of their hard work and grateful for their tireless efforts in support of our strategic initiatives. Following the sale of Harborside 1, 2, 3, the company exercised its right to call Rockpoint's preferred interest in the multifamily residential portfolio on April 5. The following day, as anticipated, Rockpoint exercised its right to the furthest purchase for one year. At this time, the company anticipates that such purchase is likely to close late in the second quarter of 2024. Turning to ESG. We continue to execute strategic initiatives at both the corporate and property level, consistent with our ongoing efforts to be a more responsible, sustainable, and inclusive multifamily company. We look forward to sharing this progress in our 2022 ESG report, which will be released later this quarter. As we enter the final phase of our transformation, our focus will be on concluding the few remaining non-strategic asset sales, repaying Rockpoint's preferred equity interest, and continuing to work with our Board to maximize and unlock the company's intrinsic value on behalf of our shareholders. With that, I'm going to hand it over to Amanda, who will update you on our financial performance during the quarter.

Thanks, Mahbod. For the first quarter of 2023, net loss available to common shareholders was $0.27 per fully diluted share versus $0.13 per fully diluted share in the first quarter of last year. Before we get into discussing additional details for the quarter, I want to call out that our income statement shows significant variances from the income statement presented in the fourth quarter. This is the result of an accounting reclassification. Harborside 1, 2, and 3, 101 Hudson, and 111 River as well as the hotels have been reclassified into discontinued operations for all periods presented. This reclassification was triggered by the sale of Harborside 1, 2, and 3 and further simplifies our financial statement. As Mahbod highlighted, with multifamily now making up 99% of NOI, the reclassification of our historical and current financial statements allows for greater ease of comparability. In particular, I'd like to call out the year-over-year growth in first quarter GAAP revenue of $19 million or nearly 50% from just a year ago. This increase has been driven primarily by organic factors such as portfolio rental growth, the stabilization of Haus25 and other newly developed assets as well as the acquisition of The James. This substantial growth is a testament to our operating platform, the quality of our assets, and the strength and dedication of our team. Core FFO was $0.15 for the first quarter as compared to $0.05 in the fourth quarter. Core FFO was up quarter-over-quarter due to a variety of factors, including improved multifamily NOI, a reduction in D&A and an increase in other income. We also have benefited from a reduction in interest expense due to lower average balances on the credit facility, plus the benefit of the cap on Haus25 and 145 Front Street. In February, we announced that Haus25 reached stabilized occupancy, and while we currently expect limited concessions being offered for renewals, concessions granted in the lease-up will continue to burn off through straight-line rent during the remainder of 2023. Same Store NOI was up almost 16% as compared to the first quarter of last year due to increased in-place rents across the portfolio, while sequential Same Store NOI increased by 8%, driven by higher rents and lower real estate taxes as a result of the one-time catch-up we realized in the fourth quarter. Turning to costs. Controllable and non-controllable property expenses improved in large part due to seasonal adjustments as well as, to a lesser extent, the timing of certain activities and our continued efforts to optimize operations. As for our general and administrative costs, after adjustments for one-time severance and certain stock compensation-related adjustments, core G&A was $9.2 million for the first quarter. We anticipate full year cost savings through 2023 and beyond as we work to further enhance operations and optimize our cost structure through our ongoing initiatives. On to our balance sheet. The $360 million received from the sale of Harborside 1, 2, and 3 is held on deposit in anticipation of the repayment of Rockpoint's preferred interest, earning interest at a rate of approximately 4.5%. This will be reported as interest and other investment income on the income statement in the second quarter. We ended the quarter with net debt to EBITDA of 10.3x, down from 18.8x in Q1 of last year, representing an improvement of approximately 8.5 turns or 45%, demonstrating a dramatic improvement in our leverage profile during a relatively short period of time. Our debt-to-undepreciated-assets ratio also remained stable during the quarter. While we anticipate continued variability in earnings as we seek to conclude our transformation, we remain confident that the downward trend in leverage is sustainable. As we look towards the future and our upcoming maturities, we have only one outstanding maturity this year, which is the $59 million mortgage on one of our stabilized Boston properties. Our debt portfolio remains well positioned with 97% of our total debt fixed and/or hedged with a weighted average maturity of 3.8 years and a weighted average interest rate of 4.4%. Harborside 1, 2, and 3 contributed approximately $7 million of core FFO in the first quarter. However, due to a number of one-time items, the run rate is closer to $6 million a quarter. We've previously noted that one of the benefits of the transition from an office-focused portfolio to a pure-play multifamily portfolio was a smoother, more predictable income profile with less onerous CapEx requirement, in particular, given our young vintage, average age of six years, high-quality portfolio. You can see this starting to take shape through our Q1 results in which AFFO, which has been historically lower than core FFO for us, converged with core FFO at $14.9 million. This compares to the first quarter of 2022, where AFFO was almost $9 million lower than core FFO. We would like to reaffirm our Same Store NOI guidance range of 4% to 6%. While our first quarter results were exceptional and exceeded this range, we are only one-third of the way into the year, and we believe it is prudent to maintain guidance at the current range given the broader economic uncertainty. We will continue to monitor our portfolio and consider revising guidance should we believe it is warranted. In conclusion, we are pleased to report another positive quarter in which we saw continued strength in rental growth, further optimization of our property and corporate level expense structure, and a substantial year-over-year reduction in our net debt to EBITDA. With that, we are ready to open the line for questions.

