Q2 2022 Veris Residential Inc Earnings Call
Good day, everyone and welcome to Berry's with one Shell's second quarter 2022 earnings conference call. Today's call is being recorded 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 estimates reflected in these statements are based on reasonable assumptions, we cannot give us sharing that the anticipated results will be achieved.
We refer you to the company's press release annual and quarterly reports filed in the S. E T four weeks ago.
As the company with what I would like to hand, you over to my Bosnia various relations Chief Executive Officer. Please go ahead.
Good morning, and welcome to our second quarter 2022 earnings call.
Im joined by our CFO Amanda Lombard.
We are pleased to announce another solid quarter during which our multifamily portfolio again posted sector, leading rental and NOI growth.
Maintaining occupancy at around 97%.
These results reflect the significant steps we've taken over the past 18 months the notes to be transformed the company repositioning the portfolio and enhancing our operational platform.
Today NOI contribution from multifamily sits at 83% on a pro forma basis up from 39% as at the end of the first quarter of 2021.
Approximately 1900 multifamily units have been added to our portfolio representing growth of over 30%. During this time.
The significant increase in NOI across all stabilized assets driven by strong demand across our properties as evidenced by continued leasing velocity at <unk> 25, which is now 66% leased and nearly 50% occupied.
We also made progress on our strategic transformation closing our acquisition of the James and signing definitive agreements for the sale of the Hyatt Hotel and 'twenty three main street.
Remaining suburban office assets.
The operating fundamentals across our 6691 unit multifamily portfolio remained strong during the quarter.
With occupancy at 97, 1% and a blended net rental growth rates of 21% a figure that was up from 16% in the first quarter and that we continue to maintain it around 20% through July .
Loss to lease was approximately 5% across the portfolio.
From 6% in the first quarter, despite pricing headline rates.
I would like to thank our teams for their continued dedication and hard work in creating a tremendous effort to these nearly 500 units and <unk> 25 in just four months.
Our 5825 unit same store operating portfolio also maintained strong occupancy at 96, 8%, while continuing to increase rents in line with market trends.
Same store year over year NOI grew by 28% the third consecutive quarter of sector, leading NOI growth, reflecting higher occupancy relative to last year, and lower concessions and increasing rents during the quarter.
As has been well documented we are in an environment that is rife with economic uncertainty with the two greatest risks at the forefront of investors' minds being inflation and a potential recession.
While not immune we continue to believe that the multifamily asset class and in particular cost save properties.
Possesses unique characteristics that make it well positioned to outperform in either of these scenarios.
The shorter term nature of our leases provides a natural hedge against inflation with the ability to continue capturing rental growth.
Particularly as supply remains subdued and homeownership and expensive alternative.
And rising construction costs and replacement values should provide support to capital values of standing stock.
The defensive characteristics of multifamily, namely that it is a critical non discretionary expenditure item.
It should provide a degree of downside protection in a recession scenario.
The proximity of our new JV portfolio to New York with our rents being approximately half of those in Manhattan. Further supports this thesis.
Looking ahead, we see our portfolio continuing to benefit from favorable market dynamics.
Including a strong tenant base reduced affordability of housing alternatives and limited supply across our key markets.
On July 21, we closed the acquisition of the James a newly built 96, 7% leased cost say 240 units apartment building located in park Ridge for $129 6 million.
The transaction is anticipated to contribute approximately 5% to <unk> to core <unk> per share in the first year on an annualized basis.
Turning to asset sales as previously announced during the quarter, we completed the disposal of DRP land parcel in Jersey City on the land part of an important <unk> for a total of $100 million.
We also signed definitive agreements to sell the Hyatt Hotel in 'twenty three main street, our last remaining suburban office asset for a total of $132 million.
These sales are expected to produce approximately $20 million of net proceeds to the company.
As we look to our office portfolio as of the end of the second quarter. The waterfront assets was 76% leased.
We leased 24200 square feet, reflecting approximately 48% of the total leasing volume in the broader New Jersey waterfront market in the three months period.
