Q1 2023 Veris Residential Inc. Earnings Call

Speaker 1: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2.

Speaker 1: Please note this event is being recorded. I would like to turn the conference over to Tyrant Fidler. Please go ahead.

Speaker 2: 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.

Speaker 2: 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.

Speaker 2: With that, I would like to hand the call over to Mahbud Nia, Ferris Residential's Chief Executive Officer. Mahbud? Yeah, sorry, I had to go over. Okay.

Speaker 3: Good morning and welcome to our 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 multi-family portfolio and momentum in our strategic transformation.

Speaker 3: We closed on the sale of Harbourside 123 despite an extremely challenging transaction market, particularly for office.

Speaker 3: Closing the Harborside 123 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 a successful development and stabilization of 4 new multi-family buildings,

Speaker 3: and one acquisition during this period have transformed various residential from primarily an office company to a pure play multi-family company with 99% of our NOI being derived from car-save multi-family properties.

Speaker 3: As of March 31st, our 7,681 unit multi-family portfolio, which now includes health 25 and same store 6,691 unit multi-family portfolios, were 95.9% and 96% occupied respectively.

Speaker 3: Following a seasonally slower start to the year, we've seen demand accelerating ahead of what we anticipate will be another busy, decent season.

Speaker 3: The same store portfolio achieved a blended net rental growth rate of almost 11% during the first quarter. Moderating is expected, but remaining extremely robust.

Speaker 3: In particular, our Jersey City important period assets, which represents approximately 72% of the portfolio, continue 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 sub-markets remain approximately 40% below average comparable Manhattan rents.

Speaker 3: The border North Jersey region has become 1 of the best performing multi family markets in the country over the last year driven by robust demand combined with extremely limited new supply, which only account is the 0.3% of total inventory at the beginning of the year.

Speaker 3: This sustained revenue growth, coupled with stable, controllable expenses compared to the 1st quarter of 2022, contributed to a 16% growth in same-stall NOI.

Speaker 3: 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.

Speaker 3: In February , we completed our previously announced state of the Port Imperial Hotel to $97 million, marking our exit from the hotel segment.

Speaker 3: compete with the sale of Parvassai 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 various residential teams. I'm extremely proud of their hard work and grateful for their tireless efforts in support of our strategic initiatives.

Speaker 3: The company exercise that's right to call rock points, preferred interest in the multi family residential portfolio on April 5th. The following day as anticipated. Rock point exercise it's right to the furthest purchase for 1 year. At this time, the company anticipates that such purchase is likely to close late in the 2nd, quarter of 2024.

Speaker 3: 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 multi-family company.

Speaker 3: We look forward to sharing this progress in our 2022 ESG report, which will be released later this quarter.

Speaker 3: 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.

Speaker 2: Thanks, Mahabharath. For the first quarter of 2023, net loss available to common shareholders with 27 cents per fully diluted share versus 13 cents per fully diluted share in the first quarter of last year.

Speaker 2: 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.

Speaker 2: This is the result of an accounting reclassification. Harbor site 1, 2, and 3, 101 Hudson, and 111 River, as well as the hotels, have been reclassified into discontinued operations for all periods presented.

Speaker 2: This reclassification was triggered by the sale of Harbor Side 1, 2, and 3 and further simplifies our financial statements.

Speaker 2: As MABBA highlighted, with Multifamily now making up 99% of NOI, the reclassification of our historical and current financial statements allows for a greater ease of comparability. In particular, I'd like to call out the year-over-year growth in first quarter gap revenue of $19 million, or nearly 50% from just a year ago.

Speaker 2: This increase has been driven primarily by organic factors such as portfolio rental growth, the stabilization of House 25, and other newly developed assets, as well as the acquisition of the James.

Speaker 2: This substantial growth is a testament to our operating platform, the quality of our assets, and the strength and dedication of our team.

Speaker 2: Core FFO was 15 cents for the first quarter as compared to 5 cents in the fourth quarter.

Speaker 2: Core FFO was up quarter over quarter due to a variety of factors, including improved multifamily NOI, a reduction in DNA, and an increase in other income.

Speaker 2: We also have benefited from a reduction in interest expense due to lower averages balances on the credit facility, plus the benefit of the caps on House 25 and 145 Front Street.

Speaker 2: In February , we announced that House 25 reached stabilized occupancy.

Speaker 2: And while we currently expect limited concessions being offered for renewal, 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 cost, controllable and non-controllable property expenses improved.

and our continued efforts to optimize operation.

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 initiative.

On to our balance sheet. The $360 million received from the sale of Harbor type 1, 2, and 3 is held on deposit in anticipation of the repayment of Rock Points Preferred Interest. Earning interest at a rate of approximately 4.5%.

This will be reported as interest in other investment income on the income statement in the second quarter.

We ended the quarter with net debt to EBITDA of 10.3 times, down from 18.8 times in Q1 of last year.

or 45%.

demonstrating a dramatic improvement in our leverage profile during a relatively short period of time.

Our debt to undepreciated assets ratio also remains 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 1 outstanding maturity this year, which is the 59M dollar mortgage on 1 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 up above the first quarter. However, due to a number of one-time items, 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 multi-family portfolio is a smoother, more predictable income profile with less onerous CapEx requirements, in particular given our young vintage, average age of 6 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 CoreFFO for us, converts with CoreFFO 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 SANE-STOR-NOI guidance range of 4-6%. While our first quarter results were exceptional and exceeded this range, we would like to acknowledge that our SANE-STOR-NOI guidance range was not only for SANE-STOR-NOI, but also for SANE-STOR-NOI.

