Veris Residential, Inc. (VRE) Earnings Call Transcript & Summary

Welcome to the 2:20 p.m. session here at Day 2 of Citi's 2020 Global Property CEO Conference. I'm Manny Korchman with Citi Research. Pleased to have with us Mack-Cali, CEO, Mike DeMarco. This session is for investing clients only, and if media or other individuals are on the line, please disconnect now. Disclosure is available here and on the webcast on the Disclosures tab. For those in the room or the webcast, you can sign on to liveqa.com, enter code citi2020 to submit any questions or you can raise your hand. Mike, I'll turn it over to you to introduce your company and management team and provide the audience 3 reasons why investors should buy your stock today.

Thank you, Manny. This is Michael DeMarco, CEO of Mack-Cali; to my right is David Smetana, my partner and CFO. I want to thank everyone for joining us today. Also Manny, before I want to -- before I start, I wanted to thank Citibank for hosting this. It's been a difficult week. You guys have done a superb job in what I think is an incredibly difficult environment. Also, I wouldn't be remiss if I didn't say happy birthday, Deidre. So okay, we're good on that. Let's talk about the company. We've been doing this now, probably on 5 years this upcoming June 2. We've had a good deal of success of turning the company around. We've inherited a portfolio substantially, if not all, suburban office that had not been renovated or dealt with for probably a decade or so. We took that portfolio, cut it down from 27 markets to 6, concentrated our holdings and renovated the assets. And within the company, we grew a multifamily division, which now is bigger than the company that we inherited day 1. We made an announcement this past December as part of the strategic plan that the Board had basically undertaken to exit the suburban business. So we're literally one of the largest suburban companies since our formation. Now exiting suburban business, hopefully, by the end of this year, we have 1/3 of the portfolio under contract, another 10% to 15% that's soon to be under. We're working on the last 45% or 50%, which we expect to get done in the next several months and closed hopefully by year-end. 3 reasons to basically buy the stock: one, I think we have a plan that is executable in the short term. It produces meaningful results. I think we're playing into the strength of the market and then it will produce the right shareholder value. I'm done, Manny. It's the 3 things.

That's right. I was waiting for you to number them for me.

Sorry?

I was waiting for you to number them for me. I was running too fast. I guess, quickie, Mike.

The other question we're asking everyone is, ESG is of increasing importance for all company stakeholders. What's one thing your company is doing to improve your overall ESG score over the next 12 months?

Well, there's 2 types of scores in ESG that we really look at being an office and a multifamily company, one is how we interact with the environment, which is energy usage; the building materials we use; whether we use correct amount of water; how we look and how we plant on the assets, the right amount of trees and bushes, the nature of the environment. We talked about adding beehives as some of our assets in order to basically produce the right amount of foliage. The other side of it is how we handle employees, right? So since I've joined the company, I've gone to great lengths to basically equitize the pay scales between men and women, broaden the diversity pool, try to mentor people, they get further education, try to train the next group of employees to get to the next level. Very proud of that. We've done a lot of promotions for getting women from VP to SVPs. Deidre is the first one that we've had that's become the executive officer of the company. She's the Chief Administrative Officer. But you try to face it on both the gender and diversification qualifications, which permeate through society and has held back a lot of classes, and then you look at the environment itself to approach how your buildings are direct with the environment in a hospitable and harmonic way.

So over the last few hours, days, months, quarters, there's been a lot of news flow about M&A with your company. So can you walk us through and just give -- catch the room up on each of those sort of scenarios to what extent you can and say why they didn't work out and why they didn't consummate in a deal?