We also continued to make meaningful progress in our efforts to become a more responsible sustainable and inclusive company in.
In May we released our 2021, the ESG report in which we committed to reducing our scope one and two emissions by 50% by 2030 target we validated by the science based targets initiative, and we're well on the way to achieving.
As a result of our enhanced ESG efforts today, approximately 40% of our wholly owned multifamily portfolio is green certified LEED or equivalent Adil.
Additionally, our introduction of new more sustainability focused policies at the corporate and property level as well as our enriched environmental and sustainability disclosures have been accredited by two independent third parties, both of whom take a data driven scoring approach to measuring corporate environmental and social disclosures.
As of this past June British residential under quality score rating of one the highest score from ISS for both environmental and social disclosures upfront ratings of nine and eight respectively received in October 2020, and as of July we saw a 26% increase in our our best SRA School from Es.
Book, a partner of glass Lewis as compared to the prior year, putting us above the 19th percentile in the broader finance sector.
These sector, leading ESG scores reflect our continued commitment towards our properties people on the planet, while seeking to create value for 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, Matt for the second quarter of 2022 net income available to common shareholders was 25 cents per fully diluted share versus a loss of 13 cents per fully diluted share in the prior quarter.
Net income available to common shareholders was up quarter over quarter due to a large gain of approximately $55 million on the sale of land parcels. The proceeds of which were used for the acquisition of the James.
<unk> for the quarter was <unk> 15 per fully diluted share as compared to nine per fully diluted share last quarter.
This increase was driven primarily by further sequential improvement in residential performance of <unk> <unk> per share and hotel performance, a <unk> <unk> per share.
Core G&A improved by one time per share this quarter due to lower professional fees in the second quarter.
<unk> tax credit contributed $2.05 per share to <unk>, which as a reminder is recorded in equity and earnings of our unconsolidated joint ventures.
Note that while we received this tax credit annually, it's timing varies and that we have historically excluded it from our same store numbers and continue to do so now.
All of this is offset by a <unk> <unk> per share increase in interest expense due to a reduction in capitalized interest as a result of <unk> 25 openings.
As Bob mentioned year over year and quarter over quarter same store NOI was up 28% and 8% respectively.
A year over year increase is driven by net rental growth of 17% and a modest increase in expenses of two 6% well below the current rate of inflation.
Three lease up properties that stabilized in the fourth quarter of 2021 contributed $3 9 million of NOI during the quarter up four 1% from last quarter.
Looking ahead, our last significant COVID-19 concessions will burn off in the third quarter and we are expecting an increase in real estate taxes in Jersey City.
While not final we project a $3 million annualized tax increase was $2 million will be incurred in the third quarter.
We remain well positioned to continue mitigating the impact of inflation on our controllable expenses as evidenced by our efforts.
Mine operation.
That ESG related matters and increase the utilization of technology.
Which coupled with recent investments in our teams.
We will allow us to more quickly identify and respond to problematic trends in a timely fashion.
This is exemplified through our same store margin, excluding property management fees, improving from 54, 9% in Q4 2020 to 64, 4% as of this quarter.
In the fourth quarter, we expect to close the sales of the two assets that have recently gone under contract subject to customary closing conditions.
However for 'twenty remain we will lease back the site through the remainder of the tenant's lease term at the same rate.
Resulting in no impact to <unk> through lease expirations.
This quarter also marks the first period in which how 25 began to contribute to earnings ahead of our expectation and we anticipate this contribution will grow significantly as the property reaches stabilized occupancy.
Finally, turning to our balance sheet, we refinanced the construction loan on River House nine subsequent to quarter end.
We also drew down $28 million on our credit facility to fund the acquisition of the James which we anticipate repaying with the proceeds from the sale of land parcels under binding contract.
Our net debt to adjusted EBITDA, which is quite sensitive to earnings fell this quarter to $14, one times versus $18 eight times in the first quarter due.
Due to the same factors, which drove higher relative to <unk> this quarter.
As some of these factors such as the early tax credit will not recur next quarter.
We expect net debt to adjusted EBITDA to fluctuate as we continue to work with the balance of the transition.
