Q3 2022 Veris Residential Inc Earnings Call
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Good morning, and welcome to the various residential third quarter 2022 earnings conference call.
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Please go ahead.
Good morning, everyone and welcome to various residential third quarter 2022 earnings conference call.
I'd like to remind everyone that certain information discussed on this call may constitute forward looking statements within the meaning of the federal Securities laws.
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 annual and quarterly reports filed with the SEC for risk factors that impact the company.
With that I would like to hand, you over to my Botnia various residential Chief Executive Officer My Bad.
Good morning, and welcome to our third quarter 2022 earnings call I'm joined by our CFO Amanda loan Bob.
During the quarter, we continued to make meaningful progress on our strategic transformation. Despite the significant market volatility, while delivering our fourth consecutive quarter of strong rental NOI growth across our multifamily portfolio.
As evidenced by a binding agreement to sell Harborside, one two and three and the completion of the sale of 101 Hudson Street. We're now in the final phase of our transformation.
Inclusive of these transactions and pro forma for the stabilization of <unk> 25.
Multifamily will represent approximately 98% of NOI.
Up from 39% around 18 months ago.
Looking ahead, the sizable proceeds anticipated some harborside one two and three in addition to potential further non strategic asset sales will provide the company with substantial liquidity as we seek to conclude our transformation.
Our 6931 unit multifamily portfolio occupancy of 95, 8% and achieved a blended net rental growth rate of 20% during the quarter.
Headline rents continue to grow in the loss to lease in the portfolio reduced from 5% to approximately 2% during the quarter as we continued to capture upside in our portfolio notwithstanding the challenging macroeconomic backdrop.
From a leasing perspective, we are seeing some signs of mounting pressure on consumers and businesses due to rising inflation and interest rates.
While we're not immune from these forces we believe that our class a multifamily properties possess unique characteristics. They are well located modern and why the media side and as such should prove somewhat resilient due to the compelling relative value proposition, especially benefit to New York City.
Of particular note, while New York City rents are calling on the whole the luxury segment has held up comparatively well given the limited supply.
This is evident in our October blended net rental growth rate remains strong in the mid teens, but softened somewhat compared to the 20% achieved in the third quarter.
Our residence on the haul assuming the well positioned to absorb the impact of increasing rents and inflationary pressures as evidenced by the increase in the average income of residents who signed leases during the third quarter as compared to the second quarter.
And our more than 20% increase compared to the same period last year.
We maintained strong leasing momentum at <unk> 25, with the property now, 83% leased and 76% occupied resulting in increased NOI contribution this quarter that Amanda will discuss in greater detail.
A $5 825 unit same store operating portfolio occupancy of 95, 7% our blended net rental growth rates of 19% on a same store year over year NOI growth of 21%, reflecting burn off of existing concessions and increasing rents during the quarter.
Sequential same store NOI declined by 2% driven by higher non controllable expenses, namely taxes in Jersey City.
Due to the steps we've taken to streamline our operations and cut costs, we're able to reduce our controllable operating expenses as compared to the prior year. Despite the ongoing inflationary pressures.
With regard to our corporate expenses, we've also taken steps over the past 18 months to right size our expense structure to bring it in line with our mid cap public REIT peers as a percentage of gross asset value.
We anticipate further opportunities to optimize our overheads upon completion of our transformation.
On the disposal front as referenced earlier this quarter, we reached significant milestones on our path to becoming a pure play multifamily REIT.
We signed a binding agreement to sell Harbor slide one two and three for $420 million.
Transaction is expected to close in the first quarter of 2023 and resulted in approximately $350 million in net proceeds providing us with substantial anticipated liquidity moving forward.
We also announced the completion of our sale of 101 Hudson Street for $346 million, resulting in $90 million of total net proceeds including $15 million that was held as a deposit.
These proceeds were used to pay down the revolving credit facility.
In the prior quarter.
Net income available to common shareholders was down quarter over quarter due to a one time non-cash impairment of approximately $85 million on the hardware side office assets recognized in the third quarter as well as the benefit of a $55 million gain on the sale of land parcels completed in the second quarter.
<unk> for the quarter was 15 for fully diluted share in line with last quarter.
We began to benefit from NOI contributions from how 25 and the James According to four cents per share.
This was offset by interest expense of three per share due to rising interest rates and another one per share related to lower capitalized interest on how 25.