Sure. We've been open to any type of transaction that would produce to shareholders the most NAV in a shortest amount of time with the least risk, I call it, the triangle. In that endeavor, we've gone to look at the company and say, what stopped us from getting a true M&A bid from day 1. No one wanted to buy a suburban company. When we were all suburban, even day 1 when I took over 5 years ago, we just did not get an offer coming in and saying, "Hey, you guys are trading at $17. I really think you were at $25, I'll pay you $21 today, take the burden." We got no inquiries. It was only until we started to create the multifamily company that people started to feel like, "Oh, there's real value here." We also have done a good job of increasing NAV. The NAV disparity that the company exists today didn't exist day 1 because we sold all those assets. It exists because we've invested in multifamily and produced probably $1 billion of capital gains in the last 5 years. It's been the same in going through the office business and making new acquisitions and getting rents higher. So that's why we have the $10 disparity, I think, that exists today. How do you capture that $10? Well, one has to basically be either -- the investor base has to think and feel that you have a sustainable program to basically produce results over the long time. We haven't been able to do that. We've had lease-up issues on the Waterfront, but we've had good multifamily growth. So the rumors, and they are substantially rumors, basically have had people come in to us and had conversations. There's been Kushner, which has been documented; Bow Street and then lastly Rizk, each one of them came in and had a convoluted plan about what they would or wouldn't do for us, and it wasn't what I consider a true M&A bid. We're looking for someone to come in and say, "Given all the data you provide, which is exhausting, we'd like you to pay this price, which is a discount to NAV; here's where equity is, a fully financed equity offer; like, I have a guy behind me, who really wants to buy this; the debt capitalization, which we think is not a difficult lift given most of our stuff is secured; and whether you'll do a corporate deal or a real estate deal." We've never gotten that. When I asked those questions, which is the gating items, we've gotten back. What we'll do is, we'll buy part of the company, you can keep the rest or spin it out and that will trade up. No, that's not a risk I want for the shareholders. Or we want to buy your stuff and leave you behind with a remainder, and we'll take it off your hands, and we'll do the sales process quicker. At the price they're charging me, it's like UberXL in the middle of a rainstorm. I think you are better off walking than paying the fee, right? So we wind up that way. But we're still open. The one thing I would point to is, every single one of them have said, "I took a meeting with the CEO, it was always almost immediately, and we had a series of conversations." It's their job to provide the documentation we need to convince the Board to basically enter into a transaction.

So I guess, the easiest one to talk about, because it was both recent and sort of documented, was the Tom Rizk, where on the last call, you said there wasn't really a letter, there wasn't really a plan. Rizk files his letters. They seem to me, at least, when I read them, to be a plan. Where did you find the disconnect between sort of what he presented to you and your presentation on your last earnings call, which I felt were disconnected or maybe I was just wrong?

You have to look at the sequence. So he came in. We gave them the information I told you about. He came back and he wrote a letter in saying, "I have UDR interested in. I also have a JPMorgan financing me," and he presents a financing bid. We make 2 calls and we get 2 nos. So JPMorgan says I'm not advising them. It's funny to use an adviser's name and not have the adviser admit to being used, right? Secondly, I've never seen someone do an M&A transaction and not hire a lawyer. There's no shortage of law firms in New York City to do M&A. And I don't know how you would envision doing a deal our size without hiring a proper law firm, and there's quite a few names. I'll give you recommendations if you wanted. Second of all, he didn't have an adviser or a law firm. And then we checked into UDR's interest, and they came back and said, and I can't -- I didn't have any direct conversation with them as they stated in their press release. But to be very candid, they didn't think they were interested in the whole portfolio. They didn't want to buy what I was told, our CIP land, which is a decent portion. So now you sit and say, "Okay, you got somebody who wants to buy your standing assets," which is the easiest thing for me to sell. I'm short my land in CIP. And I still have all the burden of the office. And you look at Rizk and say, "You're going to buy the office, where's your money?" And he's like, "No, no, I want Mack to basically contribute to our equity," that's a short conversation, by the way, "and I'd like to basically -- I'm going to finance it." So that didn't work. So we went back and said to him, "You still need to give us the data." Right? Same request, not going to change. He went back and he filed a letter with us, showed the term sheet, except which says it's not a term sheet on the last page. It says it's not -- it's been not negotiated, it's not committed to and it's missing the exhibits. It's a simple thing. I can write the letter for you. It's 1 page. And normally, he went through and the last piece that bothered me greatly, he went back and said, "You know what, this isn't working out. I'm going to leave. Wanna be friends. I don't want to do anything hostile." And on Sunday night, he leaked at the Bloomberg. So then we went back and said, "Okay, here's the letter we sent you, which has come from my special committee Chairman, who is the head of the governance committee, sent him the letter." I look and read it, basically says, we invite you to bid. And by the way, Tom, if you're interested in the office assets, they are all for sale. You can go to HFF or Cushman & Wakefield and almost every building we have is up for sale. So what is really stopping you? Since you're not a multifamily owner, how have we impeded your progress? That's the end of it.