By contrast, our debt to unappreciated assets ratio and our interest coverage ratio remained relatively constant at around 45% and two times respectively.
We believe our company is well positioned in a rising interest rate environment with 76% of our total debt portfolio fixed and are hedged at a weighted average interest rate of 369% with a weighted average maturity of five years.
Our multifamily that is 100% senior secured primarily nonrecourse and none of it is cross collateralized.
With that I think we are ready for questions operator.
Thank you well now begin the question and answer session to ask a question you May press.
And then one on your Touchstone.
If you are using speaker phone please pickup your handset before pressing the keys.
Has any kind of your question has been addressed and you would like to restart. Your question. Please press the star. Thank you.
This time, we will pause momentarily to assemble all of our mouth Sir.
Our final question.
Comments from Ron.
With Evercore.
Please go ahead.
Thank you and good morning.
I was wondering if you could just provide an update on the transaction market.
This changed over the last three to six months and to the extent there are any bids out there today.
Where are you seeing bid ask spreads for office product.
Good morning, Brian . Thank you for the question.
A very relevant one.
Well, certainly I would say in the last three to six months given.
The rising rates.
Rates environment.
And fed action and the implications that Todd on the financing markets. It has been a challenging transactional.
For sure.
I think it was primarily driven by actually the credit markets.
And the availability and cost of that having said that we continue to make progress this quarter as you saw.
And somewhat accustomed to operating in challenging environments and continuing to make progress as we have done over the course of the past.
18 months also.
We're still.
Optimistic that there's a path forward and we can continue the transformation, but it is a challenging transaction market out there.
So are you seeing any interest from levered buyers today or are they just pretty much sitting on the sidelines at this point.
For office for multifamily office.
You all I think.
It depends on the product.
The risk and return profile, but certainly theres a lot of capital that's been raised sitting on the sidelines looking for.
Value add type opportunities and this is certainly a solid environment and the asset costs and beat that there'll be looking to do.
Deploy into two halves.
<unk> is an opportunity.
Delivering solid returns that they've undertaken too.
Okay.
Thanks, I guess, just lastly on the.
Waterfront leasing.
Obviously, it's leased.
Leasing has been slow and I'm just curious what.
What in your mind needs to happen to get some meaningful traction just on the on the leasing front there.
Well I think if you look.
Whether you would have had last year or the first quarter.
The second quarter, we've outperformed in terms of the percentage of overall leasing volume that we've attracted to harvest side.
Sure.
In the first quarter of the <unk> lease.
A significant portion of what was a very good quarter.
The market around 500000 square feet.
This quarter, the 24200 square feet that we signed was.
All four of them slightly.
Over 50% of the total leasing volume transacted in the market the challenges that it is a.
Unpredictable.
Lumpy.
Market as far as leasing lowest concerned and so it's really about positioning yourself to be able to capture these 1001.
Opportunities arise in the way that we did in the first quarter and now in the second quarter, but you really need that leasing volumes to.
Tarpon.
And then it will be well positioned to capture that.
Yes, okay. Thanks for the color.
Thank you Brian .
Our next question comes from Nicholas Joseph with Citi. Please go ahead.
Thank you, it's Michael Bilerman here with Nick.
Good afternoon, there or unless you hear good morning here.
Good morning.
I had a question just your opening comments you sort of painted the picture of the macro in terms of where people's concerns are over inflation recession rising interest rates.
It sounded like you obtained to date.
Our relatively optimistic tone for various ports.
Portfolio really focusing on the multifamily in terms of its age it's rent levels relative to Manhattan. The fact that you can lease it annually.
And I guess, how do you contrast that relative to the corporation being slow or Amanda talked about how high the leverage is quarter of the debt to floating rate.
Office portfolio, you had negative net absorption again, 30% vacant and you talked about the challenges on the transaction side the development.
As a percentage of the total is very high for various relative to other REIT.
You still have the rock point interest in terms of complexity.
I'm just trying to contrast it.
It seems that there is still a lot of things and I'm not undermining all the efforts that <unk> been able to do in this transition.