We'll now begin the question-and-answer session. The first question comes from an analyst with Evercore ISI. Please go ahead.

Hey, good morning. I'm wondering if you can just talk a little bit about the conservatism you guys have baked into that 4% to 6% NOI in revenue growth per year? I know you just touched on it, but it was such a strong start in the first quarter. I'm just trying to put the pieces together on how to get to that 4% to 6% range. And just kind of what your assumptions are, especially in the back half of the year for kind of where the economy is, assuming you guys keep that 4% to 6% range? Thanks.

Good morning. Thank you for the question. Look, I think the 4% to 6% is obviously a full year figure. The fact that we've maintained guidance this quarter comes down to a couple of factors. We're only four months into the year and there are considerable potential economic headwinds and certainly uncertainty ahead. So, it's really acknowledging that. And then on the expense side, there's a degree of uncertainty as well, particularly on the non-controllable expenses, where we typically see the effects of those come through in the second half of the year. It's been a very strong start to the year. We did seek to somewhat temper expectations, and we expect rental growth to normalize to a more long-term sustainable level. We still feel that will happen, but the reality is given the strength in the New York Metro area and the very limited supply in our markets, coupled with extremely high demand for our high-quality properties, we're seeing that blended rental growth still holds up at a very robust level at this time. So, it feels a little bit early in the year. We will revisit it again next quarter. Based on the first quarter, it is very conceivable that we could be on the upper end of that range, but there's a long way to go.

Great, thanks for the information. I have one more quick question. I'm interested in the interest levels for Harborside 5 and 6, as well as 23 Main Street. Since Rockpoint has chosen to defer for a year, does that affect your timeline for selling these assets? Any comments on that would be appreciated. Thank you.

Well, look, we continue to explore our options for divesting the remaining non-strategic office assets and potentially some further rationalization of the land as well. And I think that is largely independent from the Rockpoint redemption timeline. So, we'll apply the same approach that we have done historically. We'll divest those in a thoughtful manner, seeking to maximize value, but ultimately with pragmatism in order to conclude the final phase of the transformation.

Great. Thanks. That's all for me.

Thank you.

The next question comes from Tom Catherwood with BTIG. Please go ahead.

Thank you, and good morning, everybody. Maybe sticking with Rockpoint here in a two-part question. First is, what is their kind of total return holding on for another year? Is it just a 6% dividend or is it the full 11% with the PIK? Then are you still in discussions with them? Is there still engagement or is it the kind of thing where it's like, 'Come back to us in a year, and we'll get to closing?'