So that brings us to today, and there's another news headline today that your Chairman is looking to potentially privatize the company. Can you comment on that at all?

I don't have any direct knowledge, but I do know certain things. Bill Mack doesn't talk to his family about the holdings. And he doesn't vote their units because he separated himself from them. So I really doubt, unless he's changed over the week, that he's conspiring with his family to part with the company. My conversations with the unitholders have always led them to wait and say, "We want to see what happens and what you bring to us, and we can react to." I don't think they want to quadruple up and buy the company. I don't think -- I have no knowledge. But if you're asking me my own personal opinion, that seems like a very unusual room. It'd have happened, what, maybe 2 hours before I'm about to speak in your panel.

The timing couldn't have been better.

It's amazing, Manny. You know what they say, when things seem too good to be true, they're not.

Any M&A questions in the room? I guess, just to transition to the portfolio, with all the noise on M&A, with the stock movements based on M&A, lack of M&A, letter comes out, letter from somebody else comes out, press release comes out. Do you think investors can't be on that and focus on what you're trying to do with sort of the core and the fundamentals?

Yes, every meeting we've had to date has been primarily about the portfolio and our action plan and the sales and leasing. And there's been a little bit of conversation, maybe 3 to 4 minutes of the time that we have to spend with the investor on M&A. I think people get the picture, which is we're open. We're obviously available. There is a disconnect between where we trade and value. It's apparent that they might be interested in it. We think that attractiveness is only enhanced by selling your suburban. So if you allow me for a minute, if you want to do an M&A deal and someone said to you, "What's the 3 pieces you have?" You would say, "Oh, we have the multi." Right, which the standing assets you sell, the land you could move, the CIP, obviously, you deal with this in construction. The Waterfront office, we'll trade, and we have 2 buildings up for sale, which we think we're going to get bids far in excess of what the street value is at, so we'll kind of close the gap. But the thing that's going to be an inherent impediment to achieving a transaction is owning $1.3 billion or $1.2 billion, $1.4 billion, wherever we started of suburban office, which has really no institutional bid. When I look at how we deal with multifamily in Hudson County, I can look out my window and see assets that are owned by equity residential. I look out the other window, I see assets owned by Avalon Bay. I look around the corner and go for lunch, I see assets owned by Brookfield, assets owned by AAW, JPMorgan, competitors of mine who have institutional money. I go into the suburbs, I see myself, I have a mirror, I see someone else. Right? It's really just us institutionally in New Jersey suburbs. I can't think of another major asset that's owned by a leading pension fund or a private equity shop or a public company in all the markets we deal in. Jersey City, you get other people that own office assets, but in the suburbs, no. So it's not an institutional market, therefore, exited. When you exit that market, it frees up the people to look and say, "Oh, I don't have to buy 40 suburban buildings. I don't understand or want for $1.4 billion in equity. I can now just focus on the 6 or 5, whatever buildings remaining of the Waterfront, and 26 or 28 whatever we have when we are done, obviously, Class A multifamily projects. I believe in one process, it's called less and obsess. So I try to do less and obsess about the things I do.