In the event of a recession.
There are a number of risks with the company and I am wondering if you can sort of address some of that because.
It just seems that there could be a little bit more difficulty.
In terms of raising capital and being able to finally to execute on the full transition.
Right, that's quite a lot there Michael so I'm going to try my best to dissect it but I'm going to go back to.
All very well positioned to continue.
Continue either capturing upside as I said in the inflationary environment or to weather any storms that may.
Lie ahead in the form of a recession, if you look at why everywhere a year ago with the.
Corporate unsecured bonds the recourse bonds that are outstanding that would you to mature this year and next.
That would have been a challenge to try to refinance those at this point those are now gone, we sold well over $1 billion.
Real estate.
During the course of the past 12 to 18 months used predominantly the proceeds to repay debt deleverage the company.
Company a year ago.
39% multifamily pro forma now 83% multifamily so the engine room now is multifamily and office.
And that's performing extremely well the leverage that you mentioned well thats all senior secured mortgage debt that sits on the multifamily side.
It doesn't give us any cause for concern.
Loans on depreciated assets basis, its around 45% loan to value I would argue it's lower than that so nothing that keeps us up at night.
We've been May changed in terms of capital allocation, you mentioned the development business being disproportionately large relative to the operating I agree with that and we've been chipping away at that.
Im making strides to reallocate that capital.
We're making progress in that.
Despite the challenging market, but the.
So we still have more land than we probably also have yeah, I think we do and as we rebalanced continue the portfolio rebalancing and reallocate that equity.
Two a higher and better use than I think we will continue to see metrics improve but today. There is nothing that gives us cause for concern or one construction.
Project is <unk> 25, which is complete.
And on leasing.
Very rapid pace and we will also continue to contribute to those items.
I stand by what I said I think the company is very well positioned much better than were a year ago and very well positioned.
Lisa had nothing that keeps me up at night.
Thanks This is Matt.
Nick with Michael maybe just on the multifamily side you talked about obviously the <unk>.
Strength that you've seen in the strong net effective rents was there anything as you look in Europe currently senior 30, or 60 days out where you're either seeing more normal seasonality or any slowdown in demand.
From the leases that youre signing today.
Good morning.
Not yet as you saw the 21% blended net rental growth in the quarter.
We continue to see through July .
I figured that was very close to that 20%.
As it stands.
The momentum still strong in.
And the rent levels are being sustained due I think that's a sustainable level longer term going forward I do not I think that we will see across the industry and we won't be immune from that we've had very strong rental growth over the last year or so and I think we'll see that normalize at a lower level.
Thank you.
Thank you.
Our next question comes from Tom kept her blood.
Please go ahead.
Thanks, and good morning, everybody.
On <unk> 25, a couple of questions.
First.
How has July leasing progress continued and does that kind of stayed on the trend that you saw on <unk> and then second with two thirds of the building now leased in Babaji mentioned approaching 50% occupancy.
How much of rents moved versus pro forma and does that give you confidence in boosting your yield expectations on the project overall.
Good morning, Tom.
The velocity of leasing that has been phenomenal, particularly when you consider and I really do want a credit back to the team that have been.
Alright that makes some product for us.
It's.
And even more so given the we.
We started pretty much out of the gate.
Within our vehicles are setting the bar higher and higher in terms of.
Matter of fact, the Rams pulling back concessions and pushing and pushing rents.
In terms of relative to expectations, our internal budget doubled.
Double digit figures above where we started just over 10% around 12% north of where we started in terms of rents.
And in terms of how that velocity continues today I mean, we're still seeing great demand. It is.
The unique, but but I am going to say a unique product in terms of the offering.
Yes.
It has 27000 square foot of amenity space and everything else that comes with that.
The building is very sought after and we're seeing continued strong demand for the property.
Got it I appreciate that and this is.
Tough question given your comments, you said before about the balance sheet and about the land positions at all but.
Given the performance of multifamily overall at House 25, specifically does it.
Give you any consideration of starting an additional development or given the strength in the market do you think about what may be sell the land to others to build into that strength and then along with that do changes in inclusionary zoning in Jersey City impact your land bank there.