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-desk EBITDA.

With that, we are ready to open the line for questions.

We will now begin the question and answer session.

To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the star keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

The first question comes from Jay Posquet 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 figure. 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 percent 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 in to the year and there are considerable potential economic headwinds and certainly uncertainty ahead and so it's really acknowledging

Acknowledging that, and then on the expense side, there's a degree of uncertainty as well, particularly. On the non control the expenses where we typically see the effect of those. Come through the second half of the year.

It's been a very strong start to the year. We did seek to somewhat temporary expectations that 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's when the net rental growth still holds up at very robust levels at this time. So, it feels a little bit early in the year, we will revisit it again next quarter. But, based on first quarter, it is very conceivable that we could deal with it.

at Harborside 5 and 6 and then 23 Main Street and just given Rockpoint exercised the right to defer for one year, does it kind of change your timeline for getting these assets sold or just any commentary on that would be great? Thank you.

Well, yeah, 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 Rock Point redemption timeline. So we'll apply the same approach that we have done historically. We'll seek to divest those in a thoughtful manner, seeking to maximize values, but ultimately with pragmatism in order to conclude this final phase of the transformation.

Great, thanks. That's all for me. Thank you. The next question comes from Tom Catilout with the IG. Do you please go ahead?

rock point here and a two-part question. First is what is their kind of total return kind of holding on for another year? Is it just the six percent dividend or is it the full kind of 11 percent with the pick?

And 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 1. That's part of that question. The only. Return that that is guaranteed to rock point during this time period is the 6th. The balance there'll be a revaluation done and a recalculate.

in words, we will.

Seek ways to see if there is some sort of a negotiated. Settlement that can happen prior to the timeline that's dictated in the joint venture framework. But there are no guarantees that that will reach agreement, in which case we are bound by the terms of that joint venture agreement.

Got it. Appreciate that, Mahabod. Then on the blended net rental growth rates.

the government, you know, almost 11% for the quarter. What was the breakdown for that, sorry if you mentioned it earlier, I just didn't hear it, between kind of new leases that went out versus renewal leases? It was pretty even actually, Tom, it was 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 what is the plan for those longer term, do you end up holding those because they end up being complemented?

that 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 there being a mandatory. Dividend that that would be required.

at this point.

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

The question comes from Joshua Donnerline with Bank of America. Please go ahead.

Yeah, hey guys, just kind of wanted to discuss your strategy after Rockpoint. It seemed like it was kind of a big catalyst. I know it's got delayed a year, but just kind of what's the focus afterwards? Is it pay down the debt, grow the portfolio, maybe clean up some of the land that was formerly in the JV and covered by that.

Kind of curious where your head had that good morning. Well, look, I think that's really ultimately a question for the board and the strategic review committee. To take as and when that event occurs, taking to consideration. Uh, the.

Value of the publicly traded value of the company at that point. What I would say is you have a board and a strategic review committee that is. Highly aware of that fiduciary obligations and highly focused on. Maximization of value on behalf of shareholders and.

What we've openly said in the past is that as we conclude the transformation of which the repayment of Rockpoint and simplification of the capital structure is a critical part, the board's current intention is to run a more formal strategic review process.

In order to better understand all of the potential opportunities to unlock the substantial value that has been created for our shareholders. That hasn't changed. We're certainly making progress and then near to that point with the sale of 1, 2, 3. But we have a little bit more work to do between now and repayment of rock point. Out.

focus of the management team will remain the maximization of entity value through the completion of the strategic plan.

Okay, and then just looking ahead to 2024, your

the house 25 debt comes to you just curious where your thoughts are on putting a debt on that asset.

Yeah, 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 there's still. A good bid for refinancing that asset and your assumptions should be.

Go ahead. You're welcome.

Hey, thanks for taking my questions. I guess just to 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 lie to redeem early? And I guess before they extended their sort of option to go to May 2024, does it give you a number?

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 that is dictated in that joint venture agreement.

Understood. Then you broke out on your NME page, arbor set five and six, 23 main. 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 maximise otherwise.

proceeds from the sale of those office buildings. But that's really just intended to be a place holder where book value sits, 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 lot of police in the portfolio has gone.

Yeah, I think that's that's absolutely right. We do. As I mentioned, my scripted remarks as well having.

younger vintage, very high quality, very well-immunized properties right across the river from Manhattan at a still 40% average discount to rents on that side of the river and very limited supply is what's really fueling the rental growth that you're seeing.

As you can see from the vendor's net rental growth, so we're in the kind of 1 to 2% loss release, market rents are still continuing to grow from there. So we remain at this point, we're reiterating the 4 to 6% revenue growth for the year. So, you know, take from that what you will that translates also into 4 to 6%. And I quote, as I said earlier,

based on the first quarter, you'd certainly conclude that we should end the year to the higher end of that range, maybe even exceed that range. But there's still, we're only four months into the year, so a long way to go.

Understood. Thanks for your time. Thank you. The next question comes from Derek Johnson with SearchBank. Please go ahead.