Good morning, Tom. Thanks for the question, it's a very relevant one. First part of that question, the only return that is guaranteed to Rockpoint during this time period is the 6%. The balance, there will be a revaluation done and a recalculation of the redemption value accordingly in 12 months' time. So, the 6% is the only guaranteed part of that. As for the second part of your question, your assumption should be that as any prudent management team would, we will seek ways to see if there is some sort of a negotiated settlement that can happen prior to the timeline dictated in the joint venture framework, but there are no guarantees that we'll reach agreement, in which case, we are bound by the terms of that joint venture agreement.

Got it. Appreciate that, Mahbod. Then on the blended net rental growth rates, you have almost 11% for the quarter. What was the breakdown for that, sorry, if you mentioned it earlier, I just didn't hear it, between new leases that went out versus renewal leases?

It was pretty even actually, Tom. It was both right around 11%.

Got it. And then commercial assets, just some cleanup questions on those. First off, do they sit within that resi JV as well? And then, kind of what is the plan for those longer term? Do you end up holding those because they end up being complementary to the surrounding residential assets? Or could those be things that you look at as non-core longer term as well?

Yes. I assume you mean the retail and garage income, which, yes, does fit in there and is complementary to that side of the business. So there are no plans to extract that from the joint venture at this time.

Got it. And then just one last quick one for me if I can. With the kind of gains that I assume are going to be coming in on the Harborside sale and some of the other sales that you've had, are you getting close to the point in time when you're going to trigger the need to reinstitute the dividend just to meet REIT requirements?

Well, based on our projections for this year, we don't anticipate that being a mandatory dividend that would be required at this point.

Got it. That's it from me. Thanks, everyone.

Next question comes from Joshua Dennerlein with Bank of America. Please go ahead.

Hey, guys. Just kind of wanted to discuss your strategy after Rockpoint. It seemed like it was a big catalyst. I know it got delayed a year, but what's the focus afterwards? Is it pay down the debt, grow the portfolio, maybe clean up some of the land that was encumbered by that? Just kind of curious where your head's at.

Good morning. Ultimately, that question is for the Board and the Strategic Review Committee to address when the time comes, considering the company's publicly traded value at that point. I can assure you that our Board and Strategic Review Committee are very aware of their fiduciary responsibilities and are dedicated to maximizing value for shareholders. We have previously communicated that as we complete the transformation, which includes the repayment of Rockpoint and simplifying our capital structure, the Board plans to initiate a more formal strategic review process. This process will help identify potential opportunities to unlock the significant value created for our shareholders. This stance remains unchanged. We are making progress toward that goal with the sale of Harborside 1, 2, and 3, but there's still work to be done. Until we repay Rockpoint, our management team's focus will continue to be on maximizing the entity's value by executing our strategic plan.

Okay. Looking ahead to 2024, with the Haus25 debt coming due, I'm curious about your thoughts on leveraging any debt on that asset.

Yes, the current plan is to refinance it. It's obviously an extremely high-quality property, very well leased and performing extremely well on the income side. So if there's still a good bid for refinancing that asset, your assumption should be that we would seek to refinance it.

Thank you.

Thank you.

Next question comes from Eric Wolfe with Citi. Please go ahead.

Hey, thanks for taking my questions. I guess just a follow-up on the Rockpoint redemption. I guess at this point, do you have a sense for what value Rockpoint would accept for them to redeem early? And I guess before they extended their option to go to May 2024, did they give you a number that would have allowed you to redeem right away?

Good morning. I'm not really in a position to be able to disclose any details of private discussions that may or may not be happening with them. As I said earlier, you should assume that we have and will seek to find some sort of a negotiated settlement that could happen sooner than the framework that is dictated in the joint venture agreement, but there are no guarantees that that will happen in which case we are bound by the timeline that is dictated in that joint venture agreement.

Understood. And then you broke out on your NAV page, Harborside 5 and 6, $23 million. It looks like you put it at book value. I guess, should we take from that that this is a reasonably conservative estimate of where the assets would transact, or is that just sort of a placeholder at book value for now?