Note that the NOI contribution from how 25 includes almost a full quarter of real estate taxes and expenses for the period, while revenue ramped up from a nominal amount over the quarter.
As such the ethical contribution this quarter does not yet reflect stabilize mine right.
Year over year same store NOI was up 21%. However, despite strong rental growth same store NOI sequentially was down by 2% as we had anticipated due to the ketchup and hire real estate taxes, primarily in Jersey City.
We expect that real estate taxes on a run rate basis will be roughly 3% lower than the total real estate taxes recorded this quarter due to further increase is expected in the fourth quarter.
Excluding this adjustment for real estate taxes.
The sequential Same-store NOI was up 2%.
Diving deeper into expensive the increase in marketing payroll and R&M is largely due to seasonality as leaf exploration peek over the summer and where approximately 50% higher than the prior quarter, resulting in increased costs associated with lease turnover.
Further demobbed comment around inflation, our ongoing efforts to streamline operations and.
Enhanced technology and invest in our team has largely mitigated the impact of inflation this year.
Year to date Same-store controllable expenses are down by just under 1%.
Which if you assume that the full impact of the most recent CPI increase of $8, 2% is reflected in our costs implies a reduction of over 9% over the past year.
As mobile I mentioned, our efforts to optimize expenses are not yet complete and we anticipate further potential for savings as we complete our transformation.
Turning to our general and administrative costs after adjustment for one time severance charges G&A is $9.5 million or approximately $38 million on an annualized basis.
We have included a reconciliation of core G&A and our supplemental material that stripped out the one time costs, which today are associated with the ongoing transformation to arrive at overhead required to run the day to day business.
The current quarters reduction in DNA reflect significant changes and the companies cost structure, including reorganization to simplify the operating platform between multifamily in office.
As well as considerable changes in professional fees.
Annualized DNA of $38 million is the lowest G&A in nominal terms in over a decade.
While our third quarter G&A annualized as a percentage of gross asset value is in line with the other mid cap repairs we.
We anticipate further efficiencies in cost savings as we exit nonstrategic assets and continue to simplify the business.
As in prior years I expect that next quarter TNA will be slightly higher than Q3 due to annual adjustments that typically occur in the fourth quarter.
We have made solid progress and streamlining our corporate and property cost structures with further effort to be realized as we continue the transformation.
Onto our balance sheet subsequent to quarter, and we hedged how 25, our largest floating rate that with a 4% cap due to a springing cap requirement we've.
We expect to explore options to refinance how 25 as it approaches stabilization and anticipated spread over silver that is lower the 270 basis points on the current construction loan.
Taking this into account our company is well positioned in the current interest rate environment with a weighted average maturity for four years and inclusive of the hedge on how 25, but excluding the revolving credit facility alone on 101 Hudson, 90% of our total debt portfolio is fixed and or hedged at a weighted average interest rate of 4.1%.
Further or multifamily that is a 100% senior secured primarily nonrecourse and none of it is cross collateralized.
Our net debt to adjusted EBITDA improved this quarter to $12 seven times versus $14, one time in the second quarter.
Due to lower DNA and the increased police up at half twenty-five.
While this improvement represents our continued efforts to strengthen the balance sheet as noted in prior quarter.
<unk> sensitive to small changes in earnings and May vary in any given period.
Our debt to underappreciated asset ratio and our interest coverage ratio remain relatively confident at around 47% in two times respectively.
Finally in relation to our recently announced transaction activity I would like to clarify that the net proceeds from the sale of 100, Hudson, where approximately equal to our original expected proceeds after accounting for the recent price adjustment three additional quarters of SFO in which the asset withheld and the absence of the originally projected defeasance costs of <unk>.
Three $5 million due to the buyer's assumption of the <unk> mortgage.
On a Q3 annualized pace at 101 Hudson contributed approximately 12 of <unk>, but only six months of <unk> inclusive adventurous expense incurred on the balance of the revolver that was repaid with the sales proceeds.
In addition, the assumption under loan by the buyer, which had an implied loan to value of approximately 72% based on the recent sale site improves our overall leverage metrics.
In addition, I would like to add some color on a difference between growth versus net proceeds expected upon the closing of the sale of harbor type one two and three.
