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

Good morning, and welcome to the Veris Residential, Inc. Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Taryn Fielder, General Counsel. Please go ahead.

Good morning, everyone, and welcome to the Veris Residential Fourth Quarter 2022 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 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, annual and quarterly reports filed in the SEC for risk factors that impact the company. With that, I would like to hand the call over to Mahbod Nia, Veris Residential's Chief Executive Officer. Mahbod?

Thank you, Taryn. Good morning, and welcome to our fourth quarter 2022 earnings call. I'm joined today by our CFO, Amanda Lombard. Before I turn to our financial results, I'd like to take a moment to acknowledge the tremendous progress our team made during 2022 on our path to becoming a pure-play multifamily company. Despite the significant market volatility and resulting slowdown in transaction activity. We successfully executed on $1.4 billion of nonstrategic asset sales, $925 million of which has closed since the beginning of 2022, significantly reducing our office exposure and fully exiting the hotel segment. We also completed and stabilized our newest ground-up multifamily development, Haus25 and completed the acquisition of The James together adding almost 1,000 units to our portfolio reflecting approximately 15% growth for the second consecutive year. As a result, we increased the share of our multifamily business from 56% of NOI at the beginning of 2022 to approximately 98% by year-end pro forma for sales under binding contract and the stabilized NOI from Haus25, massive concessions that we expect to burn off during the next 12 months. This progress has also allowed us to further strengthen our balance sheet reducing net indebtedness by nearly $570 million. Amanda will discuss this further. Our 6,931-unit operating multifamily portfolio and our 5,825 unit same-store operating portfolio were 95.3% and 95.5% occupied, respectively, as of December 31. This is consistent with our strategy of optimizing rents and growing NOI during the year. We continue to capture upside in our portfolio and have seen sustained growth of headline rents with loss to lease reducing to below 2% at the end of the quarter. The same-store portfolio achieved a blended net rental growth rate of 17% for the year and 11.7% for the fourth quarter. Our key markets of New Jersey and Boston achieved above-average market rental growth compared to the national average during 2022. Market rents across the Class A multifamily segment in Jersey City grew by 8% during 2022. By contrast, rents in our portfolio significantly outperformed the market, growing by over 15%, reflecting the high quality of our properties and strength of our operational platform. This was despite record new deliveries in the Jersey City market last year of almost 2,000 new units, 3x the historic average. However, near-term supply is limited with a mere 500 units expected to be delivered over the next 18 months, while demand remains robust. Full year same-store NOI increased by 20.1% compared to 2021 and driven by higher revenues and slightly lower controllable expenses despite significant and ongoing inflationary pressures. Turning to 2023. We've seen an increase in occupancy at the beginning of the year following a typically slower December driven by seasonal trends. Our same-store portfolio, which going forward will include the Upton, Capstone and RiverHouse 9, was 96% occupied as of February 14, and with a blended net rental growth rate of 11% recorded since the beginning of this year. As previously noted, Haus25, our 750-unit apartment tower in Jersey City, which commenced leasing in April was 95% leased as of February 3, well ahead of schedule and underwritten rents, demonstrating the strong demand for this property, consistent with that seen across our premium Class A multifamily portfolio. Achieving this milestone is a testament to Veris Residential's experienced leasing and marketing teams as well as our investment in environmentally friendly design features and responsible living concepts that meet the lifestyle preferences of residents. During 2022, we closed on over $800 million of sales, including 2 Waterfront office properties, 111 River Street and 101 Hudson Street, a number of nonstrategic land parcels and the Hyatt Hotel. Earlier this month, we also completed the sale of the Port Imperial hotel for $97 million, releasing approximately $13 million in equity and removing a $14 million-corporate guarantee. An additional $437 million of office properties are under binding contract. The proceeds from which upon closing are expected to provide the company with increased liquidity and valuable optionality in the year ahead. Furthermore, with our exit from the hotel segment complete, we will be only 2 office properties away from becoming a pure-play multifamily REIT once these transactions close. These remaining nonstrategic properties are unlevered and as such, are expected to release significant equity upon their sales. Since launching Embrace by Veris Residential, our formal approach to environmental, social and governance initiatives just over a year ago, we have significantly enhanced our company's efforts to support properties, people and the planet and are continuing to fulfill our stated commitments of creating communities with purpose, valuing diversity, equity and inclusion and implementing sustainable best practices, all through an approach that seeks to prioritize the creation of value for shareholders. Most recently, Veris Residential was named a member of the 2023 Bloomberg Gender Equality Index, a modified market capitalization-weighted index developed to gauge the performance of public companies dedicated to reporting gender-related data. We also joined Pledge 1%, a global movement to inspire, educate and empower companies to leverage their resources for positive social impact and formed a strategic partnership with the MIT Center for Real Estate, 1 of the world's foremost institutes for the study of real estate and technology to jointly explore innovative solutions that will help our industry effectively and efficiently evolve for the future. During the past 2 years, we have successfully reduced complexity across the company, strengthened and simplified the balance sheet and streamlined and enhanced our operational platform, resulting in a fifth consecutive quarter of sector-leading performance across our multifamily portfolio. We begin 2023 in a strong position and well equipped to weather potential economic challenges that lie ahead as we near the anticipated completion of our transformation and seek to unlock the substantial value created for shareholders. With that, I'm going to hand it over to Amanda, who will update you on our financial performance during the quarter.