I would think of it more as just a placeholder. It's not really intended to be a guide on value. We will, obviously, as we have done with the $2 billion of office that we've sold over the last two years seek to maximize proceeds from the sale of those office buildings, but that's really just intended to be a placeholder of where book value is. So it's not an indication of value.

Got it. And then I guess last question. We've heard from some of your peers, how strong the New York market has been, surprisingly so through the first quarter. Just curious what you're seeing in terms of market rents and where loss to lease in the portfolio has gone?

Yes, I think that's absolutely right. We do, as I mentioned in my scripted remarks as well, having younger vintage, very high-quality, very well-sized properties right across the river from Manhattan at a still 40% average discount to rent on that side of the river and very limited supply is what's really fueling the rental growth that you're seeing. And that is, at this point, still holding up and it remains pretty robust.

Got it. But I guess is there a way to quantify how much upside there would be if you were just marketing rents to market today?

Yes, we are addressing the loss to lease in our portfolio at a quick pace, as indicated by the vendors' net rental growth. Currently, we are experiencing a loss to lease in the range of 1% to 2%. Market rents continue to rise beyond that. Therefore, we are reaffirming our guidance of 4% to 6% revenue growth for the year, which also implies a 4% to 6% NOI growth. Based on our first quarter performance, it seems likely that we could finish the year at the higher end of that range, or possibly even exceed it. However, we are only four months into the year, so there is still a long way to go.

Understood. Thanks for your time.

Thank you.

Next question comes from Derek Johnston with Deutsche Bank. Please go ahead.

Good morning, everyone. Mahbod, could you tell us if leasing demand for the multifamily portfolio has remained strong in the second quarter? Are you observing any shifts in demand at this point, or has the strength we saw in the first quarter carried through to the year-to-date in the second quarter?

Good morning. That's a good question. The strength has continued. So we are still seeing blended net rental growth rates of double digits. And so the comments I made around the demand for the assets and the extremely limited supply now and then for the foreseeable future is still allowing us to be able to push rents at pretty compelling levels.

Okay, thanks. I mean, a lot has been asked already, but just please remind me, I know it's in the soft, but Harborside 5, 6, 23 Main Street, these are relatively unencumbered assets, correct?

That's correct. There's no leverage on those assets.

When I examine the cash position, which stands at $393 million, and considering the net debt-to-EBITDA ratio of 10.3x, I believe a significant portion of that cash will need to be set aside in escrow for Rockpoint, assuming I'm correct. Additionally, you've terminated your existing credit facilities, which may lead to a fairly low cash balance by next year. I assume you have a high level of confidence regarding the disposition of 5, 6, and 23 Main, which could potentially enhance your cash position, apart from generating free cash flow. Where do you see potential weaknesses in that outlook? Where do you concur? What is your cash outlook? Lastly, regarding the net debt to EBITDA of 10.3x, what is your target for the end of the year? Apologies for the complex question.

Well, I think the first point to make is that the business now, having 99% of its NOI generated from multifamily and that business performing extremely well, allows us to be able to actually generate a certain level of recurring cash flow from the business, which we've had a lot of volatility, understandably, given the transformation over the past couple of years, and that hasn't come to an end. But I think we are at a point where we have more visibility than we have done for some time on just the cash flow generation from the business. Beyond that, as you correctly said, we still have a substantial amount of equity that is tied up in the remaining non-strategic office assets, not to mention still a substantial land bank that could potentially be rationalized to some further degree to unlock valuable equity that could be put to a higher and better use. And thirdly, we being now, say, a much more desirable, from a credit perspective, company to lend to, you should assume, I feel confident that beyond the cash flow from operations, beyond cash released from non-strategic asset sales and potentially further rationalization of the bank, we feel confident in our ability to be able to source third-party finance to the extent required as well to plug any potential holes in liquidity needs over the next year or two.

Thank you for that detailed answer. And that's it for me.

Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, everyone, for joining us today. We're pleased to report another very positive quarter of operational performance and look forward to continuing to keep you updated next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.