These reductions include tenant improvement and leasing commission for the collectors universities, which various is primarily funding from the $25 million termination fee received in Q1, plus adjustment for approximately $30 million and remaining capital improvement as well customary closing costs and transfer taxes.
With that I will turn it back to my blog before we open the lines for questions.
Thank you Amanda.
Only to Q&A I would like to take a moment to address the answer. This is with proposals Christian accompanies was made to various residential.
This morning, they responded to the Christian accompanies via press release, which can be viewed on the various residential website.
As such we will not be answering any questions related to the situation will be able to provide any further detail beyond what was disclosed earlier today.
So please open the lines for Q&A.
Thank you very much.
I'll begin the question and answer session.
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Ventura.
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Momentum.
<unk>.
The first question comes from Steve Safwa.
Right.
Go ahead.
Thanks, Good morning <unk>.
And.
Obviously, you guys have made a lot of progress simplifying the company and streamlining to becoming almost a pure multifamily company, they're still I guess, a few remaining assets that are not multifamily to sell and I'm. Just wondering if you could sort of give us an update on harborside five and six the marketing process and the demand that may be.
Saul for Harbourside, one two and three and I guess, we're to the hotels fit.
Fit into the disposition plan.
Thanks, very much I think it's.
The relevant question given the.
The amount is.
Equity that still tied up actually.
And the impact that will have one.
The transformation.
Which is also the hotels as you need one of them.
It was under contract and scheduled to close towards fee.
End of this year.
With the other assets I have really.
Make the comment.
Across all of our remaining on strategic assets that we have.
Really giving us guidance.
And it would be imprudent to do that given particularly market conditions on timing.
Or any further realization.
Of sales, but we walked to the.
The nation Chameleon industry pragmatic sure.
Also challenging conditions over the past 18 24 months.
Transformation forward and will continue to exercise the same level.
Practices.
In a measured way.
Chris.
Fulfill the remainder call strategic assets.
I guess can you just provide any color on toward the depths of the buyer pool for the Harbourside, one two and three and I guess, if there were folks that were in that process and didn't win that bid might they come back to five.
Five and six or.
Bitter pools fairly shallow and just trying to get a sense for who's out looking for opportunistic office.
With a difficult capital market environment today.
We will we spoke with the process of all of the side.
Earlier, this year and we had decent interest around.
The whole portfolio.
Rob Subcomponent physical Sir yes, Sir.
Suppliers of strategies batteries.
Cost of either most generally.
Value odds.
They are.
There is.
And repositioning opportunities.
Space.
It is conceivable that potentially.
One or more of the buyers that we spoke to during that process could be.
For filing fixed.
But notice observations recorded announcement around that at this point.
Okay and then just other question for me just on the multifamily can you give us a sense for where you're sending out.
Renewal notices today for say the December January February time frame I realize you've had some pretty big growth, but I'm just trying to get a sense for what kind of renewal increases and maybe to the extent you've got spreads on new leasing.
Where are those shaking out for November December .
Yeah. If you mentioned look it's 20% planning that rental groceries is more sustainable really anywhere.
The.
Okay. So you can expect to see that normal life.
Total cost.
Come down to.
So it comes down to.
The teams.
I think Ah.
Going forward.
Yeah.
Period that you reference.
Double digit growth.
Great. Thanks, that's it for me.
Thank you David.
Thank you.
Participants to ask a question you may print stuff and one.
The next question comes from Nick Joseph from City. Please go ahead.
Thanks.
Health cap rates moved in the.
New Jersey multifamily.
Market today, and it's <unk>.
Provide these components to be on a b in the supplemental.
When you apply the updated cap rates are you thinking about value in terms of that maybe for the company.
Good morning Mick.
What I think I would say.
It's too early too.
Really make any definitive statements about where comprehensive landed into the market for very much bill.
In a period of time.
Discovery.
And.
We don't see in a huge amounts of transaction volume.
How fast.
Inc.
Question cap right, but why don't they why but I think it's too early society.
Calculate stabilize.
What I would say.
We are in.
<unk>.
Brian Hi.
Highest quality assets in the market.
The youngest.
The best community offering.
Much gas in nature.
And still seeing very strong.
Things are.
I would expect these assets to be somewhat more resilient, but.
No.
And the power to Barbara.
And then just from Naqvi perspective, just given them or where you think caprica you. There were maybe are today.
I think that's really a question for you to come to a judgment is actually well we've never disclosed.