Thanks, Mahbod. For the full year 2022, net loss available to common shareholders was $0.63 per fully diluted share versus $1.39 for fully diluted share in the prior year. Net income available to common shareholders was higher in 2022 as a result of the ongoing transition to a pure-play multifamily REIT and higher gains recorded in 2022 on sales of nonstrategic assets. Core FFO was $0.05 and $0.44 for the fourth quarter and full year of 2022, respectively. As communicated previously, the transition to a pure-play multifamily company continues to drive near-term variability in our earnings. As we are focused on driving long-term value and earnings growth rather than short-term profit, the sale of highly levered assets with high capital requirement results in depressed earnings in the short term despite these assets generating little cash flow for distribution to shareholders. The good news is that as we conclude the transformation and reallocate the significant equity release from nonstrategic sales, there is room for significant earnings growth over the next 24 months. Given this backdrop, we have added a reconciliation in our earnings release as the variances from the third quarter to the fourth quarter. Ignoring all the noise, fourth quarter core FFO would have been $0.07, excluding $0.02 of onetime items related to catch-up in property level expenses in Jersey City real estate taxes. We believe that earnings will grow from this space due to the Haus25 lease-up, continued improvements in our overhead cost structure and further strengthening of the balance sheet. As Mahbod mentioned, Haus25 achieved stabilized lease occupancy in February. However, the GAAP NOI in Haus25 doesn't reflect the fully stabilized NOI [ on ] there are concessions that will burn off over the next year. In addition, the fully stabilized NOI of $30 million presented in our supplemental is expected to be achieved by the end of 2023 and includes retail NOI, which is still under lease-up. Annual year-over-year same-store NOI was up 20.1%. However, despite strong rental growth, same-store NOI sequentially was relatively flat as we had anticipated due to the catch-up in higher real estate taxes, primarily in Jersey City and a dip in leasing activity due to a return to more normalized seasonal trends. Sequentially, we saw an increase in same-store rental revenue of 2.1% and believe that we will continue to capture some of our loss to lease from [ C ] market rent growth. As Mahbod mentioned, our 2023 same-store pool will include 3 additional properties comprising 856 units that together contributed around $16 million of NOI during the last year. For the last 2 quarters, we have seen elevated real estate taxes in Jersey City. While we have little control over future tax rate changes, we are doing all that we can to appeal real estate taxes and have pilot agreements in place at many of our newer properties. As we near the completion of our transition to a pure-play multifamily company, we have decided to align our reporting with that of other multifamily company and break out property level costs among controllable and noncontrollable expenses. We believe this breakout is important as it illustrates that year-over-year, same-store controllable expenses are almost flat despite the current inflationary environment. Further, the 3% increase in controllable expenses sequentially is a function of the timing in which the expenses were incurred. We believe that we will be able to continue mitigating anticipated inflationary pressures and maintain moderate expense growth in 2023. Turning to our general and administrative costs. After adjustments for onetime severance charges, core G&A for 2022 was $42 million in real term, representing the lowest level in over 2 decades. Over a year ago, we set our target to reduce cash expenses by $5 million, which we exceeded. In 4Q '21, the sum of our core G&A and real estate services expenses was $14.9 million. In 4Q '22, that sum was $12.9 million, implying a $2 million reduction on a quarterly basis or $8 million on an annualized basis. These savings were even greater, including capitalized expenses. Over the last 2 