Yes.
It's actually a great question. Thanks, Tom.
Just one.
It has to be on the table as a potential.
Use of capital, but it.
Cannot be a priority given our.
Our focus on cash flow.
And leverage reduction.
Yeah, Brad referred to so it would be.
We believe highly accretive and ultimately earnings accretive to develop but when you consider it would take three to four years to develop and stabilized asset.
And during that timeframe the capital requirements and maybe you could say, we could joint venture with someone.
Contribute the land and there is no further capital requirement, but them was still contributing capital in the form of the land that we earned on the equity thats tied up within it.
I am not what yield anything for some time and so there are challenges.
Given where we are as a company to doing that.
And if you divide up you're also adding more concentration risk in the market is performing extremely well for us.
Just from a prudent perspective, we should probably be thoughtful about adding more exposure you could manage that by selling seasons about but on the whole I'd say it's.
Something that makes a lot of sense, but just given where we are probably as not a priority.
At this time and in terms of the Ico, yes.
It is no certainly has an impact in general.
On the market and anything.
Has not yet received <unk> approval.
As far as our wholesale portfolio is concerned there are one or two sites that would be impacted.
But to put it into context harborside eight.
And I'd be Publicised, four would not be impacted and so in terms of value of remaining land bank.
In this area.
I think we're in a good position in the majority is not impacted by the Ics.
Got it I appreciate that.
And then last one for me.
I think last quarter you mentioned.
<unk> is the expectations on the closing of one on one Hudson It had been.
Some time in the third quarter.
What have your conversations been with the buy or do you have updated expectations and is there a real risk that this deal doesn't get to the finish line.
Yes, a very valid question and clearly that's taken longer to get over the line. Then we hoped or expected my expectation today is still that we get that transaction closed on over the line and the delays have been largely related to the funding structure is that the buyer has adopted.
And I, including.
Including taking over that the securitization.
Was in place as opposed to repaying debt.
And refinancing that there've been some procedural.
Things along the way that just takes a little bit of time, and we're largely over those and my expectation is it would be close having said that and this transaction environment.
And my General view on life is nothing is done until it's done so there's always risk.
Makes total sense, we'll keep a look out for it that's it for me thanks, everyone.
Thank you.
Our next question comes from John Pawlowski.
Green Street Advisors. Please go ahead.
Thanks, very much for the time.
I appreciate the color on property taxes, everybody coming quarters, just hoping you can give us a sense for total same store expenses for the multifamily portfolio in the second half of this year.
Okay.
Well we're not.
Not in position to give any guidance on that but.
But to be honest.
I would say we've gone up.
A very good job of the most in terms of controlling our controllable expenses over the course of the last year and keeping them.
<unk> you sold up by around two 6% year over year.
And we will continue to do that in the second half.
What is out of our control the non controllable expenses, we do expect as we as Amanda Sutton hubs scripted remarks, an increase primarily in Texas.
But on the whole we feel that we're in a good.
Good play.
In terms of being able to.
Identify and manage the controllable expenses.
Okay, but outside taxes, youre not expecting any unusual.
Pressure or unusual moderation in some of the major expense line items for the balance of the year.
No I mean potentially insurance is another one where we might see a bit of an increase and we've seen that.
Happen across the industry, but.
Substantial one that we expect will be the taxes.
Okay question on concessions in the stabilized multifamily portfolio could you remind me.
What point in 2021 concessions were basically over and any comments on how the retention.
Customers that were given a one or two months free a year or two years ago has trended recently.
Yes, sure. So the most part we scaled back concessions relatively ivy on towards the.
Second or third quarter of last year, we did have.
One or two properties, where we have had a copa move out.
The thing that all.
At pace, we did offer concessions later into the year. So those are still.
And the numbers and will burn off through the remainder of <unk>.
This year, but.
Today on the stabilized portfolio.
Concessions are an absolute.
Minimal level and we're seeing occupancy rates that also retention rates that have trended up from mid forties to high <unk> now.