And that may be as such.
Disclose on today.
Alright, and then on G&A when would you expect to get to that normalized G&A and no longer have the transformation costs associated with it.
Yeah, that's a good question so.
Look the G&A fluffy.
First thing I'd say is it won't be taken several steps and you have to remember the history here would choose.
The number 18 months ago, we really had two companies side by side too independent cost structures.
Effectively from six three down.
And we've taken initial steps to streamline.
Goes into one single company one single post.
Structure will be forgot already see the benefits of that.
In the run rate.
G&A going forward, we've been pretty cool.
The transmission concludes we <unk>, we see room for greater savings from this point.
That is going to be doing.
To cover the fact of the drive that.
One is that the timing us.
Completion of the transformation, but also what you do with the proceeds has implications as well so.
I think we've done a decent amount so far we definitely see more room from this point to run more efficiently I think we've been pretty.
Cognizant and the way that we will.
Managed to expenses and what has been quite an explanation right environment.
As we all know and we will continue to exercise prudence and objects include the transformation.
Based on the use of proceeds that's ultimately.
The 10 minutes walk through the building DSR fee there'll be a varied range of savings, but we anticipate from the savings, okay and any smarter.
Once banks.
Thanks, and I, just find that it looks like the cautionary.
<unk> just responded to your letter this morning.
Indicating that it is fully capitalizing committed but.
From a board perspective.
And I recognize there is probably limited stuff you could tell you, but just Ah are you committed her support committed to kind of explore and all strategic alternatives regardless of this individual.
Kind of solicitation.
Yeah.
Comment on on that I haven't seen that in Minnesota.
I wouldn't be looking to comment specifically on that proposal, what I would tell you.
Say this is shortly is that we have.
An independent transparent or.
Highly focused on value creation and have been from.
From the beginning.
You're aware of that fiduciary responsibility as we are the management team.
And we have and will continue to evaluate any opportunity to create the envelope value for shareholders.
Mister Joseph does that answer your question.
Oh, yes, thank you very much.
Thank you thank.
Thank you.
Again, if you have a question. Please press star then funds.
The next question comes from Tom Cat their votes from BT I G.
Please proceed.
Thank you and good morning, everybody maybe <unk>.
Going through the it looks like you've taken down some of your expectations for land values and the <unk> and then office side of the portfolio.
Recently got what I think is a pretty good.
On our land sale and in Jersey City.
Should I.
Would argue was probably have a lower quality and then locations in your portfolio.
What's really driving that downward adjustment in your plan value estimates.
Well.
Obviously, we've seen.
You've seen rates rise.
And the rocket fashion that they have and I've been just as.
Dining out that we will see some impact we've just taken.
Brilliant.
300, and some might say conservative approach to marketing the lines as well.
But what I would tell you.
Ultimately about landed as you.
Very very high quality.
While located one would expect extremely sold off during the sky.
Learning to read into per Se, but I think in this environment, we always take.
Something of a conservative approach when it comes to vacate values.
Got it.
So that's more a.
A kind of a general market value assessment or is it a.
We have specific pricing now on these and we have two adjusted downward or a combination of both.
No. It's generally taking a conservative views on on value given that we're just not in the same environment, we were in a culture, which equals.
Okay.
Got it I appreciate that and May.
Amanda.
Appreciate your commentary about.
Roll down from gross to net proceeds on Harborside, one two and three but maybe as we think a little more broadly given that sales in the recent closing in on one on one Hudson.
How much can you shield.
Without having to either pay certain reinstitute, the dividend or specific dividend special dividend when it comes to these asset sale proceeds.
Tom I.
I think.
The question is very much going to be if you don't mind I'll pay for other questions can be very much the bank to future.
Future asset sales undervalue realized.
Aiming Arizona.
Within any given period, but obviously to the extent of very very mandatory.
And that is required.
And we will pay that.
Obligations as it meets.
Your expectations should be based on what we've announced so far that as well.
Okay.
Got it I appreciate that.
And then.
Maybe the last one for me.
Comment on how is 25 is obviously not yet being at its stabilize run rate. The James is obviously just come into the portfolio as well it looks like there has been a pick up an expectation on stabilized NOI for that asset.
But when we think maybe about.
The.