So when you came out of your initial plan, the 2015 plan, maybe, maybe the one that was after that, selling suburban was never part of that. In fact, you started buying some more suburban assets, maybe better suburban assets than the ones you own, but you're buying more suburban assets. So what changed in your thinking over the last, call it, 18 months, to the point that the Board said, "You know what, sell not only the suburban that you inherited when you came into your seat but also the stuff that you've actively pitched them on buying."

Yes, we bought -- in fact, we started with 30.5 million square feet, 27 markets, we cut it down to 6. When we're cutting down to 6, we went for the concentration mode. We had 1031 issues, and I could have either bought multi, if it was available, and it wasn't available to buy or suburban office, which I did. And then I get criticized for buying suburban, so we started buying land. We got criticized for doing that, then we started buying multi and nobody criticizes us anymore. So we found our way to the right spot. If the multifamily assets were available in 2016, I would have bought them. But owning the asset that I didn't want to own in '15 and '16 and wait and watch it atrophy over time, just like I couldn't find the 1031 asset didn't see the right process.

But why was the 1031 such a consideration then if it's not now?

Well, 2 things. One, we take gains and losses. So we've been piling them up, and we've been able to move them. I still have a 1031 issues on some of the deals in the suburbs, but now they're small enough that we can use our dividend to basically cover it. We could only use about $80 million of shield is what we pay out. We can't pay a special because we don't have the liquidity in the stock. So it's -- look, every company Vornado, SL Green -- if you're Owen Thomas, you want to sell a building, you go to a guy and say, "Listen, let's sell 599 Lexington Avenue," which is great. We've got a -- we have $1.5 billion gain. Okay, we'll distribute it, right? I got to Class A -- A rating. I got plenty of liquidity. We've done this before. That's great. We're much smaller, don't have a A rating. My bank covenants and my bond covenants don't allow me to make that big a distribution of the dividend. I'm forced to basically then therefore pool, take gains and losses or distribute gains up to my dividend, and then I basically have to reinvest the rest. I've only bought maybe 7 buildings in the suburbs. This isn't like I bought 400 of them. I sold 293 to date, I mean, we've been rocking our home.

So dollar-wise, what you're selling? How much did you buy?

Maybe $275 million, $250 million of the $1.4 billion that we started off with. It's about 20%, give or take.

Okay. Any other questions on suburban sale, anyone? Waterfront sort of leasing and fundamentals. Anything you can share that gives you confidence that you get some space filled up?

Well, I think there's been some sales in the marketplace that indicate where value is. So one of the buildings that SJP and Prudential owned, which was an empty building that used to be rented to Bank of America, sold to a life science firm, and he paid $283 a foot.

$280 a foot to Thor, who hopes to put life science.

Yes, put the life science. That was vacant at $280. LeFrak sold the building. JPMorgan was a principal tenant to one of the private Harbor Group for $425.

Yes, about $430 a foot. Correct.

$430 a foot. So you look at those 2 benchmarks, empty building at $280. New construction will be about $600 or $650. So you have to say this stuff, "Okay, where does your buildings fall in?" We're about 80% rented. We've invested a lot of money in lobbies who visited us. We've done improvements. We do bathrooms. We're getting good tenant demand, and that's inherent. So we get people to roll over at the right rents. So cash and GAAP is up. So we're banging out at $350 a foot, call it, $370, right? At that number, you need rents probably in the low $40s to justify the right yield. We're in the $50s or high $40s. So I feel pretty good about from a value point of view where we are. From a leasing point of view, I've been burdened by the lack of incentives for almost a year. And then obviously, the Waterfront had a bunch of move outs, which basically decimated us, and we've been building back on that. You had a tenant, AIG is [ roomed ] and I hate to say done, but it's -- I know where the deals are. They sold their Pine Street headquarters. They moved their operation to Goldman Sachs' building on the Waterfront. We were #2. We left the deal because the size grew. So we were, I believe, the 1 horse or the 1a horse when it was 100,000 square feet, we had a block. Goldman was able to give them $250 contiguous, which we just don't have. But it's good for the marketplace because AIG is moving tenants -- sorry, employees from the suburbs to Jersey City and moving points from New York City to Jersey City. I think that will reverberate through the community and other CEOs to look and say, "Why aren't we doing the same thing?" We've seen a pharmaceutical company come in and look at space for $75 to $100 because they want to attract the right type of people. We've had other people look at space. Last year, we came very close to Samsung. They're basically doing a deal, which would have been a game changer for us. I think it would do, sooner or later. This is a good year for us. There's very little exploration. And if we keep on working, which we do, and be creative, which we are, then hopefully something good will happen to us.