Okay, Great last one for me and Andy you mentioned that the EBITDA is going to fluctuate.
Give me a rough sense of where you expect debt to EBITDA to land by the end of the year.
It's very difficult to I am sure I'd appreciate that.
Just given the various moving pieces in the company we are a company that's in transformation.
Notices challenging.
And the others out there that are looking to model this but even just the timing of some of these.
Movements can materially impact that number.
At the beginning of the AI I think this year, you should really measure us based on progress.
Numbers are going to fluctuate.
And one quarter be above expectations, another quarter potentially below so difficult to give you that guidance at this point I'm afraid.
Okay, no problem take care.
Our next question comes from Nicholas Joseph with Citi. Please go ahead.
Yes.
Preliminary again just had a question.
The strategic alternatives.
Go back to right before the pandemic in 2020.
The company, obviously was engaged with Bofa.
Where you had a highly reputable potential bidder, which you referred to as party a obviously the special committee and the management can be available to all involved.
And given what was coming down the pike with Covid.
Even though they expressed interest in a potential strategic transaction with the.
The company given the state of the market and offer wouldn't have been feasible at that time.
But that party in your proxy you indicated as the markets stabilize they would revisit the possibility of making a proposal to acquire the company.
And you guys encourage them to do so can you just give us an update on where your relationship stands with its highly reputable potential bidder party.
And whether that has the potential of coming back or is it.
Or is it just gotten at this point.
I think Michael Youre, referring to.
Events that occurred prior to my joining the board in the summer of 2020 with the rest of the board.
Our in place today, so youre going to have to tell me, who <unk> on the <unk>.
Right.
Im not sure, but what I would tell you is.
The board.
[laughter] embargoed.
Sure.
Okay, Michael you may, but you're asking your question and if you do the courtesy of letting me answer that okay. So since since we joined.
Myself and the rest of the board members joined the.
The board.
There is a strategic review committee, that's all set in place I can tell you that everyone is high.
<unk> focused and understands that fiduciary obligation to create and maximize value for shareholders.
And has them we'll evaluate any.
<unk> opportunity to do that.
As a management team our job is to.
Create value for shareholders at the entity level and Thats, primarily through the operations.
I believe we've done that I think the company is in a more secure place vis vis the balance sheet relative to where it was last year and I think the operations. We're seeing three quarters now sector, leading same store NOI and rental growth in the operations on the multifamily side, which now constitute 83% of the business primarily in multifamily business has pivoted in a year 18.
<unk>.
Reflect that so that's what we'll continue focusing on them.
Anything that the board and the Src.
Evaluates on a strategic level is independent of that are not mutually exclusive from our efforts.
Right, but your member of the board as well now.
I'm just trying to close the loop on this which had been obviously an important thing for when this new book.
Michael Michael Michael maybe expense to the extent I don't know who the party is in a moment to comment on that because it was before my time to the extent that there are any strategic.
Strategic proposals.
Relevant to the company.
Those are presented to the board of <unk> will be evaluated and considered how does it.
Sure.
Or is it.
On the residential NOI growth I think part of the excess is obviously back in 2020.
Portfolio had a much more severe decline relative to national and coastal and sunbelt portfolios.
And so the more recent growth in 'twenty, one and 'twenty two is partially reflective of that and then obviously your portfolio is quite unique in terms of geographic concentration and location. So just I think having some of the history on that slide going back pre pandemic levels and I recognize the whole portfolio is not there but.
There's a little bit comparing apples and oranges.
Well I think it's not I think it's just looking at how we performed over the course of the last year.
Looking at the same way that our peers are looking at it but thank you for your comments.
Thank you.
This concludes our question and answer session.
I'd like to turn the conference back over to Neil for any closing remarks. Please go ahead Sir.
Thank you everyone for joining us today, it's been another terrific quarter I'd really like to thank the team for their tremendous efforts.
And working with us to generate these results and we look forward to updating you all in coming quarters.
The conference has now concluded thank you for attending today's presentation.
You may now disconnect.
Okay.
Okay.
Okay.
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Okay.
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