Direction of debt to EBITDA for the company, it's took down materially since the first quarter as we get more NOI coming on from these multifamily assets. What is your expectation to the trajectory for that metric as we look maybe see the balance of this year and into next year.
No I think it's a good question and achieve it.
We have.
Re largely repaid that with the proceeds of of asset sales today and brought back down the mountain to measure mentioned that is a number that is somewhat sensitive as well too.
Which are fluctuating given the transformation.
I think at this point to give any guidance on trajectory.
Really.
Would be an appropriate because it's.
As long as you can be driven by <unk>.
The timing of future asset sales the use of proceeds from those sales.
But 70, something that's been a focus for us and we have been able to reduce that as you say.
Today.
Yeah, I totally get it but you know definitely.
Definitely not looking for guidance I guess the question is does it.
And it can move from quarter to quarter totally understood is it stable is it trending downward kind of Directionally is there anything we can take away from it or is it just too early to go to read.
Yeah, I think you said, we've we've got.
Between the James and how 25, Additionally income contribution that.
The remainder of the non strategic assets that leave cause if you think about all the side five and six.
If you consider potentially some of the land and not it's not going to generate any income at this point, so it's not really helping.
That the EBIT.
Number because it's not generating.
Any meaning.
Meaningful EBIT dogs. So that's why I said, but that is a significant amount of equity trapped in those assets, because that's where the equity fund it doesn't look that outside five six all right.
So that's why I say.
It is a function of the timing of those sales and what the ultimate piece of prose. These days.
And ultimately that'd.
That'd be paying on.
Or something else, that's ultimately agreed to it but.
At the moment, we're carrying.
A not insignificant amount of.
Equity that is not yielding any though.
Prior to fill in the case of Thompson.
Five.
Understood very helpful. Thanks, everyone.
Thank you Sir.
Thank you.
The next question comes from John Farnham scheme from being Street Advisors. Please go ahead.
Good morning, Thanks for the time Abboud could you give us a sense for how.
How much are how.
Large of a non refundable deposit is down for Harbourside, one two and three I'm just trying to get a sense for the chances of that transaction following through between now and the first quarter of next year.
Good morning, John .
We're actually not permitted to disclose that under the terms of contract or the identity of the by us.
Can't disclose it but what I would tell you is that it.
The buyer thoughts.
Diligence then based on what.
<unk> advisors understand that survivor is transacted.
Three decades.
Including during pretty challenging market conditions and.
And include a quiet heavy land value office repositioning investments.
Sitting here today, we feel good about the likelihood of that.
That transaction closing, obviously given the challenges.
Nothing is done until it's done.
But we feel pretty good about that.
Right.
Okay.
I know a lot can change between now and when you get the proceeds but can you help us think through a reasonable base case somehow on the on the redeployment of the capital of these office sales as you stand today, what proportion we targeted towards the debt reduction versus apartment acquisitions et cetera.
Give us a little bit of color on how you think you're gonna put this cash back to work.
Yeah. So.
I think it's a little bit early.
I mean, we would need to be closer to the time that we're coming to realize those proceeds and then evaluate on.
Closer to the real time basis.
What the highest and best use those without capital based on the alternatives that are available to us announcer discussion.
We will be having with the board have a strategic review committee to ultimately the Taliban.
<unk>.
Okay. Two quick modeling questions, if I can slip them in.
October occupancy and then I know, you're not giving twenty-three guidance, but expenses had been quite variable and you've communicated I'm. So can you just give us a sense for four Q expense growth that you expect.
Well Directionally I would say the strategy V. This year with.
Been to first run.
Compromise occupancy, which is thought at the fever.
I don't see.
That'd be a we're expecting it meaningful change and occupancy between now and year end.
Astro expenses.
But in a pretty.
On such an inflationary environment still today.
And so.
I think anybody has full clarity on how next year shakes out in terms of inflation and the impact on call.
I would say is we've been pretty.
For them the way that we managed our expenses this past year to try to mitigate the controllable side of the equation.
What's been obviously more challenging than the non control of expenses, where we see taxes rise and and actually.
Disproportionately higher than some other areas here in Jersey City.
Alright, thanks for your time.
Thank you.
Thank you.
This kind of question and answer session I would like to turn the conference back on tomorrow, but that's what I'm, saying remarks.
Thank you everyone for joining us with pizza announce another great quarter and look forward to updates and you again <unk>.
Thank you.
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