And just going back to the incentives for a second. Those would only be for new jobs created that were out of market coming to market. So anyone that's coming from a suburban New Jersey location to the urban loc doesn't care about the incentives?

True. Which is a good thing because what they do care about nowadays is how do you attract, recruit and retain talent. And you and I have definitely -- I'm definitely old, you're just a little bit younger than me, but you'll qualify as kind of slightly old now being a family man. If you look at where the younger people are moving, they're coming to join Citibank and other organizations. They've been priced out of New York City for the last 6 years. It's only gotten worse. It's been -- obviously, this change in rent control law is limited, how many rent-stabilized apartments roll over. New apartment supply is minimal given the cost of construction, so they're either living in Brooklyn or around the city or they're going to the Waterfront, right? The population growth in Hudson County has been substantial. So you're getting younger people living in Hudson County. The employers realize that, and at some point, they look and say, "Why don't we have an office there?" It's always been the way it works. And all these apartment towers are going up and are filling rapidly, essentially filling with people that are either working in 2-pod spots or maybe 3, local Manhattan or they're driving to operations in the suburbs because they don't want to live there, but they don't mind, that's where the job is. At some point, that job is going to be transferred hopefully to a -- closer to the city.

And have you actually seen a tour activity of those types of users coming through and looking at that? Or is that what should happen?

No, 100%. We see them all the time. We just haven't been able to land them, right? We get people come in and say, "This is where we work, live, whatever." One of the major pension fund advisers in the world, he's Head of Investments, lives in one of our buildings across the street, and it's kind of funny, right? So he runs a superannuation fund in the U.S. and he lives in Urby, right? And that's kind of a good sign, right? Bank of New York, same thing. They were. . .

I think they're starting to price people out of Urby.

Right. High-class problem.

Okay. David, how do you get -- assume that this company isn't sold, we're going to -- everything else from here on now we're assuming company is not sold. So we're still sitting here a year from now. How do we get to a case where leverage actually starts to come down a little bit?

Yes. So let me -- I'll talk about that a little bit. So as I talked about a little bit on the call right now, given all that's going on, liquidity is the focus. So with the sale of our suburban office assets after repayment of a mortgage in Short Hills and our NAV midpoint, it's about $950 million, we should be able to take those proceeds and get rid of all of our corporate debt, which right now is a $329 million draw on our credit line and 2 bond issues, our April 22 is for $300 million and our May 23 is for $275 million. So from there, we'll really become a mostly secured borrower using mortgages on our multifamily properties and the credit line that will be based -- whose underlying asset base will be our Waterfront assets, which are unencumbered. So the nice thing about the suburbs is they provide us a lot of liquidity, but when you're selling around a 9% cap and the popular metric is net debt-to-EBITDA at a 9.7%, it doesn't do much to put a dent in that. So we think leverage will stay around 10x in the near future. We've also announced that we will most likely move forward on 3 new, what we call, the next-wave developments mid to the end of this year, maybe one of them starts in January. So with that on the horizon, I would think leverage will stay elevated. It will go down from the current wave of developments, $1 billion at a 6-2 yield or $62 million of NOI coming online. It will go down from that, but it will begin to go back up as we start our next wave of developments at the end of the year and have to feed equity to that.

Maybe you can help tie that into sort of your earnings trajectory through 2020 and then for '21 as well?