years, we have focused on enhancing our operations when optimizing our cost structure in a thoughtful and orderly manner to ensure limited business disruption. We began this effort with a focus on people, removing duplications across the organization, adding talent to deepen our bench and rightsizing the team, positioning us well as we enter the final stages of our transformation into a multifamily company. To date, we have eliminated over 40 positions, realizing substantial payroll savings. Our G&A as a percentage of gross assets is currently in line with mid-cap rate peers. And with the right people, policies and processes now in place, we expect to realize further cost savings that will help ensure our G&A continues to be commensurate with the size of our business. We anticipate these savings to stem from internalization of services previously outsourced and consolidation of our corporate headquarters into a single location among other efforts. On to our balance sheet. To date, the primary use of proceeds from the sale of nonstrategic assets has been to pay down debt. reducing leverage and strengthening the balance sheet. As a result, over the course of the year, net debt to EBITDA improved from 15.3x to 13.3x while our debt to undepreciated assets ratio also improved from 47% to 42%. We have repaid nearly $1 billion of debt since the beginning of 2021 inclusive of an $84 million loan secured by the Port Imperial hotel maturing in 2023 that was repaid at the sale in February. As a result, the only outstanding maturity this year is a $59 million mortgage on one of our stabilized Boston properties. Furthermore, our multifamily debt is 100% senior secured, primarily nonrecore and none of it is cross collateralized. We believe that the company is well positioned in the current interest rate environment, with 96% of our total debt fixed and/or hedged, inclusive of the hedge on 145 Front Street, which was entered into subsequent to year-end, and the sale of the Port Imperial Hotel. As a result, our current total debt portfolio has a weighted average maturity of 4.1 years and a weighted average interest rate of 4.4%. Finally, in relation to our recently announced transaction activity, the Port Imperial and Hyatt Hotels contributed less than $0.01 of core FFO in the fourth quarter and a very small loss is expected for the period owned during the first quarter. As we continue to advance our transformation to a pure-play multifamily company, our earnings will remain unpredictable and variable as we put the last pieces of the puzzle into place. And so we still believe that it is appropriate to delay providing company-level earnings guidance. However, as we have greater clarity over our core multifamily operations, we feel it is the appropriate time to provide guidance on this part of the business. For 2023, we anticipate that same-store NOI will grow between 4% and 6%. We are projecting that same-store revenues and expenses will grow by a similar quantum as well. Before opening the line for questions, I'd like to briefly recap the results of our work over the last 2 years. We have simplified and focused our business, completing over $2 billion of nonstrategic property sales. Developed and stabilized over 1,600 units, growing our multifamily portfolio by 32% and increased the share of NOI for multifamily from 38% at the end of 2020 to 98% at the end of 2022 pro forma for the sale of Harborside 1, 2 and 3 and stabilized NOI from Haus25. We also strengthened our balance sheet. We're paying nearly $1 billion of debt, including $575 million of recourse corporate bonds that were due to mature in 2023 and 2024. Veris Residential built a best-in-class multifamily portfolio with an average age of 6 years, extensive immunity offerings, and the highest average revenue and lower CapEx per unit compared to our publicly traded multifamily peer. As we approach the anticipated completion of our transformation, the management team and Board of Directors continue to work closely together and remain highly focused on the creation of value for all shareholders. That concludes our remarks. And operator, now I think we're ready for questions.

[Operator Instructions] The first question comes from Steve Sakwa with Evercore ISI.

A couple of questions here. Look, I understand you've greatly simplified the company. There's not much left on the noncore side, but you still got a couple of lowly leased office buildings, and there is some land, I guess, both inside the Rockpoint JV and outside. So can you maybe just talk about kind of the timing and maybe the appetite from investors today for both the office buildings and maybe the land, assuming that you're not planning to put that land into development service anytime soon.

Steve, and thank you for the question. It's a very relevant one. I would start by saying development at this time is not a priority for the company given what that entails in the near term in terms of capital requirement, leverage implications, et cetera, and the fact that development would take minimum 3 to 4 years to begin yielding income, which is a focus for the company. So that is not a priority at this time. As for the remaining nonstrategic assets and as you correctly point out, that is the 2 remaining office buildings, once Harborside 1, 2 and 3 closed, Harborside 5 and 6, and potentially some further rationalization of the land. We are seeing continued interest from buyers in both. We're evaluating our options both on the office side and the residential side. We may seek to further rationalize the land to some extent. And the office assets have been designated as nonstrategic, doesn't mean we'll [ fly ] sell them at any price tomorrow, but it does mean that as we have done with the balance of the nonstrategic assets to date, we were in a thoughtful and balanced measured way exit those in due course.

Okay. And maybe a second question, I realize you haven't officially designated what you'll do with the proceeds. But I think the market expectation is that you would look to try and simplify the company and pay down or pay off the Rockpoint joint venture. I guess my question is, to the extent that you do close the Harborside sales and bring in the cash that you've talked about along with the suburban asset. Are there any restrictions that you have either via the line of credit or other debt that would sort of preclude that? Or kind of would hamstring you in sort of paying off the Rockpoint venture whenever that you kind of cross that mark?

Well, as I'm sure you know, there are certain parameters or framework within which a repayment would occur under the Rockpoint joint venture, so there's a buy, sell agreement that can be triggered by the party, could be deferred by up to 12 months. So within that framework to the extent the Board determines that to be the highest and best use for the equity that's released. We will look to obviously do what we can to efficiently reallocate the capital if it is determined that is the path we should go down in a manner that is consistent with the framework or otherwise negotiated. I'm sorry, what was the other part of your question?

Well, I was just trying to understand, are there any limitations kind of on the use of capital.

Yes. The only other limitation is that the credit line you should assume, given the proceeds for a potential repayment of Rockpoint would have to come from the sale of Harborside and Harborside really represents the collateral or part of the collateral for the current revolving credit facility. You should assume that there would be some sort of amendment or replacement of that revolving credit facility. But nothing that would hamper us there or restrict our ability to be able to move forward in that direction under the framework with Rockpoint.

Okay. Great. And just last question for me. As you look out to, I guess, kind of March, April and potentially even May, how are you thinking about the renewal increases that you're sending out to existing residents on the multifamily side? Like where are those notices going out? And how might that have compared to the renewals that you got in maybe December, January and February?

Well, we're -- it's still looking quite strong. We have tried to temper expectations. We do think that ultimately, they will normalize at a lower level, and we provided some guidance around that, which I hope that you and others will find helpful at this stage. But what I can tell you is for the next couple of months going forward, we're still looking at double-digit renewal notices across the portfolio.

The next question comes from Tom Catherwood with BTIG.

Following up on Steve's question on the sales. Mahbod, where are we sitting with Harborside 1, 2 and 3? I know the expectation was for that to close, I think, in the first quarter of this year. How are we kind of looking in the process?

So sitting here today, our expectation is still very much that, that transaction closes within that time frame. Nothing is done until it's done. It is a tricky transaction market, could timing slip, possibly. But actually, we're in regular dialogue with that buyer. And based on everything we know, we feel confident today that, that will still close within the time frame that we had originally indicated.

Got it. Got it. Back on the January 18 press release you put out, talking about the negotiations and then the offer that had come in from Kushner, the comment was obviously that the Board had planned to launch a strategic review process in due course. Where are you in that kind of early stages of the process? And what are the triggers that can commence that strategic review?

So look, this is -- what you've seen is -- we have recently reconstituted, independent, transparent boards that are highly focused on their fiduciary obligations and on the maximization of value for all shareholders. And in the spirit of that transparency, I think the Board was just making it be known to shareholders that we've had a number of inbounds from credible institutions who have expressed an interest in the multifamily side of the portfolio, given that now we are beginning to hopefully reach the conclusion of the transformation with the sale of the nonstrategic assets, which are less interesting to those parties. And that prudent with also consistent with best corporate governance practices, the Board as it currently stands would contemplate running some sort of a process in due course at the appropriate time, taking into consideration where we are in the strategic transformation, market conditions and any other relevant factors to evaluate that interest and ultimately determine whether it would be in the best interest of shareholders to move forward on any path there. So no specific definitive time frame given, but I think those are the sorts of factors that the Board would consider.

Got it. Appreciate that color, Mahbod. And then last 1 for me. This is kind of a couple of quarters in a row where the net asset value that you're carrying for the Rockpoint interest has declined I assume that that's with changes in the underwriting as you're looking at the ultimate IRR of that investment, what has been that kind of underwriting change or hurdle change as you're looking to value that investment?

Yes. So look, we obviously reassess the value, and that's based on an entity value of the multifamily side of the business in which we have a joint venture with Rockpoint and on a quarterly basis, we go through asset by asset and take into consideration cap rates and other relevant factors to determine where value sits and ultimately, what that would imply in terms of the value of that stake. So that's all you're seeing. If you're seeing some variability there, it's obviously primarily driven by the movement in rates and the implications for the value of assets.

As far as that cap rate moves, is it -- how material has that been as part of that underwriting?

So look, it's asset by asset. So I would say, overall, as far as the markets are concerned, it's too early to draw any conclusions in terms of where cap rates have moved to or values have moved to we're still in the period of price discovery, transaction, volumes are extremely muted, especially here in Jersey City, where we have a concentration of assets. So it is a little bit of an art as opposed to a science. There aren't too many comps, we try to triangulate to a value that ultimately we think would reflect the quality of these assets, the scarcity of these assets and be the wall of capital that's still seeking to acquire high-quality multifamily assets.

The next question comes from Joshua Dennerlein with Bank of America.

I just wanted to dig into your guidance assumptions a little bit more. Maybe just the first one, I guess, what are you guys assuming as far as market rent growth or new lease rate growth?

Sorry, what are we seeing in terms of overall rent growth...

Market rent growth for the multifamily portfolio. I know you talked earlier about -- or the renewal rates. So...

So for this coming year, we're assuming in the region of 3% rental growth.

[ Represent ] Okay. And how does that compare to what you saw, I guess, just last year across the portfolio market rent growth?

Well, it's obviously tempered down somewhat given the pace of growth that we saw last year and potentially economic headwinds ahead. So last year, to put it into context, Jersey City, where we've got the highest concentration of assets as a market for Class A saw around 8% rental growth, we achieved around 15% rental growth in the last 12 months.

Okay. Awesome. And then maybe on the noncontrollable expense side, just what are you seeing as far as real estate taxes? Or what's baked into your expense growth guidance?

Well, look, on the controllable side, so did you say on the noncontrollable or controllable?

Noncontrollable? I guess I'm just curious...